Pursuant to Article 4l Banking Act (BankG), the systemic risk buffer (SyRB) serves to prevent and mitigate macroprudential or systemic risks with potential serious adverse effects on the financial system and the real economy that have not already been covered by Regulation (EU) No. 575/2013 or Arts. 4c to 4k BankG (i.e. countercyclical capital buffer, capital buffer for global as well as other systemically relevant institutions and capital conservation buffer). The SyRB must be held in common equity tier 1 (CET1) capital in addition to the minimum capital requirement and additional capital requirements (e.g. capital conservation buffer, countercyclical capital buffer, G-SII and O-SII buffer and Pillar II requirements). A failure to meet the SyRB requirement results in distribution restrictions and the creation of a capital conservation plan.
In past banking crises, the costs of a bank recapitalization were often borne by the public sector in other countries in order to mitigate negative effects on the real economy. Therefore, the objective of the SyRB is to decrease the probability of a crisis and to reduce potential crisis costs ex-ante by strengthening the risk-bearing capacity of banks against the identified long-term, structural systemic risks.
Method and calibration
To calibrate the SyRB, we follow a three-step risk-based approach. In a first step, a systemic risk analysis is conducted. In this context, the FMA proactively identifies the development of banks, their risk-taking capacity at the system level as well as structural, non-cyclical systemic risks in the financial system in line with its financial stability mandate. For Liechtenstein, the FMA has identified two main sources of systemic risks:
- Systemic vulnerability is an increased vulnerability of financial institutions against disturbances in the financial system, either due to the interconnectedness of one or more institutions among each other, with the financial system or the real economy. As a consequence, systemic vulnerability addresses risks that operate from the financial system to the institutions, the real economy and the public budget. In Liechtenstein, examples of systemic vulnerabilities are potential risks arising from contingent liabilities related to the deposit guarantee scheme, reputational risks of the Liechtenstein financial center in general specifically due to the prevailing business models of banks, and systemic risks arising from the institutional specifics in Liechtenstein.
- Systemic cluster risks arise due to substantial similar exposures of the banking industry. These similarities across financial institutions can lead to disturbances and severe negative effects in the financial system and, as a consequence, to the real economy. A substantial cluster risk in Liechtenstein results, for example, from the banks’ large exposures to mortgage loans in light of the high household indebtedness of the private household sector.
After the identification of systemic risks for the Liechtenstein banking sector, the size of the systemic risk buffer is calibrated, based on three different calibration methods to ensure multiple perspectives relating to systemic risks in Liechtenstein.
- The top-down approach considers average crises costs in the EU and the EEA countries. This “systemic approach” aims to internalize systemic crises costs ex ante by financial institutions, so that the public sector is protected from ex-post bail-out payments.
- The bottom-up approach considers the necessary capital requirement for addressing specific systemic risks in the Liechtenstein banking sector based on different stress scenarios. This approach aims at strengthening the risk-bearing capacity of financial institutions against specific risk categories.
- For a consistency check, macroprudential capital requirements of Liechtenstein banks’ are compared to the capital requirements of peer financial systems with similar systemic risks (i.e. small and open economies with a large banking sector relative to GDP in the European Economic Area).
The calibration of the systemic risk buffer also considers overlaps with the capital buffer for other systemically relevant institutions (O-SII buffer) as well as risk-mitigating factors (such as the low complexity of Liechtenstein bank’s balance sheets due to the application of the standardized approach, the less complex business models, proportionality criteria as well as the consideration of the idiosyncratic component under the SREP or in the Pillar 2 capital requirement).
Measure
After considering the overlaps with the O-SII buffer as well as the risk-mitigating factors, the calibration results in a sectoral systemic risk buffer for all Liechtenstein banks of 1% of risk-weighted assets of loans secured by real estate property in Liechtenstein. The recalibrated systemic risk buffer applies on both the consolidated and individual basis as of the introduction of the CRD V package on 1 May 2022, as systemic risks can manifest themselves both at the consolidated and individual basis given the fact that, especially during a crisis, the allocation of capital within a cross-border banking group is not sufficiently flexible. At the same time, arbitrage opportunities should be minimized to ensure a level playing field.
[1] Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176, 27.6.2013, p.1.