Warnings and recommendations

In its meeting on 27 June 2022, the Financial Stability Council (FSC) has recommended to the Government pursuant to Article 33b(2)(d) of the Financial Market Supervision Act (FMAG), to retain the countercyclical capital buffer (CCyB) at a rate of 0% of risk-weighted assets, as there are currently no signs of excessive credit growth in Liechtenstein.

The purpose of the buffer is to build up an additional capital reserve in times of excessive credit growth by financial institutions to cushion losses in the event of a crisis. The basis for the buffer decision is the so-called credit gap, i.e. the deviation of the private sector debt ratio relative to GDP from its long-term trend. The estimation of the credit gap, which is calculated on the basis of household debt and mortgage loans, currently yields a negative value and therefore implies keeping the buffer at 0% from a purely technical, rules-based perspective. Against the background of the negative credit gap and under consideration of other indicators linked to the development of cyclical risks in Liechtenstein, the FSC concluded to keep the countercyclical capital buffer at the level of 0% of risk-weighted exposures.

The FSC continuously monitors the development of cyclical risks in the financial sector and will adapt the recommendation regarding the level of the countercyclical capital buffer if deemed necessary.

In its meeting on 27 June 2022, the Financial Stability Council (FSC) recommended pursuant to Article 33b(2)(d) of the Financial Market Supervision Act (FMAG) that the FMA retains the buffer for Other Systemically Important Institutions (O-SIIs), based on an annual calibration and buffer review of the FMA, at 2% of the total risk exposure amount on a consolidated as well as individual basis. This recommendation in particular considers the Guidelines of the European Banking Authority[1] (EBA).

The O-SII buffer is applied to financial institutions that pose substantial systemic risks to the banking system. By specifying an additional buffer consisting of Common Equity Tier 1 (CET1) capital, the O-SII buffer primarily aims to reduce the probability of default of systemically important institutions, but at the same time it also compensates for the negative effects of an implicit state guarantee. In addition, the buffer is intended to strengthen market confidence in the identified banks by increasing their loss absorbing capacity. O-SIIs are identified on a yearly basis, following a procedure established under the EBA Guidelines considering ten indicators. In the first step, a score is calculated for each relevant institution at least at the highest consolidation level. The score reflects the systemic importance of the institution and includes the following core criteria:

• size,
• importance for the economy of the Member State, capturing substitutability/financial institution infrastructure,
• complexity, including the additional complexities from cross-border activity, and
• interconnectedness of the institution with the financial system.

All four criteria are weighted equally. The systemic importance of an institution in the financial center follows from the relative weight of the institution to the other institutions in the Liechtenstein banking system. The threshold of 350 basis points as specified in the EBA Guidelines is used to designate an institution as an O-SII, given a total score of 10’000 basis points for the entire banking sector of a Member State. Since systemic risks can manifest themselves on both a consolidated and an individual basis, and capital allocation is not flexible in a crisis, especially within a cross-border banking group, the O-SII buffer is to be prescribed on both the consolidated and individual basis. The following scores and buffer rates have been calculated for the Liechtenstein institutions:

Table 1: O-SIIs in Liechtenstein and the O-SII buffer rates (consolidated basis)

Table 2: O-SIIs in Liechtenstein and the O-SII buffer rates (individual basis)

The three identified O-SIIs are systemically important to the Liechtenstein banking sector in terms of all four core criteria (i.e. size, importance for the Liechtenstein economy, complexity, and interconnectedness with the real economy). Liechtenstein’s banking sector is highly concentrated around the three systemically important banks, as is apparent from their aggregated total score of 9,157 and 9’063 (out of a possible 10’000 basis points). Given that all three identified O-SIIs have a total score of more than 1’000 points, and hence far exceed the defined threshold of 350 basis points for the identification of a systemically important bank, the FSC recommends that the FMA retain the O-SII buffer at 2% of the total risk exposure amount for all three mentioned banks on a consolidated and individual basis.

[1]  Guidelines on criteria for determining the conditions of application of Article 131(3) of Directive 2013/36/EU (CRD) as regards the assessment of other systemically important institutions (O-SII) (EBA/GL/2014/10)

The Financial Stability Council (FSC) has recommended to the Government in its meeting on 28 June 2021 pursuant to Article 33b(2)(d) of the Financial Market Supervision Act (FMAG), to retain the countercyclical capital buffer (CCyB) at a rate of 0% of risk-weighted assets, as there are currently no signs of excessive credit growth in Liechtenstein.

The purpose of the buffer is to build up an additional capital reserve in times of excessive credit growth by financial institutions to cushion losses in the event of a crisis. The basis for the buffer decision is the so-called credit gap, i.e. the deviation of the private sector debt ratio relative to GDP from its long-term trend. The estimation of the credit gap, which is calculated on the basis of household debt and mortgage loans, currently yields a negative value and therefore implies keeping the buffer at 0% from a purely technical, rules-based perspective. Against the background of the negative credit gap and under consideration of other indicators linked to the development of cyclical risks in Liechtenstein, the FSC concluded to keep the countercyclical capital buffer at the level of 0%.

The FSC continuously monitors the development of cyclical risks in the financial sector and will adapt the recommendation regarding the level of the countercyclical capital buffer if deemed necessary.

[1]  Guidelines on criteria for determining the conditions of application of Article 131(3) of Directive 2013/36/EU (CRD) as regards the assessment of other systemically important institutions (O-SII) (EBA/GL/2014/10)

In its meeting on 13 October 2021, the Financial Stability Council (FSC) recommended pursuant to Article 33b(2)(d) of the Financial Market Supervision Act (FMAG) that the FMA retain the buffer for other systemically important institutions (O-SII), based on an annual calibration and buffer review of the FMA, at 2% of the total risk exposure amount on a consolidated as well as individual basis. This recommendation in particular considers the Guidelines of the European Banking Authority[1] (EBA) and was issued on the basis of the planned revision of the Banking Act (BankG) to implement CRD V, which - subject to the approval of the Liechtenstein Parliament - is expected to come into force in Liechtenstein in spring 2022. The new capital buffer provisions, as set forth in this AFMS recommendation, are to apply as of the entry into force of the revised Bank Act.

The O-SII buffer is applied to financial institutions that pose substantial systemic risks to the banking system. By specifying an additional buffer consisting of Common Equity Tier 1 capital, the O-SII buffer primarily aims to reduce the probability of default of systemically important institutions, but at the same time it also compensates for the negative effects of an implicit state guarantee. In addition, the buffer is intended to strengthen market confidence in the identified banks by increasing their loss absorbing capacity. O-SIIs are identified on a yearly basis, following a two-step procedure established under the EBA Guidelines and taking into account ten indicators. In the first step, a score is calculated for each relevant institution at least at the highest consolidation level. The score reflects the systemic importance of the institution and includes the following core criteria:

• size,
• importance for the economy of the Member State, capturing substitutability/financial institution infrastructure,
• complexity, including the additional complexities from cross-border activity, and
• interconnectedness of the institution with the financial system.

All four criteria are weighted equally. The systemic importance of an institution in the financial center follows from the relative weight of the institution to the other institutions in the Liechtenstein banking system. The threshold of 350 basis points as specified in the EBA Guidelines is used to designate an institution as an O-SII, given a total score of 10’000 basis points for the entire banking sector of a Member State. Since systemic risks can manifest themselves on both a consolidated and an individual basis, and capital allocation is not flexible in a crisis, especially within a cross-border banking group, the O-SII buffer is to be prescribed on both the consolidated and individual basis. The following scores and buffer rates have been calculated for the Liechtenstein institutions:

Table 1: O-SIIs in Liechtenstein and the O-SII buffer rates (consolidated basis)

Table 2: O-SIIs in Liechtenstein and the O-SII buffer rates (individual basis)

The three identified O-SIIs are systemically important to the Liechtenstein banking sector in terms of all four core criteria (i.e. size, importance for the Liechtenstein economy, complexity, and interconnectedness with the real economy). Liechtenstein’s banking sector is highly concentrated around the three systemically important banks, as is apparent from their aggregated total score of 9,157 and 9’063 (out of a possible 10’000 basis points). Given that all three identified O-SIIs have a total score of more than 1’000 points, and hence far exceed the defined threshold of 350 basis points for the identification of a systemically important bank, the FSC recommends that the FMA retain the O-SII buffer at 2% of the total risk exposure amount for all three mentioned banks on a consolidated and individual basis.

[1]  Guidelines on criteria for determining the conditions of application of Article 131(3) of Directive 2013/36/EU (CRD) as regards the assessment of other systemically important institutions (O-SII) (EBA/GL/2014/10)

In order to address the structural, long-term systemic risks in the Liechtenstein banking sector, the Financial Stability Council (FSC) has recommended to the Government pursuant to Art. 33b(2)(d) of the Financial Market Supervision Act (FMAG) that a systemic risk buffer (SyRB) be established for all Liechtenstein banks in the amount of 1% of mortgage-backed loans for properties in Liechtenstein, both on a consolidated and on an individual basis. This recommendation was made on the basis of the planned revision of the Banking Act (BankG) to implement the revised EU Capital Requirements Directive (CRD V[1]), which - subject to approval by the Liechtenstein Parliament - is expected to come into force in Liechtenstein in spring 2022. The new capital buffer provisions according to this FSC recommendation are to apply as of the entry into force of the revised Banking Act.

In the revised EU Capital Requirements Directive, the O-SII buffer (Art 131 CRD V) and the SyRB (Art 133 CRD V) will be additive, whereas previously only the higher of the two capital buffers was applied. Against the background of these legal changes, a recalibration of the SyRB - but also of the O-SII buffer (see FSC Recommendation 2021/2) - is now to be carried out. Subject to the planned revision of the Banking Act, the level of the buffers will therefore be adjusted in such a way that the implementation of CRD V does not result in an increase in the effective buffer requirements merely due to the regulatory changes.

The systemic risk buffer serves to avoid or mitigate macroprudential risks or systemic risks with potential serious adverse effects on the financial system and the real economy that have not already been captured by the countercyclical capital buffer or O-SII buffer. The recalibration of the SyRB is methodologically based on the calibration in 2019, but in addition considers the regulatory changes resulting from the planned CRD V introduction.

Based on the FMA's analysis, two significant sources of systemic risk were identified for the Liechtenstein banking sector. These are systemic vulnerability and systemic cluster risk.

Systemic vulnerability results from an increased vulnerability of banks to the financial system, which can arise through the interconnectedness of banks with each other, with the financial system and with the real economy. Examples of systemic vulnerability are

• potential risks arising from contingent liabilities to the deposit insurance scheme,
• reputational risks of the Liechtenstein financial center in general as well as due to the prevailing business model, and
• systemic risks arising from the special institutional features in Liechtenstein.

Systemic cluster risk arises from substantially similar risk sources in the banking sector and can lead to significant negative effects in the financial system and in the real economy due to the similarity of business models across banks. In Liechtenstein, the high mortgage portfolios in the bank balance sheets against the background of the high indebtedness of the private household sector as well as the similar dependencies vis-à-vis correspondent banks were identified as systemic cluster risks.

The level of the systemic risk buffer is calibrated using different methodological approaches, taking into account both historical crisis costs and potential costs due to the materialisation of specific systemic risks, as well as a comparison of macroprudential capital buffer requirements with similar banking systems to Liechtenstein’s.

In particular, the calibration also considers overlaps with the capital buffer for other systemically important institutions (O-SII buffer) as well as risk mitigating factors. These include, for example, the lower complexity of Liechtenstein bank balance sheets due to the application of the standardised approach, the less complex business models, proportionality criteria as well as the addressing of idiosyncratic risks in the Supervisory Review and Evaluation Process (SREP) or in the Pillar 2 capital requirement. After considering the overlaps with the O-SII capital buffer as well as the risk-mitigating factors, the calibration results in a sectoral SyRB for all Liechtenstein banks of 1% of the risk-weighted amount of mortgage-backed loans secured by real estate properties in Liechtenstein. The sectoral SyRB aims to strengthen the resilience of the banking sector in relation to the identified real estate-related systemic risks. The recalibrated systemic risk buffer is expected to apply from spring 2022 - when the revised Banking Act enters into force - on both a consolidated and an individual basis, as systemic risks can manifest themselves on both a consolidated and an individual basis and capital allocation is not sufficiently flexible, especially in a crisis. At the same time, arbitrage opportunities should be excluded to ensure a level playing field for all Liechtenstein banks.

The sectoral SyRB of 1% of the risk-weighted amount of the mortgage-backed loans secured with real estate properties in Liechtenstein is considered effective, proportional and appropriate based on the stress scenarios and past crisis costs. This is based on the identified systemic risks in the Liechtenstein financial system and the potential losses due to structural risks. Should the systemic risks continue to increase - in particular due to rising risks in relation to private household debt - the FSC will consider increasing the buffer ratio in the course of the regular review of the systemic risk buffer, provided that no other (and more accurate) macroprudential instruments are available to address the systemic risks.

[1] Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures, OJ. L 150, 7 June 2019, p. 253.

Pursuant to Article 33b(2)(d) of the Financial Market Supervision Act (FMAG), the Financial Stability Council (FSC) has recommended to the Government in its meeting on 29 June 2020 to retain the countercyclical capital buffer (CCyB) at a rate of 0% of risk-weighted assets, as there are currently no signs of excessive credit growth in Liechtenstein.

The purpose of the buffer is to build up an additional capital reserve in times of excessive credit growth by financial institutions to cushion losses in the event of a crisis. The basis for the buffer decision is the so-called credit gap, i.e. the deviation of the private sector debt ratio relative to GDP from its long-term trend. The estimate of the credit gap, which is calculated on the basis of household debt and mortgage loans, currently yields a positive value and would therefore imply an increase in the buffer from a purely technical, rules-based perspective. A closer analysis shows, however, that the increase in the credit gap is mainly due to the expected decline in GDP and that there is still no evidence of excessive lending. Against the background of the current global recession and under consideration of other indicators linked to the development of cyclical risks in Liechtenstein, the FSC therefore concluded that an increase in the countercyclical capital buffer is currently not recommended.

The FSC continuously monitors the development of cyclical risks in the financial sector and will adapt the recommendation regarding the level of the countercyclical capital buffer if deemed nec-essary.

In its meeting on 29 June 2020, the Financial Stability Council (FSC) recommended pursuant to Article 33b(2)(d) of the Financial Market Supervision Act (FMAG) that the FMA retain the buffer for Other Systemically Important Institutions (O-SII) at 2% of the total risk exposure amount on a consolidated basis. This recommendation takes account in particular of the Guidelines of the European Banking Authority (EBA).[1] 

The O-SII buffer is applied to financial institutions that pose substantial systemic risks to the banking system. By specifying an additional buffer consisting of Common Equity Tier 1 capi-tal, the O-SII buffer primarily aims to reduce the probability of default of systemically im-portant institutions, but at the same time it also compensates for the negative effects of an implicit state guarantee. In addition, the buffer is intended to strengthen market confidence in the identified banks by increasing their loss absorbing capacity.

O-SIIs are identified on a yearly basis, following a two-step procedure established under the EBA Guidelines and taking into account ten indicators. In the first step, a score is calculated for each relevant institution at least at the highest consolidation level. The score reflects the systemic importance of the institution and includes the following core criteria: 

• size,
• importance for the economy of the Member State, capturing substitutability/financial institution infrastructure,
• complexity, including the additional complexities from cross-border activity, and
• interconnectedness of the institution with the financial system.

All four criteria are weighted equally. The systemic importance of an institution in the finan-cial centre follows from the relative weight of the institution to the other institutions in the Liechtenstein banking system. The threshold of 350 basis points as specified in the EBA Guidelines is used to designate an institution as an O-SII, given a total score of 10 000 basis points for the entire banking sector of a Member State. The second step consists in a super-visory assessment by the national authorities, in which further optional indicators may be used to assess systemic importance. This serves to identify all systemically important banks as O-SIIs, even if they were not identified as such in the first step.

The following scores and buffer rates have been calculated for the Liechtenstein institutions:

The three identified O-SIIs are systemically important to the Liechtenstein banking sector in terms of all four core criteria (i.e. size, importance for the Liechtenstein economy, complexity, and interconnectedness with the real economy). The Liechtenstein banking sector is highly concentrated around the three systemically important banks, as is apparent from their aggregated total score of 9'046 (out of a possible 10'000 basis points). Given that all three identified O-SIIs have a total score of more than 1'000 points, and hence far exceed the defined threshold of 350 basis points for the identification of a systemically important bank, the FSC recommends that the FMA retain the O-SII buffer at 2% of the total risk exposure amount.

[1] Guidelines on criteria for determining the conditions of application of Article 131(3) of Directive 2013/36/EU (CRD) as regards the assessment of other systemically important institutions (O-SII) (EBA/GL/2014/10).

In its meeting on 29 June 2020, the Financial Stability Council (FSC) recommended pursuant to Article 33b(2)(d) of the Financial Market Supervision Act (FMAG) that the FMA implement the recently published ESRB recommendations in the context of the COVID-19 pandemic.

ESRB Recommendation 2020/6 deals with liquidity risks due to margin calls, which may occur to a greater extent in times of financial market turbulence. While the ESRB Recommendation is only partially relevant for Liechtenstein, as there is no central counterparty (CCP) operating in Liechtenstein, the FSC recommends that the FMA consider the recommendations relevant for Liechtenstein in its regular supervision activities and implement them accordingly.

ESRB Recommendation 2020/7 provides for a restriction of dividend distributions, share buy-backs, and payments of variable remuneration to material risk takers for banks, insurance and reinsurance undertakings, and central counterparties until the end of the year in order to strengthen the quantity and quality of own funds of financial intermediaries in the context of the COVID-19 pandemic. In principle, the FSC supports the ultimate objectives of the recommendation to prevent a spillover of the downturn of the real economy to the financial sector, allowing the financial sector to play an important supportive role in the following economic recovery. Against the background of the current global recession, a prudent and cautious distribution policy in the financial sector therefore remains essential. However, considering the special characteristics of the financial sector in Liechtenstein, especially the well above-average capitalization of the Liechtenstein banking and insurance sectors, as well as the legal framework, a general prohibition of dividend distributions, share buy-backs, and payments of variable remuneration to material risk takers in Liechtenstein is not considered being proportional in light of the objectives of the Recommendation. The FSC therefore recommends the FMA not to implement the respective ESRB Recommendation in Liechtenstein.

ESRB Recommendation 2020/8 requires the national macroprudential authorities to monitor the financial stability implications of the fiscal measures taken to support the real economy in the context of the COVID-19 pandemic. In this context, the FSC recommends that the FMA establish a respective monitoring, as proposed in the Recommendation, and regularly report the results of the analysis to the ESRB. The FSC recommends the Government to make the data for this analysis available to the FMA.