Financial stability and macroprudential supervision

A stable financial system is a necessary condition for the efficient allocation of resources in an economy, for an effective risk management in the financial sector and the ability of the financial system to absorb financial shocks. Financial market stability also ensures sustainable access to financial services and credit for both households and businesses in times of recessions and booms.

The latest global financial crisis has shown that besides microprudential policy - which aims at safeguarding individual financial institutions – macroprudential policy is inevitable to guarantee financial stability. Due to the absence of a central bank in Liechtenstein, which is primarily responsible for the stability of the financial system in other countries, the FMA is the competent authority to safeguard the financial sector.

Macroprudential supervision

Macroprudential supervision contributes to the stability of the financial system by strengthening the resilience of the financial system and by reducing the accumulation of systemic risks. A stable financial system is a fundamental prerequisite for fulfilling its economic functions. The main task of macroprudential supervision is the ongoing and preventive monitoring and evaluation of systemic risks for the Liechtenstein financial sector. For addressing the identified systemic risks, macroprudential supervision uses a number of macroprudential instruments, warnings and recommendations, which focus on lowering financial stability risks.

The necessity for macroprudential interventions is particular based on three types of systemic externalities. These externalities include:

• the tendency of the financial system to boost negative macroeconomic shocks;

• macrofinancial feedback mechanisms, which lead to a high vulnerability of the financial system against these shocks;

• the interconnectedness within the financial system, which increases the vulnerability of the system against specific ("idiosyncratic") shocks.

With regard to these three externalities, in particular, various tasks arise for macroprudential supervision and policy.

• Increasing the resilience of the financial system against these shocks, e.g. through the build-up of adequate capital buffers;

• Reducing systemic risks, through reducing the procyclicality of the financial system, e.g. through limiting the leverage and volatile sources of financing. 

• Ultimately, macroprudential policy can assess and structurally reduce vulnerabilities by analyzing the interconnectedness between financial intermediaries and the critical role financial institutions play in core markets.

The responsibility for financial stability and macroprudential policy and supervision are spread among several institutions. According to Article 4 FMA Act, the FMA shall safeguard the stability of the Liechtenstein financial market, the protection of customers, the prevention of abuse, as well as the implementation of and compliance with recognised international standards. The tasks of the FMA arise from its role as being the competent authority for macroprudential supervision and safeguarding financial stability as well as the use of macroprudential instruments. The government decides on introducing macroprudential instruments in the framework of existing legislation and thereby defines the operational framework of macroprudential supervision in Liechtenstein.

To strengthen financial market stability in Liechtenstein and to reduce systemic and procyclical risks, the Financial Stability Council (FSC) was established on 1 May 2019, which is composed of representatives from the FMA and the Ministry of General Government Affairs and Finance of Liechtenstein. The FSC aims at strengthening cooperation related to macroprudential policy among the institutions represented in the council and discusses relevant issues for financial stability.