Financial Sector Assessment Program

Swiss financial institutions are well capitalized and could withstand the severe shocks under the adverse stress test scenarios, but macrofinancial vulnerabilities are deepening. Important reforms have been made since the 2014 FSAP, but several critical recommendations and emerging challenges have yet to be fully addressed. Capital buffers have increased across all categories of banks, and while the two global systemically important banks have downsized and deleveraged significantly since the global financial crisis, since 2013 they have been growing again. Macroprudential measures have not been taken since 2014 and is constrained by having only one mandated tool and a self-regulation agreement with banks. The financial supervisor (FINMA) has developed into a trusted supervisor, but as a small entity, it relies heavily on external auditors to conduct on-site supervision; the associated conflict of interest and supervisory objectivity risks need to be carefully managed. The combination of an ex-post funding mechanism, a low cap on banks’ contributions, and a private deposit insurance agency run by active bankers, weakens the crisis management arrangements.


Swiss financial institutions are well capitalized and could withstand the severe shocks under the adverse stress test scenarios, but macrofinancial vulnerabilities are deepening. Important reforms have been made since the 2014 FSAP, but several critical recommendations and emerging challenges have yet to be fully addressed. Capital buffers have increased across all categories of banks, and while the two global systemically important banks have downsized and deleveraged significantly since the global financial crisis, since 2013 they have been growing again. Macroprudential measures have not been taken since 2014 and is constrained by having only one mandated tool and a self-regulation agreement with banks. The financial supervisor (FINMA) has developed into a trusted supervisor, but as a small entity, it relies heavily on external auditors to conduct on-site supervision; the associated conflict of interest and supervisory objectivity risks need to be carefully managed. The combination of an ex-post funding mechanism, a low cap on banks’ contributions, and a private deposit insurance agency run by active bankers, weakens the crisis management arrangements.

Executive Summary and Key Recommendations

Swiss financial institutions appear to be well capitalized and could withstand severe macrofinancial shocks, but macrofinancial vulnerabilities are deepening. Capital buffers have increased across all categories of banks, and the two global systemically important banks (G-SIBs) have downsized and deleveraged significantly—in aggregate by about one-third since 2007. In the IMF adverse scenario, banks remain above their regulatory capital hurdle rates although a few banks would breach capital buffers. The banking system has ample overall liquidity, but some banks are vulnerable to USD liquidity risk. Swiss insurers are broadly resilient against the market shocks that the FSAP evaluated. Insurers remain profitable after stress, even when assuming no recovery in asset prices; solvency rates start improving gradually in the year following the stress. However, in the medium-term, the persistence of the low-yield environment will pose increasing challenges. The financial, corporate, and household sectors are highly exposed to growing real estate sector imbalances, particularly in the residential investment property segment.

Important reforms have been made since the 2014 FSAP, but several key challenges remain. The authorities have strengthened the too-big-to-fail (TBTF) regime with leverage ratios higher than international standards, introduced governance requirements for cantonal banks, enhanced the bank resolution regime, and revised the regulatory framework for financial market infrastructures (FMIs). Legislative work is ongoing to support fintech developments, enhance insurance business conduct regulation and policyholder protection, introduce an insurance resolution regime, and revise deposit insurance. However, several critical recommendations made by the 2014 FSAP have yet to be fully addressed (Appendix I), as discussed below.

FINMA has developed into a trusted supervisor; going forward, its autonomy, governance, and accountability should be strengthened. FINMA enjoys more institutional, functional, and financial autonomy than its predecessors. It is in Switzerland’s interest that there be a strong, competent, and autonomous financial supervisor, which is critical for the financial system’s stability, reputation, and global competitiveness. FINMA’s prudential mandate should take primacy over other mandates. FINMA should continue to strengthen its supervisory capacity and the exercise of its powers, and its authority to set binding prudential requirements and codify supervisory interpretations and practices should be preserved.

To address emerging challenges, the authorities’ data collection, analytical capacity, and resources should be addressed. The availability of timely, consistent, and granular data is necessary to avoid risks going undetected. Enhancing supervisory reporting would strengthen stress testing. Pension funds’ investment flows and search for yield behavior, particularly in real estate markets, need to be tracked, as the sector is large, and the data is lacking in timeliness, granularity, and coverage. Fintech firms benefitting from sandbox initiatives should be subject to reporting requirements; better data should also inform development of fintech-related policies and legislation. More resources are needed to support high-quality data gathering, to improve IT and analytical systems, to better monitor the fast-moving fintech sector, and to advance recovery and resolution planning.

Macroprudential measures worked well in 2012–14 but there is need for an expanded, mandated, and more agile and accountable macroprudential framework to address inaction bias and rising risks. The framework is constrained with only one mandated tool and a self-regulation agreement with banks. The financial sector is highly exposed to the real-estate market. A planned introduction of higher risks weights for income-producing real estate is welcome, but further supply- and demand-side tools are needed. The tax deductibility of mortgage interest payments should be reviewed to mitigate incentives for mortgage debt. Decision-making for existing, expanded, and future macroprudential tools should specify expectations—and not only possibilities—for actions by each authority, for which they should be publicly accountable. Cantonal banks remain a source of bank-sovereign risk at the cantonal level.

While bank supervision has become more effective under FINMA’s stewardship, a more robust FINMA-led supervision is needed. While a small supervisor responsible for a large and diverse sector could benefit from external supervisory audits, conflicts of interest risks need to be managed, and supervisory audits need to be focused. FINMA—rather than banks—should contract and pay audit firms directly for supervisory audits using ‘audit-level’ practices in critical areas and it should itself conduct more risk-based on-site inspections, especially for the largest banks. Explicit and strengthened assessments of banks’ key risk management and control practices, and rapid remedial actions, are needed to enforce strong corporate governance. FINMA should consider ‘post-stress’ capital requirements and restrict capital distributions when requirements are not met.

FINMA has strengthened nonbank supervision’s effectiveness, but a more engaged approach is needed to ensure that risks do not go undetected. The regulatory framework for insurance is highly sophisticated, but oversight of operational risk management and conduct regulation should be strengthened. Systemically important FMIs are well developed and subject to close supervision, but their internal governance and crisis management arrangements require further work. The supervision of asset management activities would benefit from the ability to impose administrative fines, better monitoring and managing concentration risks, more granular data, and greater enforcement resources. Risks in the rapidly growing fintech space may not be well understood due to data gaps, resource constraints, and the authorities’ liberal approach. Legislative reforms to facilitate digitization should preserve a level playing field and avoid singling out blockchain and distributed ledger technology (DLT) as the technological winners.

The authorities have made progress in strengthening financial safety net and crisis management arrangements, but more work is needed to improve banks’ recovery and resolvability. Removing the G-SIBs resolvability impediments—particularly resolution funding—should be prioritized. Recovery and resolution planning should be enhanced, expanded, and expedited, including for the three domestic systemically important banks (D-SIBs) and the midsized banks that could be systemic at the point of failure in a system-wide crisis. A thorough reform of the deposit insurance system (DIS)—beyond what is currently considered—is warranted, including a fully funded public deposit insurance agency (DIA) with a government backstop and the authority to use deposit insurance funds for resolution measures subject to safeguards. The resolution framework should be supplemented with ex post recovery fees from banks for any government funding.

Table 1.

Switzerland: FSAP Main Recommendations

article image

C = Continuous; I = Immediate (within one year); ST = Short Term (within 1–2 years); MT = Medium Term (within 3–5 years).

Macrofinancial Background

A. Financial Sector Structure

1. The banking and insurance sectors are highly concentrated (Figure 1), and FMIs are operated by one private entity.

  • The banking sector represents 54 percent of financial sector assets: 468 and 265 percent of GDP based on global and Swiss-only consolidation, respectively, in 2017.1 Insurance and pension fund assets total 253 percent of GDP and other financial institutions’ assets (mainly asset managers) total 190 percent of GDP.

  • The two G-SIBs (Credit Suisse, UBS) account for about half of banking assets; the five SIBs (including also three D-SIBs: PostFinance;2 Raiffeisen; and Zürcher Kantonalbank), for 69 percent.

  • The 24 cantonal banks account for close to 18 percent of banking sector assets.

  • The life insurance sector holds assets of about 52 percent of GDP, and the five largest companies have a market share of 85 percent of written premiums. Swiss Re is the second-largest global reinsurers, earning more than 98 percent of its premiums abroad. The four largest non-life insurers’ market share is close to 60 percent.

  • Occupational pension funds manage assets close to 150 percent of GDP; collective investment vehicles manage about 160 percent of GDP.

  • SIX Group operates the real-time gross settlement system (for the SNB), the central counterparty, the securities settlement systems, and the central securities depository.

2. The two G-SIBs represent over 250 percent of GDP (Figures 23), and they are looking at taking on more risk. They downsized their balance sheet from over 400 percent of GDP in 2008 and improved their capital base to an average 13.1 percent Common Equity Tier 1 (CET1). Their cross-jurisdictional activity involves 60 percent of assets; intra-financial claims (liabilities) reached 20 (25) percent of assets in 2018. Domestically, their share is 33 percent in corporate loans, 27 percent in the mortgage market (down from 35 percent in 2008), and 33 percent in customer deposits. The two G-SIBs’ employment has dropped to 35 percent of banking system staff from 50 percent in 2007. The G-SIBs’ focus has shifted toward growth strategies and new business initiatives;3 since 2013, the two G-SIBs have grown by more than 18 percent.

Figure 1.
Figure 1.

Switzerland: Structure of the Financial Sector

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Sources: Financial Stability Board, 2017 Global Shadow Banking Monitoring Report, Haver Analytics, SNB, and Swiss Financial Accounts.
Figure 2.
Figure 2.

Switzerland: Progress in Deleveraging of the G-SIBs Since the Global Financial Crisis

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

3. About one-half of the cantons are exposed to bank-sovereign risk (Figure 4). Credit-rating agencies justify cantonal banks’ high ratings partly on the (implicit) guarantees of their respective cantons. The high ratings imply a funding advantage for cantonal banks and can incentivize risk-taking and support expansion. Many cantonal banks are substantial mortgage providers in their cantons and nationally.4 As some guarantees account for a multiple of the cantonal GDP, they may jeopardize local finances in the event of financial stress: 12 of 24 cantonal banks’ assets exceed their respective canton’s GDP. A high degree of maturity transformation and mortgage lending concentration makes cantonal banks vulnerable to a sharp snap back in interest rates and to housing market shocks. Some large cantonal banks are also active in wealth management and could face headwinds from the cost of complying with investment suitability legislation compounded by earnings pressure from low investment yield of active asset management strategies.

Figure 3.
Figure 3.

Switzerland: Banking Sector Developments

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Source: SNB and IMF staff estimates.
Figure 4.
Figure 4.

Switzerland: Cantonal Bank Total Assets to Cantonal GDP Ratio

(In percent, in 2016)

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Source: Swiss Bundesamt für Statistik; S&P Global Ratings.

4. The Swiss insurance market is large and well developed, with one of the highest penetrations and expenditure per capita ratios in the world. Switzerland is home to large internationally active insurance groups. Despite improved business models, the prolonged low-yield environment remains challenging. Low interest rates drain life insurers’ profitability, particularly on those with larger legacy business carrying high interest rate guarantees. Swiss insurers reacted early by reducing the volume of guaranteed business, focusing more on protection products and products with low or no guarantees attached. The low-yield environment is also challenging for many small pension fund and asset managers (the latter account for a sizable 11 percent of the market).

B. Macrofinancial Risks

5. The positive credit gap is large and persistent,5 and banks have high real-estate exposure (Figure 5). Negative interest rates—expected to continue—and sharply declining net interest margins (Figure 6),6 have encouraged risk taking and risks in real estate have increased. Historically high house prices (Figure 7) pose credit risks, due to imbalances between prices and rents or income, and banks’ high exposure to real estate markets.7 Domestic balance sheets are heavily exposed (and regionally concentrated) to real estate.

Figure 5.
Figure 5.

Switzerland: Credit and Business Cycle

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Sources: Haver Analytics and BIS.1 Long-term trend of private nonfinancial credit-to-GDP calculated using a one-sided Hodrick-Prescott filter with a smoothing parameter of 400,000.
Figure 6.
Figure 6.

Switzerland: Net Interest Margin on Loans1

Domestically Focused Commercial Banks, Weighted Average2

(In percent)

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Sources: SNB and IMF staff calculations.1 The interest margin is net interest rate operations divided by the sum of mortgage claims and claims against customers.2 Domestically focused commercial banks include cantonal banks, Raiffeisen banks, and regional and savings banks.
Figure 7.
Figure 7.

Switzerland: Housing Prices

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Sources: Haver Analytics, IMF staff.

6. Household and nonbank financial firms have large exposures to real estate (Figure 8). The exposures are through direct ownership and indirectly through bank deposits, pension and insurance vehicles, equity holdings, and investment funds. Household gross liabilities—at 130 percent of GDP—are among the highest in the world and mostly relate to mortgage borrowing. While household net worth is very large (some 500 percent of GDP), over 40 percent is accounted for by directly-held real-estate.8 Households have exposure through direct ownership of property, at about 303 percent of GDP, and indirectly through savings and bank deposits; most of their liabilities are related to mortgages. There may also be large indirect exposures to real estate in the pension and collective investment schemes. Swiss home owners tend to accumulate financial assets rather than amortizing their mortgage loans.9 Seventy five percent of bank loans were for mortgages in September 2018 (60 percent for the two G-SIBs).10 Moreover, pension funds, insurers, and fund managers have substantial direct exposures to domestic real-estate. Pension funds’ direct exposure to real estate is about 19 percent of assets, of which 89 percent is invested domestically. Insurers’ exposure has increased to about 10 percent of their assets.

Figure 8.
Figure 8.

Switzerland: Household Wealth and Balance Sheet

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

7. Nonfinancial corporates have substantial financial liabilities, but these could partly relate to Switzerland’s appeal as an investment destination and some conceptual measurement biases related to the allocation of savings in the national accounts (Figure 9).11 Nonfinancial corporates also have substantial real assets.12 Large Swiss multinational companies have major international operations and a diverse ownership structure; they borrow and operate in international markets.

Figure 9.
Figure 9.

Switzerland: Nonfinancial Sector Net Financial Assets

(In CHF billions)

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Source: SNB.

8. Imbalances in the residential investment property segment and risks associated with affordability are growing. The deterioration in the price-to-income and price-to-rent ratios (Figure 10),13 and the increase in vacancy rates of properties, point to rising risks in the real-estate sector. Private and institutional investor demand for rental properties is high,14 driving up prices; leverage in the build-to-let segment is also high. Mortgages in this segment account for about one-third of bank mortgages. Loan affordability risks have risen with about half of new loans issued exhibiting high loan-to-income (LTI) ratios. Moreover, nonbank lending is growing quickly and is exerting further downward pressure on banks’ lending rates and profitability. Potentially significant structural changes in the mortgage market could further pressure banks’ margins and profits, driving greater risk-taking behavior. Potential drivers include changes to the tax deductibility of mortgage interest payments and taxation of imputed rents, and, potentially, a large new entrant to the real-estate mortgage markets (e.g., PostFinance).15 In 2012 and again in 2014, the authorities acted by raising the sectoral countercyclical buffer (CCyB) and agreed a tightened self-regulation on loan-to-value (LTV) limits with the banking industry, but no macroprudential measures have been taken since.16

Figure 10.
Figure 10.

Switzerland: Real Estate Prices

(Price-to-Rent Ratio, 1992: Q4=100)

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Source: IMF staff estimates.

Systemic Risk and Resilience

9. The Swiss financial sector is vulnerable to a variety of cyclical and structural shocks. The FSAP Risk Assessment Matrix (Appendix II) summarizes financial-system-relevant shocks. Moreover, due to Brexit, the G-SIBs could become subject to euro area supervisory and resolution authorities, depending on the size and materiality of their subsidiaries in the European Union (EU).

A. Banking Sector Resilience and Stress Testing


10. The FSAP banking sector stress tests used confidential firm-specific supervisory data—a first for a Switzerland FSAP—and covered nearly 80 percent of the Swiss banking sector.17 The FSAP developed a structural model of the mortgage portfolio by risk bucket, tailored to the Swiss mortgage market,18 and undertook a granular analysis of the interest rate risk in the banking book with dynamic effects. The resilience of the banking sector was assessed under baseline and adverse scenarios covering five years (Figure 11).19

Figure 11.
Figure 11.

Switzerland: Bank Stress Test

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Source: IMF estimates.

Solvency Stress Testing

11. Under the baseline scenario, capitalization ratios decrease slightly, reflecting the low interest rate environment. Baseline projections imply a weighted-average 70 basis point decrease in banks’ CET1 ratio by 2020 with some variation across banks.20 The results also vary across business models, with domestically focused banks (DFBs) facing greater profitability challenges.21 These banks are more affected by the negative liability margin under current baseline conditions.

12. Under the adverse scenario, while all banks meet minimum capital requirements, a few banks breach their capital buffers. Macroeconomic shocks and market risks deplete capital ratios by an average of 440 basis points at the low point of stress, with a wide degree of variation across banks (Figure 12).22 Results also vary across groups due to differences in business models, risk exposures, and geographic segmentation. Comparable, if somewhat more favorable, results were obtained by the SNB top down (TD) tests and G-SIBs’ bottom up (BU) tests (Figure 14). The impact of the adverse scenario on banks’ capital positions reflects stressed earnings and risk-weighted assets (RWAs) expansion, with the contribution from other risk factors evenly distributed (Figure 13).

Figure 12.
Figure 12.

Switzerland: Results of the FSAP Solvency Stress Test—Adverse Scenario

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Source: Fund Staff estimates. The sample included twelve major banks. Aggregate results (top LHS, and bottom LHS charts) are weighted by asset size. The boxplot (top RHS chart) shows the distribution of individual bank results. The dashed line indicates the minimum capital regulatory ratio. Boxplots include the mean (yellow dot), the 25th and 75th percentiles (boxes) and the 15th and 85th percentiles (whiskers).
Figure 13.
Figure 13.

Switzerland: Cumulative Impact on CET1, All Banks

(In percentage points)

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Source: IMF staff estimates.
Figure 14.
Figure 14.

Switzerland: Results of the Solvency Stress Test by Type of Bank

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Sources: IMF staff estimates and the SNB. The sample of banks includes the two G-SIBs, six DFBs, and four private banks for the top LHS chart; the two G-SIBs for the RHS charts, and the six DFBs for the bottom LHS chart.1 Differences in results are mainly attributable to the higher contribution of RWAs to capital depletion in the Fund test.

13. The capital impact of mortgage default risk from the combination of a large real estate price correction and rising lending rates could be quite large. Under the adverse scenario (a 25-percent correction in real estate prices over two years and a rise in 10-year mortgage lending rates from 1.5 to 3.0 percent) default rates rise to about 1 percent, leading to an aggregate 60 basis points CET1 capital depletion for the G-SIBs and DFBs (excluding private banks).23 Sensitivity tests suggest that default rates increase exponentially with the size of the shock--with lending rates of 6.0 percent the capital depletion would reach 275 points (Figure 15).

Figure 15.
Figure 15.

Switzerland. Sensitivity Test: Mortgage Risk

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Source: IMF staff estimates.Note: The red line in the LHS chart shows the current rate for a 10-year mortgage. The test is based on an unemployment shock of 110 basis points, a house price correction of 25 percent, and a wide range of interest rate shocks. These projections are built on conservative assumptions related to: the distribution of historical vintages by LTV and LTI similar to the matrix observed in June 2018; the repricing tenor of outstanding mortgages; and, banks’ activation of margin calls from the widening in Point-in-time LTV ratios due to a real estate price correction required to satisfy the amortization of the second mortgage over the remaining maturity of the mortgage.

14. In an extreme scenario, FINMA real estate stress tests indicate that total capital ratios could fall on average by about 400 bps (Figure 16).24 In 2018: Q4, FINMA undertook a mortgage stress test covering 18 banks, including SIBs and other DFBs.25 To capture mortgage risk profiles properly, banks were required to provide their portfolio distribution by region, LTV, and LTI. The potential mortgage stress loss over seven years was determined based on a predefined stress scenario calibrated by FINMA on the Swiss mortgage crisis of the late nineties. The 2018 stress test revealed the following key insights:

  • On average, compared to the previous tests undertaken between 2012 and 2017, the banks’ risk profile has deteriorated, meaning that the loss ratios for the same negative scenarios are higher than in previous years.

  • The risks have generally shifted from owner-occupied residential properties to investment properties. Over 70 percent of the stress losses are incurred in the investment property portfolio, although this only accounts for 29 percent of total mortgage lending in the sample.

  • About half of the banks would fall below their capital thresholds,26 in some cases by a wide margin, and would therefore have to raise additional capital.

Figure 16.
Figure 16.

Switzerland. FINMA Real Estate Stress Test

(In percent)

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Source: FINMA. Note: The chart compares the post-stress total capital ratio to the pre-stress capital ratio as of 2017 year-end. The median post-stress total capital ratio would fall by about 400bps.

15. The SNB’s stress testing framework could be further enhanced. The consistency and granularity of supervisory reporting should be increased, supported by user-friendly IT systems.27 The analysis of risk interactions should be deepened, particularly for credit, market, and basis risks, and for solvency and liquidity feedback loops. The Swiss authorities should include major private banks in the stress testing framework. The failure of a major private wealth-management bank could expose the Swiss banking system to significant reputational risk, spread to other Swiss banks through their wealth management activities, and affect funding markets.

Liquidity Stress Testing

16. While all banks in the sample meet the 100 percent minimum liquidity coverage ratio (LCR) requirement, there are foreign currency liquidity mismatch risks (Figure 17). The average LCR across all banks stood at 165 percent in 2018: Q2 owing to an ample stock of high-quality liquid assets, with the two G-SIBs and the four private banks posting comparatively higher ratios. In contrast, the LCR in USD tends to be more volatile and falls substantially below 100 percent for many banks. Some banks are vulnerable to high run-off rates in unsecured corporate funding, operational deposits, repo operations, and liquidity risk from contingent liabilities.

17. The LCR-based tests reveal potential currency mismatches for some Swiss banks. Maturity transformation and portfolio diversification results in vulnerabilities to USD unsecured retail funding, with high-value deposits subject to a higher run-off rate than other liabilities in the LCR framework. Private banks have global franchises benefitting from wealth creation across regions, funded with client sight deposits partly in USD. Currency mismatch risk is also present in the G-SIBs with their central intragroup funding and large U.S.-centric activities, including market-making and execution services in foreign exchange cash and swap markets. While USD liquidity poses a potential challenge for some banks, the banks with a USD deficit have an EUR and CHF excess and could use swap markets to tap USD funding. However, banks remain vulnerable to turmoil in global money markets that can spill over into FX and currency swap markets. Banks should ensure that currency-specific mismatches are managed effectively to reduce the risk of funding strains and FINMA should ensure that major currency-specific liquidity requirements are closely monitored.

18. The LCR-based tests suggest that the largest Swiss banks are less resilient to a wholesale event than to a retail event.28 Under more stressed conditions than prescribed by the Basel ‘Retail’ and ‘Wholesale’ scenarios, the average LCR ratio declines to about 140 and 95 percent, respectively. The ratio’s sensitivity to a wholesale event is higher than to a retail event, reflecting potential liquidity risk from high value deposits and contingent liabilities.

19. Cash-flow based liquidity stress tests suggest that most banks are resilient (Figure 18). This is underpinned by large liquidity buffers, despite a few banks’ relatively high share of encumbered assets due to covered bonds, derivatives, and securities financing transactions.

Figure 17.
Figure 17.

Switzerland: Banks’ Liquidity Positions

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Sources: IMF Staff Estimates and FINMA.
Figure 18.
Figure 18.

Switzerland: Cash-Flow Based Stress Test Results

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Sources: IMF Staff Estimates and FINMA. Figures are expressed in thousands of CHF.1 The output table of the 30-day Cash-Flow test shows the number of banks that become illiquid after 30 days of cumulative stress (column “Survival”, row “No”), and their size relative to system assets (column “Net cash short shortfall”) using FINMA contractual maturity mismatch data. Stressed assumptions on contractual in- and outflows, and available unencumbered assets are shown in Jobst, Lian Ong, and Schmieder (2017), “Macroprudential Liquidity Stress Testing in FSAPs for Systemically Important Financial Assets”, IMF WP/17/102.


20. Contagion through exposures within the Swiss interbank market are currently low relative to their capital buffers. The aggregate Swiss network density of interbank exposures is low. Interconnectedness is contained, except for interbank exposures between the two G-SIBs and some private banks (Figure 19). Swiss banks’ interconnectedness is modest relative to their capitalization levels precluding the spreading of cascading defaults.29 Even under extreme assumptions of loss given default (LGD) = 100 percent of original exposures, there is no potential for contagion rounds.

Figure 19.
Figure 19.

Switzerland: Network Analysis-Index of Contagion1

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Sources: SNB ARIS data and Fund staff estimates.1 The Index of Contagion shows the average percentage of loss of other banks due to the failure of each bank in the X axis, in terms of excess CET1 capital over regulatory minimum.

21. The risk of spillovers between listed Swiss banks appears moderate. Market perceptions of systemic risk through equity markets have eased following crisis episodes (Figure 20). The value at risk (VaR) of financial system returns, computed as the tail of the distribution of banking system returns at the 95th percentile, controlling for macrofinancial drivers, edged down to about – 15 percent of weekly returns in October 2018 from a peak of -60 percent during the global financial crisis. The marginal contribution to systemic risk from the most systemic bank during the financial crisis reached -15 percent of weekly equity returns; it has come down to 8 percent in 2018. The most relevant drivers of systemic risk are volatility, equity risk, and, more significantly, stress in peer banks.

Figure 20.
Figure 20.

Switzerland: Market-Based Contagion

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Source: Fund Staff estimates. The sample of banks included the 6 listed Swiss banks in the 12-bank solvency sample. The analysis is based on weekly data from October 2005 through November 2018. The bottom charts show the average contribution to systemic risk during the global financial crisis.

B. Insurance System Resilience and Stress Testing

22. Six insurance groups participated in the insurance ST on a consolidated basis, ensuring a market share of 56 and 45 percent in the domestic life and non-life sector, respectively (Figure 21). Their resilience was assessed with TD and BU stress tests.30 Stress tests and sensitivity analyses built on the Swiss Solvency Test (SST), and the scenarios were broadly aligned with the banking STs’ macrofinancial shocks; the insurance ST, however, focused more on market risks (Appendix V).

Figure 21.
Figure 21.

Switzerland: Asset Allocation of Insurance Stress Test Participants

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Source: Fund staff calculations based on company submissions.

23. In the adverse scenario, the median SST ratio drops from 224 to 176 percent, and no company falls below the 100 percent regulatory threshold (Figure 22). The main impact stems from higher credit spreads and from the shocks to equity and real estate prices—together, the value of bonds, equity, and real estate drops by an amount equivalent to 45 percent of risk-bearing capital; interest rate and currency shocks contribute considerably less as assets and liabilities are closely matched. In general, the stress is more pronounced for life business where bond investments have longer maturities and sensitivities to spread changes are accordingly higher.

24. Swiss insurers remain profitable after stress, even when assuming no recovery in asset prices, and solvency rates start improving gradually in the year following the stress. Future investment returns are expected to decline even in the baseline scenario, illustrating the challenges from the low-yield environment. Nevertheless, solvency ratios are likely to improve in the year following the instantaneous stress, based on a solid underwriting business and favorable technical results.

Figure 22.
Figure 22.

Switzerland: Insurance Stress Test Results

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Source: Fund staff calculations based on company submissions.

25. As high-coupon bonds expire, insurers are likely to face declining investment returns (Figure 23). On aggregate, participating groups record positive spreads of investment returns over guaranteed interest rates; they are also expected to remain profitable when the adverse scenario materializes, but significant differences exist across companies: insurers that are more active in non-life and unit-linked life business are less affected and could sustain the current low-yield environment for a prolonged period; insurers with a high stock of guarantees on their policies are likely to see lower profits. The SST has improved asset-liability matching, investment horizons have lengthened, and reinvestment risks in the short term are limited.

Figure 23.
Figure 23.

Switzerland: Maturity and Average Coupon Rate of Insurers’ Fixed-Income Investments

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Sources: Fund IMF staff calculations based on company submissions.Notes: Each bubble represents the nominal value (size) and the coupon of fixed-income instruments expiring in a given year (ST participants only). The orange, grey and yellow lines show a projection of the average coupon, assuming that all maturing instruments are reinvested at a rate of 1.5, 1.0 and 0.5 percent, respectively.

26. FINMA should regularly conduct insurance sector stress tests. The tests should cover large insurers’ post-stress ability to reestablish their profitability and solvency position, and results should be used to challenge companies’ Own Risk and Solvency Assessment and underlying projections for future business, specifically the expectations for premium growth and investment returns.

C. The Pensions Sector

27. The large and fragmented Swiss pension fund sector faces challenges from low interest rates and public rejection of fundamental reforms. While the sector has consolidated substantially, the occupational (mandatory) pension fund sector still comprises nearly 1,700 heterogenous entities, managing close to CHF 1 trillion of assets (149 percent of GDP). Low interest rates and higher life expectancy call for adjustments in the business model, but some of the key technical parameters are politically determined or, like the conversion rate, were subject to referendums. Consequently, pension plans can only earn the necessary technical pay-out interest rate by taking on more risks on the asset side.

28. Considering pension funds’ substantial and growing size, and their exposure to real estate and the broader financial sector, their contribution to systemic risks and contagion bears careful monitoring (Figure 24). While on average the sector is adequately funded, medium-term challenges stem from the low-yield environment and aging. Pension funds can adjust their liabilities mostly only in the non-mandatory business, and as collective schemes compete for business, some keep technical parameters at levels which are beneficial to members in the short term, but less sustainable. The relative share of liquid assets and bond holdings has declined, while the share in equities, real estate, and alternative investments has risen. The three asset classes now account for about 59 percent of total assets

Figure 24.
Figure 24.

Switzerland: Pension Savings

(In CHF billions)

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Sources: FSIO , SFSO; IMF staff calculations

29. Data gaps significantly compromise market-wide horizontal and systemic risk analyses. Official statistics are available only annually and with a considerable delay; other surveys, including by OAK BV, are voluntary for pension funds. Cantonal authorities collect annual statements, but only a few allow electronic submissions. It is paramount for systemic risk monitoring that FINMA, the SNB, and OAK BV track pension funds’ investment flows and search for yield, particularly in domestic real estate markets. Regular information on risk sensitivities, at least for larger pension funds, would also support horizontal analyses for the market and certain peer groups.

Financial Sector Oversight

30. Switzerland’s financial oversight comprises three key agencies.31 The SNB is the monetary authority and lender of last resort, oversees systemic FMIs, and is responsible for systemic risk surveillance. FINMA is responsible for protecting the functioning of financial markets; it supervises the banking, insurance, and securities sectors, and FMIs; it is also the resolution authority for licensed entities and FMIs. The FDF prepares and executes the Federal Council’s—the federal government’s—financial market policies and regulations.32 Together, the three agencies are responsible for macroprudential policies.

31. The FSAP undertook a focused assessment of financial sector regulation and supervision. The assessment was covered in several technical notes—summarized below—focusing on selected principles and themes, which were agreed upon with the Swiss authorities.

A. FINMA Autonomy and Governance

32. The authorities should continue to strengthen FINMA’s autonomy, governance, and accountability. By focusing on its prudential mandate, and doing so with operational autonomy and competent staff, FINMA promotes a stable and competitive Swiss financial system. FINMA’s staffing resources should be commensurate with its broad mandate and the size of the Swiss financial system. FINMA should continue to strengthen its supervisory capacity and the use of its powers; its authority to set binding prudential requirements (FINMA ordinances) and to codify supervisory interpretations and practices (FINMA circulars) should not be weakened. In response to a parliamentary motion, the FDF is evaluating FINMA’s governance. While efforts to unify regulatory practices and procedures, such as public consultation requirements, are reasonable, these should not hinder FINMA’s flexibility and autonomy in setting out and codifying supervisory interpretations, expectations, and practices.

33. Efforts to strengthen FINMA’s governance structure should focus on the Board of Directors, which, arguably, represents the public interest and is a buffer against political influence. Key elements of such efforts should include abolishing the requirement for final approval from the Federal Council of, for example, FINMA’s annual report, personnel ordinance, and strategic goals; publicly specifying qualification requirements and selection procedures, including strengthened rules on incompatibilities and dismissals, for members of FINMA’s Board of Directors; introducing staggered mandates for Board members; and subjecting FINMA’s operational effectiveness and efficiency to audits by the Federal Audit Office.

34. While statutory protection for supervisory staff is broadly adequate, individual cases reveal vulnerabilities, which could have chilling effects on supervisory stringency. While primary liability rests with the agencies, shielding to some extent their staff, with authorization from the Department of Justice, individuals can be prosecuted for criminal offences in the execution of their mandate (there has been at least one case in recent years) and can then also be liable in civil court. Moreover, when the agencies are held liable, they can seek reimbursement from their officials and staff. The powers introduced in the aftermath of the global financial crisis are more intrusive than previously, and stakeholders have become more vocal and litigious. FINMA’s efforts to strengthen its decision-making processes to further shield individual officials and staff against personal prosecution and litigation are welcome, as are FINMA’s demonstrated ability and willingness to indemnify its (former) officials and staff. Further enhancement should be considered in clarifying procedures and criteria for (i) authorizations for personal criminal prosecution (e.g., restricting authorization grounds), and (ii) ex post reimbursement of staff for legal costs (e.g., more generous use of the FINMA’s discretion to deem individuals’ (in)actions not in gross negligence).

B. Macroprudential Policy

35. There is a need for a more agile and accountable macroprudential policy framework. Notwithstanding rising risks, as noted in the SNB’s financial stability reports, no macroprudential measures have been taken since 2014, evidencing an inaction bias. To effectively address rising risks and inaction bias, the macroprudential toolkit should be expanded with supply- and demand-side mandated tools, and the policy decision-making process should be made more agile, with greater expectations to act The tax deducibility of mortgage interest payments should be reviewed to mitigate incentives for mortgage debt Higher risks weights for income-producing real estate is one option to directly target the growing risks in the investor property segment, informed by stress testing, analysis of macro and financial market data, and intensified supervision.33 Demand side tools (e.g., LTV and amortization requirements) would be appropriate to address risks associated with affordability concerns and increase borrowers’ resilience.

36. The macroprudential framework should be enhanced along several dimensions.

  • The macroprudential toolkit should be expanded. The 2.5 percent ceiling of the sectoral CCyB should be raised and its credit-growth trigger removed or broadened. As a (credit) supply-side instrument, this tool is unsuitable to address risks associated with affordability. On the demand side, self-regulation requires agreement with the Swiss Bankers Association, which may impact timeliness and stringency. Therefore, the Federal Council should expand the toolkit with binding supply- and demand-side instruments such as risk surcharges, and LTV, debt-to-income (DTI), and debt-service-to-income limits.

  • To strengthen operational agility and to address inaction bias, a framework with the expectation to act is needed. The SNB, under its existing financial stability mandate, would trigger the process to calibrate any current, expanded, or future tools. On a comply-or-explain basis, and after consultation with the FDF, FINMA would be expected to calibrate the tools, possibly within certain predetermined ranges (e.g., LTVs between 75–90 percent). As future circumstances require, and on a comply-or-explain basis, the SNB and FINMA should propose new macroprudential tools to the FDF. The foregoing would specify expectations—and not only possibilities—for actions by each authority for which they should be publicly accountable.

  • Transparency on systemic-risk surveillance and macroprudential policies should be increased. A statutory requirement for regular meetings between the FDF, the SNB, and FINMA, with prescribed public communications on systemic risks and macroprudential policies would enhance transparency and support accountability. This approach could build on the existing arrangements for information exchange between said agencies; the tripartite memorandum of understanding should be revitalized with clearer operational modalities, while the agencies would continue to autonomously exercise their mandates.

  • Continued closing of data gaps. Better data is needed on nonbanks and pension fund investment activities, on commercial real estate transactions and prices, LTV and DTI ratios, and income calculations. Enhanced cooperation among regulators is needed to monitor risks from the pension sector.

C. Banking

37. The authorities have taken steps to address key concerns raised during the 2014 FSAP.34 FINMA further clarified its expectations for risk management and corporate governance, including for the roles and responsibilities of the boards and senior management in ensuring an effective risk management framework and associated internal controls. Guidance was strengthened on a range of practices, providing greater detail and clarity on expectations for firms and supervisory auditors in risk areas. The planned refinements and improvements to strengthen supervisory effectiveness that FINMA introduced in January 2019 are welcome. This includes implementing a more focused regime for supervisory auditors, complemented with other enhancements to supervision practices.

38. While there are benefits to using external auditors for a small supervisor responsible for a large and diverse sector, there are risks to manage. About two-thirds of the supervision program is carried out by external auditors and the supervisory audits are overly broad. Progress has been made in the use of the forward-looking and risk-focused approach; however, FINMA should itself conduct more risk-based on-site inspections and more can be done to rebalance and improve the effectiveness of the supervisory audit system.35 Coverage at large banks can be reduced where internal audit should do much of this work under the Board’s responsibility. Supervisory audits should focus on key areas, resulting in ‘positive audit-level opinions’ on critical risk management and control practices, rather than the lower standard of ‘critical assessment.’ Moreover, arrangements under which the banks contract and pay the supervisory auditors, who typically also provide consultancy and financial audit services, raise conflict of interest concerns that may affect supervisory objectivity. FINMA—rather than banks—should contract and pay for the external auditors’ supervisory work.

39. Further measures are needed to address material risk management and control weaknesses. In the absence of an explicit legal basis for a thorough assessment of banks’ boards and senior management, FINMA is constrained in holding responsible parties accountable. FINMA requires Pillar 2 add-ons to incentivize the largest banks to address control weaknesses. However, while these add-ons can be a useful tool, they cannot replace rapid remedial action by banks to address the risk management and control weaknesses that necessitate the add-on in the first place. FINMA should assess banks’ boards and senior management effectiveness against their corporate governance responsibilities. Moreover, such governance assessments of boards and senior management should directly enable FINMA to impose restrictions (such as, on capital distributions). All of this would aim to incentivize banks to take the appropriate remedial action to address material risk management and control weaknesses.

40. A ‘post-stress’ leverage ratio requirement should be considered to strengthen the regulatory toolkit. It is commonly accepted that the combined use of an internal models-based approach for calculating RWAs and a leverage ratio serving as a non-risk-sensitive backstop incentivizes banks to underestimate their risks. This puts a premium on strong oversight of banks’ internal models for calculating risk-based capital requirements and the use of other methods, such as stress testing and scenario analysis, to ensure comprehensive capture of risk exposures—particularly risks that internal modeling approaches may not captured well. Consistent with the authorities’ prudent regulatory approach, a ‘post-stress’ leverage ratio requirement would introduce risk sensitivity under stress into the leverage ratio while maintaining total assets as the denominator.

41. FINMA should continue to increase its understanding of the two G-SIBs’ large foreign operations in the U.S., the U.K., and Asia. FINMA has significantly increased its cooperation with U.S. and U.K. supervisors. Additionally, by hosting supervisory colleges it has regular formal discussions with host-country supervisors. The two G-SIBs’ large foreign operations increase the importance of, and challenges for, FINMA’s understanding of these operations and their risks. FINMA should allocate adequate resources to the supervision of the G-SIBs consolidated operations.

D. Insurance

42. The regulatory framework for the insurance sector is highly sophisticated, but oversight of operational risk management and conduct regulation should be strengthened. Globally, Switzerland has one of the most developed insurance markets, and it is home to large internationally active insurance groups. FINMA’s supervisory approach is forward-looking and risk-based. FINMA should enhance the analytical framework for assessing operational risks and prescribe capital add-ons if needed. Furthermore, FINMA should have more legal powers and resources for the supervision of insurance intermediaries and business conduct of insurers. Furthermore, a resolution regime for insurance companies should be established.

43. The solvency regime is one of the most developed in the world. The SST has contributed to a proliferation of modern risk management practices across the sector. Nevertheless, more key SST features should be enshrined in binding ordinances and operational risks should be monitored more closely. While originally the SST relied highly on insurance companies developing their own internal models for calculating their capital requirements, a revision of the Insurance Supervision Ordinance in 2015 led to a promotion of standard models that were subsequently developed by FINMA in consultation with the insurance sector; now, only a few large (or complex) companies use an internal model.

44. A new law is expected to strengthen the legal framework for conduct regulation and policyholder protection. The 2014 FSAP recommended articulating specific rules on business conduct, noting that supervision of tied agents was only indirectly performed through insurers, and that there were no on-going reporting requirements for intermediaries. So far, only marginal improvements were made: a revision of the Insurance Supervision Act will not enter into force before 2021–22. The draft act foresees a more stringent supervision of insurance intermediaries, more transparency towards policyholders, and a specific restructuring law for insurance companies.

45. The authorities are considering a special restructuring regime for insurers in the event of a crisis. The regime would allow FINMA, for example, to transfer insurance portfolios, restructure the insurer’s debt and equity, amend insurance contracts, and defer the termination of reinsurance contracts, when an insurer becomes “over-indebted” or has “major liquidity problems.” Although insurance resolution is subject to ongoing regulatory developments at the international level, several emerging policy positions could guide the development of the insurance resolution framework. The authorities may consider, for example, enabling FINMA to exercise resolution powers without requiring the consent of interested parties, incorporating provisions on run-off, or envisaging the possibility of transferring reinsurance contracts associated with the transferred policies in resolution. Moreover, the proposed regime has not been designed to deal with the failure of a systemically significant insurer; further changes would be needed to deal with the resolution of such an insurer.

E. Financial Market Infrastructure

46. While systemically important FMIs in Switzerland are generally well developed and subject to close supervision and oversight, their internal governance and crisis management arrangements require further work. Swiss FMIs appear to generally observe the Principles for Financial Market Infrastructures (PFMI). SIX Group AG (SIX Group) operates in a competitive environment, and it is important that the systemically important FMIs it operates have strong internal governance arrangements that are sufficiently independent from the commercial incentives of the group to support sound risk management. While FMI supervision and oversight largely meet the Responsibilities set out in the PFMI, FINMA should dedicate more resources to FMIs. The authorities and SIX Group should also strengthen FMI crisis management arrangements.

47. A revised regulatory framework for FMIs came into effect in Switzerland in January 2016. FINMA has responsibility for supervision of FMIs, and the SNB has responsibility for oversight of systemically important FMIs. There is close cooperation between FINMA and the SNB where their responsibilities overlap, and the authorities have been effective in inducing change in several areas. However, resources at FINMA dedicated to FMI supervision, and to FMI recovery and resolution, should be increased to ensure that FINMA can fulfil its mandate in these areas.

48. The independence of the governance arrangements of SIX x-clear and SIX SIS should be improved, and the effectiveness of the revised SIX Interbank Clearing governance arrangements should be monitored. This will ensure that a high priority is placed on sound risk management and financial stability considerations. Competitive pressures weigh on incentives to implement best practice risk management. FMI risk governance arrangements should give sufficient attention to the risk management of the systemically important FMIs and decisions about these matters should be sufficiently independent from broader business decisions of SIX Group.

49. FMI crisis management work should continue to be a priority. The systemically important SIX Group FMIs have implemented recovery plans, broadly covering the issues considered in pertinent international guidance. Further work is required to ensure that the recovery arrangements effectively support the continuity of the FMIs’ critical services, even in extreme scenarios. FMI resolution planning is at an early stage in Switzerland. FINMA—in consultation with the SNB—should progress expeditiously with the development of FMI resolution plans. In 2018, FINMA established a crisis management group (CMG) for SIX x-clear. The authorities are strongly encouraged to complete their broader ongoing work to develop crisis management cooperation plans among Swiss authorities and with relevant foreign authorities.

F. Asset Management

50. The fund market in Switzerland has grown 10 percent annually since 2013, reaching 160 percent of GDP at end-2017. Leverage levels are low and stable for equity and bond funds, and the assets under management of money market funds (MMFs) increased slightly.36 Official data is incomplete, and the market could be twice as large.

51. Since the 2014 FSAP, FINMA has enhanced the intensity of supervision of the asset management and the fund industry, but its analytical capacity is lagging. FINMA utilizes a range of supervisory tools, has introduced a new “off-site inspections” program, has significantly increased on-site inspections, and has enhanced its enforcement policy. These are welcome developments and FINMA should continue to enhance the cooperation with foreign supervisors to monitor and supervise more effectively other internationally active asset managers. FINMA should update its IT systems and address data gaps to improve its analytical capacity; it should conduct industry-wide liquidity stress tests.

52. Concentration risk should be better monitored and managed. While funds are subject to concentration limits for their investments, higher limits apply to concentration risks through certain derivative transactions and counterparty credit risk. Some risks (such as concentration of exchange-traded funds’ swap counterparties) warrant heightened supervision to prevent undue concentration.

53. FINMA should have the power to impose administrative fines. While FINMA can seize profits resulting from serious regulatory violations and revoke the violator’s license, FINMA cannot impose administrative fines. This limitation should be remedied, because it could pose important challenges to FINMA, particularly when in 2020 it will start indirectly supervising a considerable number of independent asset managers. FINMA should use its existing enforcement tools more actively and comprehensively disclose individual enforcement actions and license revocations.

G. Fintech and Crypto-Assets

54. Although the current size of fintech activities may not be large enough to cause systemic risk, reputation and contagion risk should not be underestimated. While the number of banks engaged in crypto-related activities is small, the growth size and speed of fintech services are significant in some banks. This needs careful monitoring and more resources. If material failure and loss of confidence should occur in the fintech sector, this might affect the reputation of FINMA and the government, particularly when this coincides with financial market turmoil.

Legislative Initiatives

55. The Swiss authorities are at the global forefront of promoting blockchain and DLT by providing legal clarity and certainty. A recent Federal Council report proposes legislative changes to embed blockchain technology and DLT into existing laws. The authorities describe the initiative’s approach as underpinned by the principle of “technology-neutrality,” with some exceptions. In departing from this principle and creating a new blockchain and DLT infrastructure category, the authorities should identify risks, including regarding new types of misconduct, and introduce appropriate legal safeguards to maintain a safe and stable Swiss financial system. Accordingly, legislative amendments for the new blockchain and DLT infrastructure category should include clear and transparent eligibility standards and requirements to ensure operational safety and stability.

56. Legislative reform should preserve a level playing field. Legislative initiatives for market signaling purposes could have unintended consequences for the legal system’s integrity and financial sector reputation (e.g., facilitating market applications of poorly understood technologies and nurturing financial sector dependencies on protocols with vulnerabilities that are not initially apparent). Moreover, the initiatives’ technology-centric focus on blockchain and DLT, and removing legal obstacles to their development in particular, may inadvertently introduce market distortions and misallocate resources to untested projects. The broader goal to exploit the opportunities offered by digitalization, might be more effectively achieved by an approach to enabling innovation that is less tailored to the particular workings of blockchain and DLT.

57. The authorities should continue to engage with a diversity of stakeholders, conduct more comprehensive risk and benefit analysis, and tailor the relevant laws and regulations proportionate to the fintech activities’ evolving risk profile. In drafting targeted legislative amendments, the authorities should consider how blockchain and DLT activities may alter the structure of financial markets. The report’s proposed amendments could accelerate such change. The traditional approach under existing laws and regulations, which focus on traditional market infrastructures, is not always well suited for decentralized blockchain and DLT models. This would help to ensure coherent legal treatment, improve investor protection, preserve the Swiss financial sector’s reputation, and contribute to mitigating possible systemic risks.

Regulation and Supervision

58. Introducing new reporting requirements on and allocating additional staffing resources to fintech activities would help the authorities develop better policies and more effectively mitigate risks. Several initiatives were introduced without effective reporting requirements; the authorities rely heavily on anecdotal evidence. For better policies and risk mitigation, FINMA should collect reliable data on material activities and enhance its monitoring and analytical capacity, which would require additional staffing resources.

59. The authorities should remove regulatory gaps, particularly when these diminish retail investor protection. For example, crypto-asset related service providers (such as crypto brokers) are not always subject to prudential or market conduct regulations—except for anti-money laundering and combating the financing of terrorism (AML/CFT) regulations. Moreover, banks do not need FINMA approval for crypto-related services per se. To further enhance retail investor protection, the authorities should particularly apply prudential requirements on crypto brokers who trade payment tokens, and market conduct requirements for tradable payment tokens.

H. Financial Integrity

60. Despite good progress in adopting AML/CFT recommendations, an assessment by the Financial Action Task Force (FATF) in 2016 found that efforts should continue. The assessment evaluated Switzerland’s AML/CFT regime as technically robust, with good results overall. Nonetheless, building on a 2015 national risk assessment by Swiss authorities, the FATF assessment noted that Switzerland was exposed to the laundering of assets resulting from offenses committed abroad, with highest risk identified particularly at the level of private banks, independent asset managers, fiduciaries, lawyers, and notaries. Remaining key deficiencies included strengthening the authorities’ control of the obligation to report suspicious transactions, particularly for financial institutions; ensuring that sanctions are commensurate with the seriousness of misconduct; enhancing international cooperation.

61. Since the 2016 assessment, the authorities have taken several steps to address the deficiencies and to proactively mitigate ML/TF risks emanating from the fintech sector. Notably, they strengthened requirements for wire transfers and higher risk countries, and applied AML/CFT regulations to a range of virtual asset service providers. The authorities assessed the risks emanating from financial intermediaries and fiduciaries, and crypto-based activities. The authorities should expedite legislation on strengthening international cooperation. They should also continue to adjust the AML/CFT framework to FATF developments on fintech.

Financial Safety Net and Crisis Management

A. Early Intervention and Recovery Planning

62. FINMA enjoys a broad range of enforcement and early intervention powers to deal with problem banks but lacks an explicit early intervention framework. A written framework would enhance timely intervention, while adhering to the principles of proportionality and equal treatment under the law. Furthermore, there is no formal process in place describing which, when, and how relevant information must be exchanged between pertinent divisions. The operational modalities thereof should be documented to enhance timely recovery and resolution interventions.

63. FINMA should allocate greater resources to recovery planning. Recovery planning and measures are critical in preventing banks from entering resolution. Only the five SIBs are required to maintain recovery plans and FINMA has yet to outline its general expectations for recovery planning. FINMA should establish guidance for recovery planning and require all banks to prepare recovery plans. The guidance should ensure that the impact of scenarios for recovery planning is consistent across banks while the scenarios are firm specific. The recovery planning requirement should be expanded to all banks, prioritizing banks with insured deposits higher than the CHF 6 billion DIS cap.

B. Bank Resolution Powers and Planning

64. FINMA’s resolution powers, including liquidation, are closely aligned with the FSB Key Attributes. The authorities have addressed key 2014 FSAP concerns, including requiring that bail-inable bonds be issued in Switzerland and governed by Swiss law. FINMA now also has explicit statutory powers to write down or convert debt in resolution and to stay early termination rights.

65. FINMA has spent considerable resources to operationalize the resolution regime, focusing on the two G-SIBs, but more needs to be done to enhance resolvability. FINMA has yet to establish the G-SIBs’ resolution plans and remove critical obstacles to resolvability, including: funding in resolution; the cross-border transferability of group surplus liquidity and collateral; and timely and sufficient liquidity support during resolution. The CMGs’ roadmaps to remove resolvability impediments by end-2021 should be accelerated. To enhance resolvability, FINMA should have the power to require changes in banks’ legal and business structure or operations.

66. Resolution planning should be enhanced and expanded to all banks that could become systemic under certain circumstances. FINMA should further expand resolution planning to banks with insured deposits higher than the CHF 6 billion DIS cap.37 Resolution planning for these banks should be formalized, and they should be legally required to provide FINMA all pertinent information.

C. Deposit Insurance

67. The Swiss DIS lacks critical elements of the IADI Core Principles and best international practice; changes that the authorities are preparing will not remedy this. The DIS is designed to rely on the DIA (esisuisse) only for a form of back-up funding when a failed bank’s liquidity is insufficient to reimburse insured depositors. The liquidator is responsible for the reimbursement process—usually a key DIA competence. esisuisse is a banking sector self-regulatory body run by active bankers with a narrow ex-post funded pay-box mandate; it cannot be used to finance resolution measures, which would benefit the public and esisuisse as, for example, a transfer of deposits is more cost effective than a payout and allows depositors to have uninterrupted access to their deposits. The system does not have a public backstop; payout timeframes are not defined by law. The combination of an ex-post funding mechanism, the statutory CHF 6 billion cap on banks’ joint contribution for deposit insurance, and the lack of a formal public backstop could leave doubts that the DIS would always be able to fulfill its mandate, leaving taxpayers to pay what is required beyond the CHF 6 billion cap. Without a thorough reform, the DIS cannot effectively contribute to the financial safety net and the DIA cannot be integrated into the crisis management framework.

68. The authorities should include the following in the ongoing DIS reform proposals:38

  • Make the DIA a public-sector entity without any active bankers participating in its board.

  • Allow the DIS to fund resolution measures, subject to safeguards (least-cost test).

  • Abolish the CHF 6 billion ceiling and introduce full ex-ante funding with a target level based on the simultaneous failure of several midsize banks,39 supplemented by a government back-up.

  • Formalize a seven-day payout timeframe starting from license revocation.

  • Require banks to produce a single customer view on request, subject to regular audits and tests.

D. Resolution Funding and ELA

69. An ex post funding mechanism should support the resolution regime. While allowing the DIS to fund resolution measures would provide a new funding source, this will be limited and take time to build up. There should be a legal mechanism to recover from banks any public funding of resolution measures.

70. The SNB should issue policies and procedures supporting its authority to provide ELA to any bank that is considered systemic and viable under certain circumstances. The SNB has undertaken significant ELA preparations with the five SIBs. The SNB can provide ELA to any other group of banks that the SNB deems systemic—a determination that it is able to make quickly. However, public information on ELA requirements and procedures is sparse. The SNB should issue ELA guidance to help non-SIBs prepare for ELA that should remain at the SNB’s discretion.

E. Contingency Planning

71. Systemwide crisis preparedness must be advanced. While it may be difficult to predict the source of any future crisis, official responses are typically limited to a defined catalogue of actions, such as recovery measures, ELA, and resolution. Policy and operational choices for such actions should be laid down in a national contingency plan, ensuring complementarity of agency-specific plans and including a communication plan, regularly tested with simulation exercises.

72. Although the regime does not explicitly establish arrangements for exceptional support, the Federal Council could use constitutional emergency powers during a financial crisis. The Constitution authorizes the Federal Council to issue ordinances for extraordinary measures. These could include official support for banks to preserve financial stability. In 2008, the Federal Council used these powers to recapitalize UBS.

Table 2.

Switzerland: Selected Economic Indicators (2016–24)

(In percent)

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Sources: Haver Analytics; IMF’s Information Notice System; Swiss National Bank; and IMF Staff estimates.

Contribution to growth. Inventory accumulation also includes statistical discrepancies and net acquisitions of valuables.

Reflects new GFSM 2001 methodology, which values debt at market prices. Calculated as the sum of Federal, Cantonal, Municipal and Social security gross debts.

Based on relative consumer prices.

Table 3.

Switzerland: Financial Soundness Indicators of the Banking Sector (2010–18)

(In percent)

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Source: Swiss National Bank.

Based on parent company consolidation. This consolidation basis equals the CBDI approach defined in FSI compilation guide plus foreign bank branches operating in Switzerland, and minus overseas deposit-taking subsidiaries.

From 2007 onwards broader criteria pursuant to national accounting regulations (FINMA-RS 08/2 Art. 228b) has been applied for defining non-performing loans.

As percent of total credit to the private sector.

Includes mining and extraction, production and distribution of electricity, natural gas and water, financial intermediation, social security, and ex-territorial bodies and organizations.

In 2015, the indicator was redefined in line with Basel III regulations, leading to a series break. The 2015 value under the new definition is not yet available.

The indicator “liquid assets as percent of short-term liabilities” has been replaced by the ratio of hiqh quality liquid assets to net cash outflows. This leads to a break between 2014 and 2015.

* These ratios were calculated from numbers that originate from the Basel I as well as from the Basel II approach. Therefore, interpretation must be done carefully since they can vary within +/- 10%.
Table 4.

Switzerland: Financial Soundness Indicators of the Insurance Sector (2013–17)

(In percent)

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Source: IMF staff calculations based on FINMA data.Notes: Reinsurance includes captives.

Liquid assets include bonds, equity, cash and deposits, and investment funds.

Appendix I. Implementation Status of 2014 FSAP Recommendations

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Appendix II. FSAP Risk Assessment Matrix (RAM)

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Appendix III. Scenario Assumptions for Stress Test


Switzerland: Domestic Macroeconomic Scenario

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Source: IMF estimates.

Switzerland: International Macroeconomic Scenario

Citation: IMF Staff Country Reports 2019, 183; 10.5089/9781498321662.002.A001

Source: IMF estimates.

Appendix IV. Banking Sector Stress Testing Matrix (STeM)

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Appendix V. Insurance Sector Stress Testing Matrix (STeM)

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Swiss banks have large global wealth-management divisions, whose assets are held off-balance sheet. About 75 percent of the assets are under custody and 21 percent of assets under a discretionary asset management agreement. The Swiss Bankers association reports that Swiss banks managed CHF 6.7 trillion assets in 2016, but other sources report larger amounts.


PostFinance is Swiss Post’s state-owned financial services arm.


SNB, Financial Stability Report, 2018.


Cantonal banks’ assets are over CHF 575 billion; 62 percent of which are mortgage loans.


The BIS defines the credit-to-GDP gap as the difference between the credit-to-GDP ratio and its long-run trend.


See further, Country Report No. 18/174.


Over the last ten years, the price-to-income and price-to-rental ratios for owner-occupied real estate increased by a cumulative 27 percent and 22 percent, respectively.


The distribution of household wealth, and assets and liabilities, could also pose macrofinancial risks.


Under the “self-regulatory” framework, owner-occupiers are only required to amortize their mortgage debt above a loan-to-value ratio of 67 percent.


The figure declines to one-third at the consolidated banking level.


Conceptual measurement biases refer to the blurred boundaries between residents and non-residents, and the attribution of income across countries. For more information, see the 2018 IMF External Sector Report.


Swiss banks’ exposures to corporates amount to 7 percent of total assets. Banks have only 2 percent exposures to large Swiss companies.


After the real-estate bubble in the late 1980s, some cantonal banks went bankrupt or where rescued, and the banking industry consolidated. Switzerland experienced a recession and severe financial stress.


Real estate prices are to a large extent driven by domestic investors; with some exceptions, foreign buyers are not allowed to directly invest in real estate.


PostFinance is Swiss Post’s state-owned financial services arm. The government has proposed to partially privatize PostFinance and provide it with a full banking license.


The Federal Council decides on the CCyB stance on a proposal by the SNB after consultation with FINMA.


In terms of consolidated assets as of June 2018, run at the highest level of consolidation. Appendix IV details the solvency tests’ specifications and methodology.


Risk buckets included estimated vintage distributions of loan-to-income and loan-to-value ratios. FSAP results were broadly comparable to FINMA’s 2018 pilot mortgage stress test exercise involving 18 banks.


Appendix III shows paths for core macrofinancial variables projected in the stress test scenario.


The assumed dividend payout rule is on average 50 percent of net profits.


DBFs include banks with domestic credit exposure amounting at a minimum 50 percent of their total balance sheet. They represent one-third of total banking system assets.


Capital depletion for the sample of banks represents about 3 percent of projected nominal GDP in 2022.


The vulnerability of DFBs to sharp rises in interest rates is also explored by the Swiss authorities. Their results indicate that DFBs are more vulnerable to harsher interest rate shocks than G-SIBs, due to net interest income compression due to maturity mismatches, in combination with a surge in write-downs on domestic mortgages.


Since 2012, FINMA has conducted regular real estate stress tests as a microprudential supervisory tool. Key scenario assumptions include: (i) a 30–40 percent real estate price correction for the owner-occupied segment (44–54 percent for owner-occupied luxury segment), and 35–45 percent for both the investment-led segment and commercial real estate; and, (ii) a hike in lending rates to 7.0 percent.


The sample covered approximately 70 percent of the total Swiss mortgage lending currently standing at over CHF 1,000bn.


The capital threshold is defined as the total capital ratio, which is the total required regulatory capital incl. anticyclical buffer divided by RWA.


This includes enhanced granularity of regular reporting on banks’ securities and investments portfolios, and the geographical breakdown of material exposures by the obligor’s residence.


The net stable funding ratio is not yet implemented in Switzerland.


Interconnectedness between banks and nonbank financial firms, too, is low. Only 1 percent of assets are exposures to insurance companies and pension funds, and 4 percent of liabilities are amounts due in respect to customer deposits of insurance companies and pension funds


In the absence of large bank-insurance cross holdings, the ST was conducted on a stand-alone basis.


The agencies are part of supervisory and resolution colleges that serve as platforms for cross-border cooperation.


The Federal Department of Home Affairs is responsible for policymaking in the pension sector.


The authorities are considering to advance the implementation of the Basel III regulation for higher risk weights on income-producing real estate with LTV ratios above 66 percent.


Switzerland is a member of the Basel Committee on Banking Supervision and follows Basel III.


Article 24(4) of the FINMA Act provides that “the Federal Council regulates the main aspects of the content and conduct of the audit and the form of the report.”


Constant net asset value per share MMFs (C-NAV MMFs) are not allowed in Switzerland, although Swiss asset managers are managing some foreign domiciled C-NAV MMFs.


Eleven Swiss banks have insured deposits of more than CHF 6 billion. Only six of them are subject to some form of resolution planning: full-fledged planning for five SIB’s and simplified planning for one non-SIB.


In 2010, after public consultation, the government withdrew a reform proposal including a nationalized DIS with an ex-ante fund, back-up funding from the government, and a CHF 10 billion target level.


For purposes of this note, mid-size banks are the 10–15 banks—out of the over 300 banks in Switzerland—just below the level of banks with a SIB designation.