## 1cheea2019007

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### EXECUTIVE SUMMARY — Macroprudential framework and institutional roles
- Financial stability responsibilities and powers are shared across agencies:
  - SNB: lender of last resort; oversees systemic financial market infrastructures (FMIs); responsible for systemic risk surveillance.
  - FINMA: responsible for protecting the functioning of financial markets through supervision of banks, insurers, securities firms, and FMIs.
  - FDF: prepares and executes the Federal Council’s financial market policies and regulations.
- One dedicated formal macroprudential tool:
  - Sectoral Counter-Cyclical Buffer (CCyB). The Federal Council takes the decision on the CCyB stance based on a proposal by the SNB after consultation of FINMA.
- Current constraints and concerns:
  - Framework constrained by having only one mandated tool along with a self-regulation agreement with banks.
  - Self-regulation may impact timeliness and stringency of demand-side measures.
  - Need to address inaction bias and rising risks through an expanded, mandated, and more accountable framework.

### EXPERIENCE WITH 2012–14 MEASURES
- Actions taken:
  - On the SNB’s proposal, the Federal Council introduced and raised the CCyB.
  - Demand-side measures targeting mortgage loans financing residential properties were introduced.
  - Measures required banks to hold additional CET1 of 1 percent of their associated risk-weighted positions, and a further increase of 1 percent was announced in 2014.
  - FINMA recognized new requirements for mortgage financing drawn up by the SBA as minimum regulatory standards since mid-2012 (including down payment and repayment time).
  - The Federal Council required more capital for non-compliant loans, and for the part of mortgages exceeding 80 percent of the property value.
  - FINMA tightened rules for risk weighing bank mortgages using an internal ratings-based approach.
- Impact:
  - Residential real estate prices and mortgage volumes recorded slower growth compared to 2012.
  - Activation and increase of the sectoral CCyB helped preserve and, in some cases, increase the banking sector’s resilience.
  - Banks affected by the CCyB reduced mortgage growth rates and raised mortgage rates relatively more than competitors (Basten and Koch (2015, 2017)).
  - Reduction of LTV risk-taking observable across the banking system, accompanied by an increase of affordability risks (measured by LTI ratios).

### KEY MACROFINANCIAL RISKS AND VULNERABILITIES
- Low interest rates and leverage:
  - Negative domestic interest rates have driven the search for yield and the credit gap has been persistently positive since 2009.
  - Private sector leverage and real estate exposures of banks and households are high and housing affordability has deteriorated.
  - Deterioration in price-to-income and price-to-rent ratios, increase in property vacancy rates, and long duration of the real-estate up-cycle point to rising risks.
- Investment-property segment and affordability:
  - Demand from private and institutional investors for rental and other properties is high, driving up prices.
  - Leverage in the build-to-let segment is high; about one-third of bank mortgages is in this segment.
  - About half of new loans issued exhibit high loan-to-income ratios.
  - Nonbank lending is growing quickly and exerts further pressures on valuations.
- Systemic exposure to real estate across sectors:
  - Eighty six percent of bank loans are for mortgages (83 percent for global systemically important banks (G-SIBs)).
  - Pension funds, insurers, fund managers, and households have substantial direct exposures to domestic real estate.
  - Pension funds have direct real-estate exposures of about 19 percent of assets, of which 89 percent is invested domestically.

### MACROPRUDENTIAL ANALYSIS TOOLS AND METHODS
- Growth-at-risk and housing-at-risk methodology:
  - FSAP used a growth-at-risk approach (Adrian et al., 2018) to quantify macrofinancial risks for future GDP growth and real-estate prices.
  - Methodology uses financial prices and aggregates, domestic financial conditions index (FCI), domestic financial leverage, trade partner macro variables, and euro area and global financial conditions.
  - Quantile regressions estimate expected quantiles of future GDP and real-estate prices depending on current financial conditions and output growth.
  - For the first time in an FSAP, growth-at-risk approach was adapted to real estate (‘housing-at-risk’) using apartment price advertisements and other aggregates.
- Findings:
  - Downside risks to the 2019 GDP growth forecasts appear to be moderate in the absence of financial shocks.
  - A one-standard-deviation (s.d.) shock to euro area financial conditions would likely result in a substantial slowdown in GDP growth and a reduction in confidence of the GDP forecast.
  - Downside risks to 2019 real-estate prices one year ahead are limited in the absence of financial or growth shocks, but shocks to domestic and/or foreign financial conditions suggest downside risks to real-estate prices.
  - Under a one-standard-deviation shock to domestic financial conditions, the distribution of apartment prices in 2019 shifts to the left and widens.

### REAL-ESTATE DOWNSIDE RISKS (ONE-YEAR HORIZON)
- Scenario and quantification:
  - Analysis employs quantile regression estimation using macrofinancial data from 1976: Q3 to 2018: Q3 to calculate the probability of downside risks to apartment prices.
  - The figures show the 5 percent value at risk for a one-year-ahead horizon:
    - At-risk at 5 percent Before shock: -0.1
    - At-risk at 5 percent After shock: -3.3
  - A two s.d. shock to external financial conditions and to growth has a large impact on risks to real-estate prices.
  - A prolonged period of tighter financial and macro conditions would substantially increase downward risks to real-estate with a likely substantial macroeconomic impact due to large gross exposures of the economy to real-estate.

### INSTITUTIONAL FRAMEWORK FOR MACROPRUDENTIAL POLICY
- Evaluation principles: (i) ability to act through regulatory powers; (ii) willingness to act in the face of potential opposition; (iii) information; and (iv) communication and reporting across agencies.
- Decision process for CCyB:
  - SNB proposes activation, increase, or adjustment of the CCyB after consultation with FINMA, before a final decision by the Federal Council.
  - Implemented into Swiss legislation in July 2012.
  - Broad-based CCyB currently set at 0 percent.
  - Sectoral CCyB on mortgage exposures currently set to 2 percent, with a current upper limit of 2.5 percent.
- Cooperation mechanisms:
  - Bilateral MOU between SNB and FINMA establishes Strategic Steering Committee (meets at least twice a year; co-chaired) and Operational Standing Committee for Financial Stability (meets at least four times a year).
  - Tripartite MOU (FDF, SNB, FINMA) prescribes regular trilateral meetings (high-level meetings at least twice per year in principle), but such high-level meetings have taken place only once in the past few years.

### INSTITUTIONAL ASSESSMENT, CONSTRAINTS, AND RECOMMENDATIONS TO ADDRESS INACTION BIAS
- Constraints:
  - Only one mandated (supply-side) tool, set near its limit.
  - Banking sector self-regulation requires sector cooperation, which may not always be forthcoming or timely.
  - Key decision-making role of the Federal Council can contribute to inaction bias through political pressures.
- Operational recommendations:
  - Federal Council should create new macroprudential tools.
  - SNB would trigger the process to calibrate any current, expanded, or future tools under its financial stability mandate.
  - 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).
  - SNB and FINMA should propose new macroprudential tools to the FDF as future circumstances require, on a comply-or-explain basis.
  - Introduce a statutory requirement for regular meetings between the FDF, the SNB, and FINMA, with prescribed public communications on systemic risks and macroprudential policies.
  - Revitalize the tripartite MoU with clearer operational modalities.

### MACROPRUDENTIAL TOOLS — CURRENT DESIGN, LIMITS, AND RECOMMENDATIONS
- CCyB and capital risk weights:
  - Sectoral CCyB worked well to increase banks’ resilience, but is not first-best for affordability risks.
  - Need more flexibility: raise the 2.5 percent ceiling of the sectoral CCyB and remove or broaden its credit-growth trigger.
  - CAO risk weights (standardized approach):
    - Risk weight of 35 percent for mortgage loans secured by residential property for tranche ≤ two-thirds of market value.
    - Risk weight of 75 percent for tranche > two-thirds but ≤ 80 percent of market value.
    - Risk weight of 100 percent for tranche > 80 percent of market value.
    - If mortgage loan does not meet certain SBA self-regulation requirements recognized by FINMA (2014), 100 percent risk weight applies for these positions.
  - IRB approach can result in substantially lower risk weights for mortgages on non-income producing residential real estate; UBS and Credit Suisse apply the advanced IRB approach while two large Cantonal banks apply the foundation IRB approach.
- Implementation limits on mortgage restrictions (dependence on SBA):
  - LTV: No quantitative cap on LTV; SBA delegated-regulation requires a minimum down payment of 10 percent of the internal bank mortgage lending value, from a source other than occupational benefits provision. Non-compliance triggers 100 percent risk weighting for the entire mortgage loan amount.
  - DStI: No quantitative cap; only a qualitative requirement in the delegated-regulation requiring credit evaluation and long-term capacity assurance for owner-occupied properties.
  - Amortization: SBA delegated-regulation requires mortgage debt be reduced to two-thirds of the lending value within a maximum of 15 years; non-compliance triggers 100 percent risk weighting for the entire mortgage amount.
- Recommended toolkit expansion (principal recommendations):
  - Expand the macroprudential toolkit with mandated supply- and demand-side tools, including to better address risks associated with affordability (LTV, loan-to-income (LTI), DStI, and amortization requirements). (FDF; ¶30) — Timing: ST; Priority: H
  - Introduce a comply-or-explain process involving the SNB, FINMA and the FDF for creating new macroprudential tools and implementing existing tools. (SNB, FINMA and FDF; ¶23-24) — Timing: ST; Priority: H
  - Make the sectoral CCyB more flexible, including by raising the 2.5 percent limit of risk-weighted assets and eliminating or broadening its credit-growth trigger. (FDF; ¶31) — Timing: ST; Priority: H
  - Advance the adoption of Basel III regulation on income-producing residential real estate, with higher risk weights. (FDF, FINMA; ¶32) — Timing: ST; Priority: H
  - Close data gaps relating to investment property activities, commercial real estate, and more granular LTVs. (FINMA, SNB; ¶40) — Timing: ST; Priority: H

### PENSION FUNDS — ROLE, RISKS, AND DATA GAPS
- Structure and coverage:
  - Three-pillar pension system. Occupational pension sector manages close to CHF 1 trillion of assets (149 percent of GDP).
  - Participation mandatory for employees with annual income of at least CHF 21,330; obligation to contribute starts at age 17. Mandatory insurance covers annual incomes of up to CHF 85,320.
  - Retirement age normally 65 years for men and 64 for women.
- Conversion rates and technical parameters:
  - Law sets conversion rate for mandatory occupational pensions: 6.8 percent.
  - Federal Council sets minimum interest rate: 1 percent.
  - Conversion rate of 6.8 percent translates into a technical interest rate between 4.5 and 5.0 percent for mandatory schemes.
- Market size and composition:
  - Sector manages close to CHF 1 trillion and is still in an accumulation phase.
  - Number of supervised schemes totaled almost 1,700 in 2017.
  - DC schemes dominant: 93 percent of active members, accounting for about 85 percent of the pension liabilities.
- Investment allocation and exposures:
  - Exposure limits: equity 50 percent, real estate 30 percent; alternative assets allowed up to 15 percent.
  - Asset allocation trends: equities, real estate, and alternative investments account for about 59 percent of total assets.
  - Pension funds have direct real-estate exposures of about 19 percent of assets, of which 89 percent is invested domestically.
- Risks and performance:
  - Minimum interest rate of 1 percent and conversion rate of 6.8 percent put pressure on pension schemes; technical interest rate between 4.5 and 5.0 percent is very high in the current low and negative interest rate environment.
  - Since 2005 annual return performance averaged about 3 percent; preliminary 2018 figures show pension funds recorded performance -3.5 percent (worst since 2008).
  - Persistent low interest rates and higher life expectancy call for adjustment of key technical parameters, but adjustments have been twice rejected by national referendums.
- Governance, supervision, and data:
  - Data gaps significantly compromise market-wide horizontal and systemic risk analyses: official statistics are available only annually and with a considerable delay; other surveys are voluntary.
  - Recommendation: FINMA, the SNB, and OAK BV should better monitor pension funds’ investment flows and search for yield, particularly in domestic real estate markets.
  - Recommendation: Regular information on risk sensitivities, at least for larger pension funds, would support horizontal analyses for the market and certain peer groups.
  - Recommendation: Improve transparency for collective schemes and include compulsory disclosure of key risk figures, particularly economic funding levels.

### EFFECTIVENESS OF RECOVERY MEASURES FOR PENSION FUNDS
- Key findings:
  - Higher member contributions can only be collected from active members, not from retirees.
  - Lowering attributed yields is constrained by the minimum interest rate for obligatory business—only in severe cases can a pension fund go below this rate for a limited period.
  - Impact quantification (distribution across pension funds, measured in terms of pension liabilities):
    - Projected annual increase in funding levels after raising contributions by 1 percent:
      - 0,00% – 0,19%: 41,2%
      - 0,20% – 0,39%: 31,2%
      - 0,40% – 0,59%: 10,9%
      - 0,60% – 0,79%: 7,9%
      - 0,80% – 0,99%: 7,0%
      - 1,00% or more: 1,7%
    - Projected annual increase in funding levels after lowering attributed yields by 1 percent:
      - 0,00% – 0,19%: 1,0%
      - 0,20% – 0,39%: 10,0%
      - 0,40% – 0,59%: 52,8%
      - 0,60% – 0,79%: 17,5%
      - 0,80% – 0,99%: 14,6%
      - 1,00% or more: 4,2%
  - Conclusion: Lowering attributed yields is materially more effective than small contribution increases for many schemes.
- Observed recovery actions:
  - Employers and active members made recovery contributions of more than CHF 10 bn since 2008.
  - Guarantee Fund paid out CHF 660 million over the last ten years (net of recoveries).

### IMPLEMENTATION STATUS (SELECTED POINTS FROM 2014 FSAP RECOMMENDATIONS)
- Transparency and accountability:
  - Implemented: Cross agency activities and policy analysis are communicated to the public using individual institutions’ public communication.
  - Implemented: FDF continues to be directly involved in macroprudential policy discussions.
  - Implemented: FMIA (2016) and National Bank Act provisions Art. 16a and Art. 50 (2016) enhance cooperation between the SNB and FINMA on access to and exchange of information.
  - Implemented: SNB enhanced its new mortgage loans survey; since 2017 it collects data on new mortgage loans on a loan-by-loan basis for a wider set of characteristics.
- Macroprudential arrangements and tools:
  - Partially Implemented: Authorities regularly assess need to update the framework; MOUs facilitate cooperation.
  - Partially Implemented: LTV and LTI caps were introduced through self-regulation with banks; addition of further tools to the macroprudential toolkit is not planned.
  - Not Implemented: Authorities have not issued regulations targeting the demand side, e.g., LTV and DTI limits.
  - Not Implemented: Increased capital requirements targeted by region were not adopted.
- Real estate and mortgage market measures:
  - Implemented: FINMA and SNB closely follow and analyze mortgage market developments; SBA tightened self-regulatory minimum standards effective 1 September 2014.
  - Not Implemented: Existing measures could be tightened (e.g., higher capital requirements for high LTV loans); public consultation regarding adaptation of the Capital Adequacy Ordinance opened on April 5, 2019, proposing an increase in the risk-weights for IPRRE with LTV greater than 66 percent.
  - Partially Implemented: Loan-to-Income limitation was discussed in 2018 but not adopted.

### FRAMEWORK ENHANCEMENTS AND OPERATIONAL RECOMMENDATIONS (SUMMARY)
- Toolkit expansion and calibration:
  - Raise the 2.5 percent ceiling of the sectoral CCyB and remove or broaden its credit-growth trigger.
  - Introduce binding supply- and demand-side instruments such as risk surcharges, LTV, DTI, and DStI limits.
  - Advance Basel III adoption for income-producing residential real estate (IPRRE) with higher risk weights.
- Decision-making, accountability, and transparency:
  - Establish expectation to act and public accountability for each authority to strengthen operational agility and address inaction bias.
  - SNB to trigger calibration processes; FINMA to calibrate tools on a comply-or-explain basis after consultation with FDF.
  - Require statutory regular meetings between FDF, SNB, and FINMA with prescribed public communications on systemic risks and macroprudential policies.
  - Enhance communication on financial stability risks through early warning indicator (EWI) heat maps or similar analytical tools.
- Pension fund monitoring and data:
  - Improve monitoring of the pension sector in systemic risk analysis (SNB, FINMA, FDF; ¶40, ¶41) — Timing: MT; Priority: M
  - Improve the exchange of information on pension fund systemic risks (SNB, FINMA, OAK BV, Federal Council; ¶57) — Timing: ST; Priority: M
  - Collect more granular and high-quality data for larger pension funds, based on common reporting standards and enhanced audits (OAK BV, Federal Council; ¶56) — Timing: ST; Priority: H
  - Improve transparency of collective pension schemes and include compulsory disclosure of key risk figures, particularly economic funding levels (OAK BV, Federal Council; ¶58) — Timing: MT; Priority: M

*International Monetary Fund. EXECUTIVE SUMMARY (selected excerpts).*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 5

### EXECUTIVE SUMMARY

### Macroprudential framework and institutional roles
- Financial stability responsibilities and powers are shared across agencies:
  - SNB: lender of last resort; oversees systemic financial market infrastructures (FMIs); responsible for systemic risk surveillance.
  - FINMA: responsible for protecting the functioning of financial markets through supervision of banks, insurers, securities firms, and FMIs.
  - FDF: prepares and executes the Federal Council’s financial market policies and regulations.
- There is one dedicated formal macroprudential tool: the sectoral Counter-Cyclical Buffer (CCyB).
  - The Federal Council takes the decision on the CCyB stance based on a proposal by the SNB after consultation of FINMA.
- Current constraints and concerns:
  - Framework constrained by having only one mandated tool along with a self-regulation agreement with banks.
  - Self-regulation may impact timeliness and stringency of demand-side measures.
  - Need to address inaction bias and rising risks through an expanded, mandated, and more accountable framework.

### Experience with 2012–14 measures
- Authorities took timely macroprudential measures in 2012–14:
  - On the SNB’s proposal, the Federal Council introduced and raised the CCyB.
  - Demand-side measures targeting mortgage loans financing residential properties were introduced.
  - Measures required banks to hold additional CET1 of 1 percent of their associated risk-weighted positions, and a further increase of 1 percent was announced in 2014.
  - FINMA recognized new requirements for mortgage financing drawn up by the SBA as minimum regulatory standards since mid-2012 (including down payment and repayment time).
  - The Federal Council required more capital for non-compliant loans, and for the part of mortgages exceeding 80 percent of the property value.
  - FINMA tightened rules for risk weighing bank mortgages using an internal ratings-based approach.

### Key macrofinancial risks and vulnerabilities
- Prolonged low interest rates have encouraged risk taking:
  - Negative domestic interest rates have driven the search for yield and the credit gap has been persistently positive since 2009.
  - Private sector leverage and real estate exposures of banks and households are high and housing affordability has deteriorated.
  - Deterioration in price-to-income and price-to-rent ratios, increase in property vacancy rates, and long duration of the real-estate up-cycle point to rising risks.
- Investment-property segment and affordability risks:
  - Demand from private and institutional investors for rental and other properties is high, driving up prices.
  - Leverage in the build-to-let segment is high; about one-third of bank mortgages is in this segment.
  - Loan affordability risks have risen with about half of new loans issued exhibiting high loan-to-income ratios.
  - Nonbank lending is growing quickly and exerts further pressures on valuations.
  - Structural changes under discussion (including tax changes and potential new entrants) could further pressure banks’ margins and profits, driving greater risk-taking behavior.
- Systemic exposure to real estate across sectors:
  - Eighty six percent of bank loans are for mortgages (83 percent for global systemically important banks (G-SIBs)).
  - Pension funds, insurers, fund managers, and households have substantial direct exposures to domestic real estate.
  - Pension funds have direct real-estate exposures of about 19 percent of assets, of which 89 percent is invested domestically.
- Pension fund sector pressures:
  - Occupational pension fund sector comprises nearly 1,700 heterogeneous entities, managing close to CHF 1 trillion of assets (149 percent of GDP).
  - Persistent low interest rates and higher life expectancy call for adjustment of key technical parameters, but adjustments have been twice rejected by national referendums.
  - Earning necessary technical interest rate can be achieved only by greater risk-taking on the asset side, with implications for asset markets, notably real estate.
  - Data gaps significantly compromise market-wide horizontal and systemic risk analyses.

### Macroprudential analysis tools and methods
- Growth-at-risk and housing-at-risk methodology:
  - The FSAP used a growth-at-risk approach (Adrian et al., 2018) to quantify macrofinancial risks for future GDP growth and real-estate prices.
  - The methodology uses financial prices and aggregates, domestic financial conditions index (FCI), domestic financial leverage, trade partner macro variables, and euro area and global financial conditions.
  - Quantile regressions are used to estimate expected quantiles of future GDP and real-estate prices depending on current financial conditions and output growth.
  - For the first time in an FSAP, the growth-at-risk approach was adapted to real estate (‘housing-at-risk’) using apartment price advertisements and other aggregates.
- Findings from the analysis:
  - Downside risks to the 2019 GDP growth forecasts appear to be moderate in the absence of financial shocks.
  - A one-standard-deviation (s.d.) shock to euro area financial conditions would likely result in a substantial slowdown in GDP growth and a reduction in confidence of the GDP forecast.
  - Downside risks to 2019 real-estate prices one year ahead are limited in the absence of financial or growth shocks, but shocks to domestic and/or foreign financial conditions suggest downside risks to real-estate prices.
  - Under a one-standard-deviation shock to domestic financial conditions, the distribution of apartment prices in 2019 shifts to the left and widens.

### Principal recommendations (from Table 1)
- Expand the macroprudential toolkit with mandated supply- and demand-side tools, including to better address risks associated with affordability (LTV, loan-to-income (LTI), DStI, and amortization requirements). (FDF; ¶30) — Timing: ST; Priority: H
- Introduce a comply-or-explain process involving the SNB, FINMA and the FDF for creating new macroprudential tools and implementing existing tools. (SNB, FINMA and FDF; ¶23-24) — Timing: ST; Priority: H
- Make the sectoral CCyB more flexible, including by raising the 2.5 percent limit of risk-weighted assets and eliminating or broadening its credit-growth trigger. (FDF; ¶31) — Timing: ST; Priority: H
- Remove the tax deductibility of mortgage interest payments for households. (FDF; ¶33) — Timing: MT; Priority: H
- Improve monitoring of the pension sector in systemic risk analysis. (SNB, FINMA, FDF; ¶40, ¶41) — Timing: MT; Priority: M
- Advance the adoption of Basel III regulation on income-producing residential real estate, with higher risk weights. (FDF, FINMA; ¶32) — Timing: ST; Priority: H
- Close data gaps relating to investment property activities, commercial real estate, and more granular LTVs. (FINMA, SNB; ¶40) — Timing: ST; Priority: H
- Enhance communication on financial stability risks through the early warning indicator (EWI) heat maps or similar analytical tools. (SNB) (¶41) — Timing: MT; Priority: M
- Improve the exchange of information on pension fund systemic risks (SNB, FINMA, OAK BV, Federal Council; ¶57) — Timing: ST; Priority: M
- Collect more granular and high-quality data for larger pension funds, based on common reporting standards and enhanced audits (OAK BV, Federal Council; ¶56) — Timing: ST; Priority: H
- Improve transparency of collective pension schemes and include compulsory disclosure of key risk figures, particularly economic funding levels (OAK BV, Federal Council; ¶58) — Timing: MT; Priority: M

### Framework enhancements and operational recommendations
- Toolkit expansion:
  - Raise the 2.5 percent ceiling of the sectoral CCyB and remove or broaden its credit-growth trigger.
  - Introduce binding supply- and demand-side instruments such as risk surcharges, LTV, DTI, and DStI limits.
- Decision-making and accountability:
  - Establish a framework with an expectation to act to strengthen operational agility and address inaction bias.
  - SNB would trigger the process to calibrate tools under its financial stability mandate.
  - On a comply-or-explain basis, and after consultation with the FDF, FINMA would be expected to calibrate the tools, possibly within predetermined ranges.
  - SNB and FINMA should propose new macroprudential tools to the FDF as future circumstances require, on a comply-or-explain basis.
  - These arrangements would specify expectations for actions by each authority, for which they should be publicly accountable.
- Transparency and information sharing:
  - Require statutory regular meetings between the FDF, the SNB, and FINMA, with prescribed public communications on systemic risks and macroprudential policies.
  - Continue closing data gaps: better data on nonbanks and pension fund investment activities; more granular information on real estate and mortgage LTV and DTI ratios, and income calculations.
  - Enhance cooperation among regulators to monitor risks from the pension sector.

_International Monetary Fund. EXECUTIVE SUMMARY (selected excerpts)._

### 7. At a one-year horizon, downward risks to real-estate prices rise substantially with

### 7. At a one-year horizon, downward risks to real-estate prices rise substantially with

### Real-estate downside risks (one-year horizon)
- A two s.d. shock to external financial conditions and to growth has a large impact on risks to real-estate prices.
- The analysis employs a quantile regression estimation using macrofinancial data from 1976: Q3 to 2018: Q3 to calculate the probability of downsides risks to apartment prices.
- The figures show the 5 percent value at risk for a one-year-ahead horizon:
  - At-risk at 5 percent Before shock: -0.1
  - At-risk at 5 percent After shock: -3.3
- A prolonged period of tighter financial and macro conditions would substantially increase downward risks to real-estate with a likely substantial macroeconomic impact due to large gross exposures of the economy to real-estate.
- Real estate prices are sensitive to domestic and foreign macrofinancial variables.

### Institutional framework for macroprudential policy (overview)
- Evaluation principles: (i) ability to act through regulatory powers; (ii) willingness to act in the face of potential opposition; (iii) information; and (iv) communication and reporting across agencies.
- Financial stability responsibilities and powers are split across agencies:
  - SNB: systemic risk surveillance; designating systemically important institutions; oversight of systemically relevant FMIs.
  - FINMA: protecting the functioning of the financial markets; supervisory authority with responsibility for circulars and ordinances where explicitly delegated.
  - Federal Council and the Ministry of Finance (FDF): legislation, ordinances, and decisions on the CCyB.
- Decision process for CCyB: The SNB proposes activation, increase, or adjustment of the CCyB after consultation with FINMA, before a final decision by the Federal Council.
- Cooperation mechanisms:
  - Bilateral MOU between SNB and FINMA establishes:
    - Strategic Steering Committee (meets at least twice a year; co-chaired).
    - Operational Standing Committee for Financial Stability (meets at least four times a year).
  - Revision to the SNB-FINMA MOU in May 2017 clarifies co-lead arrangements for regulatory projects with substantial impact on banking soundness (e.g., capital, liquidity, concentration risk).
  - Tripartite MOU (FDF, SNB, FINMA) prescribes regular trilateral meetings (high-level meetings at least twice per year in principle), but such high-level meetings have taken place only once in the past few years; information exchanges occur at technical levels and in the Committee on Financial Crises.

### Willingness to act — measures taken (2012–2014)
- Authorities used a three-pronged approach to address real estate market risks:
  - Tighter bank self-regulation:
    - SBA revised self-regulation guidelines in 2012 and 2014.
    - Supervisory minimum standards recognized by FINMA for new transactions:
      - Minimum down payment of 10 percent of the lending value of the property from the borrower’s own funds (may not be obtained by pledging or early withdrawal of pension assets).
      - Mortgages must be paid down to two thirds of the collateral value at origination over a 15-year period with linear repayment schedule.
  - Higher risk-weights:
    - The Capital Adequacy Ordinance (CAO) changed so mortgages exceeding 80 percent of the property value will have a risk weight of 100 percent (up from 75 percent) applied to the part of the loan exceeding the 80 percent threshold.
    - FINMA tightened rules for banks using an internal ratings-based approach to apply a bank-specific multiplier to new and renewed Swiss owner-occupied residential mortgages when calculating risk-weighted assets.
  - Raising the CCyB:
    - Federal Council activated the CCyB in February 2013 on the proposal of the SNB.
    - Banks had to hold a CCyB of 1 percent of their risk weighted, direct or indirect, mortgage-backed positions secured by residential property in Switzerland by September 30, 2013.
    - CCyB increased to 2 percent effective end-June 2014; the increase was announced in January 2014.

### Impact of 2012–2014 macroprudential measures
- Overall impact:
  - Dynamics on the Swiss residential mortgage and real estate markets slowed compared to 2012.
  - Residential real estate prices and mortgage volumes recorded slower growth, suggesting the measures affected mortgage lending and real estate prices.
  - Activation and increase of the sectoral CCyB helped preserve and, in some cases, increase the banking sector’s resilience.
- Findings from empirical studies and SNB research:
  - Basten and Koch (2015, 2017): Banks affected by the CCyB reduced mortgage growth rates and raised mortgage rates relatively more than competitors; no evidence banks raised prices more for high LTV mortgages or substituted low- for high-LTV customers.
  - SNB researchers: Some banks affected by the sectoral CCyB reduced mortgage share with LTV between 80–90 percent but increased mortgage share with LTV between 66–80 percent.
  - Risk-weighting schemes influenced CCyB effects.
- System-wide effects:
  - Reduction of LTV risk-taking observable across the banking system.
  - Reduction in LTV risks was accompanied by an increase of affordability risks (measured by LTI ratios) in the banking system.
  - Macroprudential measures did not prevent the increase in affordability risk in the banking system.

### Information, communication, and reporting
- Information sharing:
  - FINMA has access to all information required to fulfill its tasks; supervised institutions must immediately report significant incidents.
  - SNB’s access rights to information on financial market participants are limited to gathering statistical data; for more detailed information SNB relies on (i) exchanging information with FINMA; or (ii) voluntary information sharing by financial market participants.
  - SNB-FINMA MOU allows exchange of non-public information required for fulfilling mandates; lists information to be shared, including assessments of risk exposures, capital adequacy and liquidity for SIBs, and conclusions for small and medium-sized banks.
  - Tripartite MOU specifies general information sharing between FDF, FINMA, and SNB; expected exchanges at least twice a year at high level, but high-level meetings have been infrequent.
- Communication:
  - SNB publishes an annual Financial Stability Report to draw attention to risks or imbalances; covers the two G-SIBs and analyses of domestic SIBs (D-SIBs), with an internal quarterly assessment of financial stability risks communicated to the Board.
  - FINMA publishes analyses of financial stability in annual reports and internally produces a semi-annual Risk Monitor and a semi-annual Real Estate Monitor (not publicly available).
  - Sectoral CCyB decisions are accompanied by press releases from the Federal Council, SNB, and FINMA, ensuring transparency of positions (example: 2013 FINMA did not support activation of the CCyB and stated preference to wait for effect of other measures).

*Source: IMF staff estimates and text from the provided IMF Technical Note on Switzerland.*

### 21. Overall, the institutional aspects of the macroprudential framework worked well in

### Overall, the institutional aspects of the macroprudential framework worked well in

### Institutional assessment and constraints
- 2012–14: institutional aspects worked well when the authorities acted urgently and convincingly; combination of supply- and demand-side measures plus repeated public warnings was effective on market dynamics such as house prices and mortgage credit growth (Box 3).  
- Constraints:
  - There is only one mandated (supply-side) tool, which is set near its limit.
  - Banking sector self-regulation requires sector cooperation, which may not always be forthcoming or timely (as in mid-2018).
  - Reliance on self-regulation agreements can contribute to inaction bias due to the need for agreement with the sector.
  - The key decision-making role of the government (the Federal Council) in the institutional framework can contribute to inaction bias through political pressures.

### Recommendations to enhance operational agility and address inaction bias
- Specify expectations and public accountability for each authority (not only possibilities for action):
  - The Federal Council should create the new macroprudential tools, as listed in the next chapter.
  - Under its existing financial stability mandate, the SNB 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.
- Increase transparency on systemic-risk surveillance and macroprudential policies:
  - Introduce a statutory requirement for regular meetings between the FDF, the SNB, and FINMA, with prescribed public communications on systemic risks and macroprudential policies.
  - Revitalize the tripartite MoU with clearer operational modalities; build on existing information exchange arrangements.

### Macroprudential tools: current design and limits
- Countercyclical Capital Buffer (CCyB):
  - Implemented into Swiss legislation in July 2012.
  - Broad-based CCyB is currently set at 0 percent.
  - Sectoral CCyB on mortgage exposures is currently set to 2 percent, with a current upper limit of 2.5 percent.
  - Swiss framework allows CCyB use either as broad-based (Basel III definitions) or as a sectoral instrument targeting specific domestic credit segments.
- Risk-weighted capital requirements (standardized approach majority usage):
  - Risk weight of 35 percent for mortgage loans secured by residential property for tranche ≤ two-thirds of market value.
  - Risk weight of 75 percent for tranche > two-thirds but ≤ 80 percent of market value.
  - Risk weight of 100 percent for tranche > 80 percent of market value.
  - If mortgage loan does not meet certain SBA self-regulation requirements recognized by FINMA (2014), 100 percent risk weight applies for these positions.
  - 100 percent risk weight also applies for positions secured by other properties.
  - IRB approach can result in substantially lower risk weights for mortgages on non-income producing residential real estate; currently UBS and Credit Suisse apply the advanced IRB approach while two large Cantonal banks apply the foundation IRB approach.

### Implementation limits on mortgage restrictions (dependence on SBA)
- LTV:
  - No quantitative cap on LTV; SBA delegated-regulation (approved by FINMA as a minimum standard) requires a minimum down payment of 10 percent of the internal bank mortgage lending value, from a source other than occupational benefits provision.
  - Non-compliance by banks triggers 100 percent risk weighting for the entire mortgage loan amount.
- DStI:
  - No quantitative cap on DStI ratio; only a qualitative requirement in the general delegated-regulation by the SBA (approved by FINMA) requiring banks to proceed to credit evaluation.
  - For owner-occupied properties, financial capacity must be assured over the long term (using long-term average interest rates).
- Amortization:
  - SBA delegated-regulation (approved by FINMA) requires mortgage debt be reduced to two-thirds of the lending value within a maximum of 15 years.
  - Non-compliance triggers 100 percent risk weighting for the entire mortgage amount.

### Systemic importance and supervisory roles
- SNB responsibilities:
  - Legal responsibility to identify SIBs and their systemically relevant functions (domestic credit and deposit business, payment systems; additional criteria include size, risk profile, interconnectedness).
  - SNB designations influence subsequent FINMA enforcement.
  - Credit Suisse and UBS designated as G-SIBs by the FSB and designated systemically important by the SNB.
  - Three D-SIBs: PostFinance, Raiffeisen Group and Zürcher Kantonalbank.
  - SNB continuously monitors and may designate other banks or change existing designations.
- Tax policy impact:
  - Imputed rental value for owner-occupied property is fully taxable; maintenance costs, certain operating costs, value-enhancing energy measures and paid mortgage interest are tax-deductible.
  - Deductibility of mortgage interest incentivizes households to take out mortgages.

### Assessment and recommendations on toolkit and fiscal policy
- Toolkit expansion:
  - Sectoral CCyB worked well to increase banks’ resilience, but is not first-best for affordability risks.
  - Self-regulation worked effectively in 2012–14 but depends on banking sector willingness and timeliness.
  - Recommend complementing toolbox with mandated supply- and demand-side measures: LTV, DTI, DStI and amortization requirements.
- Sectoral CCyB flexibility:
  - Need more flexibility regarding sectoral capital buffers, including raising the limit above 2.5 percent of risk-weighted assets.
  - With sectoral CCyB close to the maximum of 2.5 percent, there is a case for raising the limit to effectively address sectoral risks.
  - Risks can increase independently of credit growth rate (current trigger); broadening or abolishing the trigger would improve agility.
- Basel III adoption for IPRRE:
  - Plan to advance national adoption for income-producing residential real estate (IPRRE) segment is welcome.
  - Finalized Basel III standard states higher risk weights should be applied for IPRRE loans with LTV higher than 60 percent than currently applied in the CAO.
  - Public consultation regarding adaptation of the CAO was opened on April 5, 2019.
  - A core part of the proposal is an increase in the risk-weights for IPRRE with LTV greater than 66 percent.
- Tax reform:
  - Remove tax deductibility of mortgage interest payments for private households to eliminate incentives for large mortgages.
  - Current low interest environment presents a window of opportunity despite political sensitivity.

### Systemic risk analysis framework and practices
- SNB CCyB decision process:
  - Based on a guided-discretion approach with rule-based and discretionary components.
  - Rule-based: EWIs measure imbalances; core EWIs include credit-to-GDP gap and real estate price-to-rent indicators.
  - Activation and maximum thresholds for EWIs are based on imbalances from the previous boom/bust cycle in Switzerland (1980–90s) following Basel Committee guidelines.
  - Discretionary component: monitors secondary indicators (bank risk-taking, market risk indicators); expert judgment used due to limited historical data.
  - Once activated, buffer level set proportionally to degree of imbalances.
- SNB analytical tools:
  - Uses both simple ratios and models: asset pricing model and a model relating housing price dynamics to income, population, interest rates, residential construction, and construction costs.
  - Analysis indicates imbalances in apartment and apartment buildings segments; particularly high correction risk in apartment buildings due to strong price increases and growing vacancy rates.
  - Assessment of commercial real estate prices is more difficult due to data limitations.
  - Regional price developments considered but not regularly modeled due to lack of regional fundamental factors.
- Household debt monitoring:
  - Two main analyses:
    - Aggregate household indebtedness using ratios such as Credit-to-GDP and household debt to disposable income; indebtedness has grown steadily since 2001 to a high level historically and internationally, increasing household vulnerability.
    - Risks related to household mortgage loans assessed using indicators notably LTV and LTI ratios; SNB monitors share of new mortgages with high LTV or high LTI since 2012 via “Survey of new mortgages”.
  - Since 2017 the SNB enhanced the survey to collect loan-by-loan data on new mortgages for a wider set of characteristics, enabling analysis of risk correlations among new mortgages.
- Stress testing and other analyses:
  - Stress tests assess adequacy of banks’ capital buffers and resilience to adverse scenarios; results inform TBTF capital requirements and other macroprudential policy decisions.
  - Stress-test results used in discussions on affordability measures in the residential investment segment.
  - SNB uses an internally developed score card system to identify risky banks.

### Shadow banking, FINMA focus, and data gaps
- Shadow banking:
  - Authorities conducted in-depth analysis (detailed internal report ~100 pages) and published a country case study in the FSB’s Global Shadow Banking Monitoring Report 2014.
  - Institutional follow-up:
    - Permanent shadow banking working group created with experts from FDF, FINMA, SNB to assess risks, coordinate FSB data inputs, and recommend regulatory action if warranted.
    - Expanded statistical surveys to enhance monitoring of collective investment vehicles.
- FINMA activities:
  - Focus on individual institutions; closely monitors systemically important institutions.
  - Conducts semi-annual stress-testing for the two big banks; stress tests based on real estate shocks relevant for systemic risks.
  - Shares aggregated stress test results with the SNB.
  - Early warning and Camels-based rating system in place; Risk Barometer covers real estate risks quarterly; produces periodic risk monitors guiding supervisory priorities.
- Data availability and gaps:
  - Overall data availability for financial stability analysis improved and is good, especially in mortgage lending, but key gaps remain.
  - Historical data scarcity and quality issues, notably historical real estate prices and detailed bank credit portfolio information before and during the 90’s crisis (used to calibrate stress-test models and EWIs).
  - LTV granularity: detailed up-to-date LTV and LTI distribution information on the stock of loans in banking books is lacking (survey covers new mortgages but not stock).
  - SNB evaluating options to enhance database on credit portfolios (stock); Basel III implementation could improve availability (e.g., LTV distributions for mortgage sub-portfolios).
  - Non-bank real estate activity: need better data on real estate activity by non-banks (including pension funds) and improved corporate real estate price measurement.

### Communication, analytical presentation, and transparency
- Enhance public and financial sector understanding of identified risks:
  - Use heat maps to clearly communicate the degree of concern in particular segments and aggregate financial stability.
  - Clear communication of policy intentions can improve transmission of macroprudential action and counter inaction bias.
  - Public communication on CCyB decision process, computation, and circumstances for adjustment could be enhanced; Bank of England example noted for extensive information publication.

*Source: 1cheea2019007 - 21. Overall, the institutional aspects of the macroprudential framework worked well in; https://www.imf.org/-/media/files/publications/cr/2019/1cheea2019007.pdf*

### 42. Occupational pension funds play

### 42. Occupational pension funds play

### Role and structure of the three-pillar system
- Switzerland has a three-pillar pension system.
- The first pillar is a mandatory pay-as-you-go system administered by the public sector and is conceived as the basic source of retirement income.
- The second pillar comprises occupational pension plans; pensioners already receive about 30 percent of their retirement income from this second pillar pension sector.
- The third pillar is a voluntary personal supplementary system.
- Occupational pension schemes have been obligatory for the largest part of employees since 1985 and the sector is still in an accumulation phase with inflows exceeding outflows.
- The mandatory part can be complemented with additional contributions, typically for employees with higher salaries.

### Institutional types and coverage
- Institutions offering second pillar retirement savings include pension funds and (group) life insurers through special vehicles.
- Pension funds are predominantly organized as non-profit foundations; cooperatives and public-law entities also exist.
- Group life insurance contracts (“Vollversicherung” or “teilautonom”) are typical for companies with very few employees; insurance undertakings offering this business are subject to the Insurance Supervision Act and the Swiss Solvency Test (SST); FINMA supervises the life insurance business and life insurers fully bear the risks without recourse to employers.
- Defined-contribution (DC) schemes are dominant: 93 percent of active members, accounting for about 85 percent of the pension liabilities, are organized as DC schemes.
- Participation is mandatory for employees with an annual income of at least CHF 21,330 and the obligation to contribute starts at age 17. The mandatory insurance covers annual incomes of up to CHF 85,320.
- Retirement age is normally 65 years for men and 64 for women.
- Before age 25, contributions cover only death and disability; at age 25 old-age is covered as well.

### Contributions, conversion rates, and technical parameters
- Old-age pensions are financed from individually accumulated savings at retirement; assets can be converted into a life-long pension or paid out as a lump sum.
- The law sets the conversion rate for mandatory occupational pensions; currently this is set at 6.8 percent (meaning the annual pension is 6.8 percent of the saved assets: for every CHF 100,000 in assets, pension funds must pay CHF 6,800 per year).
- The Federal Council sets the minimum interest rate; the minimum interest rate is 1 percent.
- The conversion rate of 6.8 percent translates into a technical interest rate between 4.5 and 5.0 percent for mandatory schemes.
- Pension funds set conversion rates for non-mandatory occupational pensions.
- Funding rules: Swiss occupational pension funds have to hold a minimum 100 percent funding level. A funding level below the regulatory threshold must be addressed without delay and underfunding recovery must be demonstrated to the supervisory authority within five to seven years.

### Market size, consolidation, and accumulation phase
- In international comparison the Swiss occupational pension sector is large, with assets amounting to almost 150 percent of GDP.
- The sector now manages close to CHF 1 trillion and is still in an accumulation phase where contributions significantly exceed benefit payouts.
- The saturation phase will not be reached within the next decade and is expected to be reached even later due to increasing labor migration resulting in net contributions.
- The number of supervised schemes totaled almost 1,700 in 2017.
- The number of single-employer funds has declined by almost two thirds since 2004; collective schemes now account for about 43 percent of assets.
- Pension funds operate mostly as foundations; less than 6 percent are public-law entities and less than 1 percent are cooperatives.

### Investment regulations and asset allocation
- Investment regulations are liberal with no restrictions on foreign investments.
- Exposure limits: equity 50 percent, real estate 30 percent; these thresholds can be exceeded if prudent management, security and risk diversification can be demonstrated, with additional disclosure.
- Investments in alternative assets are allowed up to a share of 15 percent.
- Limits on individual holdings and issuers: 5 percent on equity and real estate, 10 percent on bonds issued by the private sector.
- Maximum of 30 percent unhedged FX exposure is allowed.
- Asset allocation trends: the share of liquid assets and CHF-denominated bonds has declined; equities, real estate, and alternative investments account for about 59 percent of total assets.
- FX exposures: 56 percent of the funds have an FX exposure of at least 15 percent.
- Most pension funds target annual volatilities of less than 7 percent; for 85 percent the annual volatility is estimated to be lower than 7 percent.

### Risks, vulnerabilities, and performance
- Risk drivers include demographic changes, substantial assets, greater risk-taking after rejection of reforms in 2017, common exposures to real estate and the broader financial sector, and a persistent low interest rate environment.
- Data from the sector are incomplete and insufficiently granular for extended analysis.
- The minimum interest rate of 1 percent and the conversion rate of 6.8 percent put pressure on pension schemes; the technical interest rate between 4.5 and 5.0 percent is very high in the current low and negative interest rate environment. Consequently, active members are increasingly cross-subsidizing retired members.
- Since liabilities are rather stale and only partially adjustable, pension funds seek yield and have shifted into equities, real estate, and alternatives.
- Historical returns and volatility: since 2005 annual return performance averaged about 3 percent, but was negative in 2018 (-3.5 percent)—the worst annual performance since 2008.
- Based on preliminary 2018 figures, pension funds recorded performance -3.5 percent vs. an average of +3.2 percent between 2006 and 2017.

### Governance, supervision, and prudential concerns
- Collective schemes compete for market share and some act less prudently by keeping technical parameters at levels beneficial in the short term but less sustainable.
- Governance and internal control systems have attracted supervisory attention.
- OAK BV has issued instructions to enable uniform information gathering by cantonal authorities at the level of individual pension plans rather than the scheme as a whole, to underpin risk assessment, increase transparency of risk diversification and decision-making structures, and set minimum standards for organizational and loyalty requirements.
- Calculated reserves are not explicitly risk-based and therefore may not comprehensively take into account the risk profile of funds, potentially overestimating coverage ratios and reserves adequacy.

### Recovery mechanisms and loss-bearing arrangements
- Pension funds must take actions if funding levels decline below 100 percent; recovery measures include recovery contributions by pension scheme members and employers, and (temporary) reductions in attributed yields.
- Since 2008, recovery contributions totaled CHF 10.7 bn, of which 92 percent were paid by employers.
- The Guarantee Fund secures payment of retirement benefits in case of insolvency and has paid out about CHF 660 million over the last ten years.
- The vast majority of insolvencies related to individual misbehavior including fraudulent activities, and insufficient internal controls and governance.

*Source: 1cheea2019007 - 42. Occupational pension funds play (PDF).*

### 55. The effectiveness of recovery measures depends on the composition of a pension

### 55. The effectiveness of recovery measures depends on the composition of a pension fund’s business and the member structure

### Effectiveness of recovery measures — key findings
- Higher member contributions can only be collected from active members, not from retirees, making contribution-based recovery measures more effective for pension funds with a high share of active members.
- Lowering attributed yields is constrained by the minimum interest rate for obligatory business—only in severe cases of under-funding can a pension fund go below this rate for a limited period.
- The impact of lowering the yield by 1 percent is bigger than of raising contributions by 1 percent, resulting in an increase in the funding level of at least 0.6-percentage points for about one third of the pension schemes.
- Recovery contributions of 1 percent have only a minor effect on the funding level, while lowering attributed yields is more effective.

### Switzerland — observed recovery actions and guarantee fund
- Employers and active members made recovery contributions of more than CHF 10 bn since 2008.
- The Guarantee Fund paid out CHF 660 million over the last ten years (net of recoveries).
- Charted data cover annual recovery contributions by active members and employers from 2004 through 2017 and net insolvency payments by the Guarantee Fund from 2000 through 2016.

### Quantitative distribution of projected funding-level increases (pie-chart summaries)
- Projected annual increase in funding levels after raising contributions by 1 percent (distribution across pension funds, measured in terms of pension liabilities):
  - 0,00% – 0,19%: 41,2%
  - 0,20% – 0,39%: 31,2%
  - 0,40% – 0,59%: 10,9%
  - 0,60% – 0,79%: 7,9%
  - 0,80% – 0,99%: 7,0%
  - 1,00% or more: 1,7%
- Projected annual increase in funding levels after lowering attributed yields by 1 percent (distribution across pension funds, measured in terms of pension liabilities):
  - 0,00% – 0,19%: 1,0%
  - 0,20% – 0,39%: 10,0%
  - 0,40% – 0,59%: 52,8%
  - 0,60% – 0,79%: 17,5%
  - 0,80% – 0,99%: 14,6%
  - 1,00% or more: 4,2%

### Summary and Recommendations (paragraphs 56–58)
- 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 submission.
  - Recommendation: FINMA, the SNB, and OAK BV should better monitor pension funds’ investment flows and search for yield, particularly in domestic real estate markets.
  - Recommendation: Regular information on risk sensitivities, at least for larger pension funds, would support horizontal analyses for the market and certain peer groups.
- The fragmented supervisory framework complicates exchange of information on potential systemic risks:
  - A formal platform is lacking for discussions on developments in the pension fund sector among Swiss authorities responsible for financial stability analysis and macroprudential surveillance.
  - Recommendation: Establish communication lines to facilitate exchange of information, particularly between the SNB, FINMA, and OAK BV.
- Shortcomings in transparency and potentially the incentive and governance structure of collective schemes:
  - Recommendation: Improve transparency for collective schemes and include compulsory disclosure of key risk figures, particularly economic funding levels.
  - Recommendation: Based on these disclosures, OAK BV and cantonal authorities should scrutinize the long-term viability of potentially ruinous competition among the schemes.

### Appendix I — Implementation status of 2014 FSAP recommendations on Macroprudential Policy (selected points)
- Transparency and accountability:
  - Implemented. Cross agency activities and policy analysis are communicated to the public using the individual institutions’ public communication.
  - Implemented. The FDF continues to be directly involved in macroprudential policy discussions.
  - Implemented. The new Swiss Financial Market Infrastructure Act (FMIA; 2016) and National Bank Act provisions Art. 16a and Art. 50 (2016) enhance cooperation between the SNB and FINMA on access to and exchange of information.
  - Implemented. The SNB substantially enhanced its new mortgage loans survey; since 2017 it collects data on new mortgage loans on a loan-by-loan basis for a wider set of characteristics.
- Systemic importance of non-banks and shadow banking:
  - Implemented. Authorities conducted an in-depth analysis of the Swiss shadow banking system and published a country case study in the FSB’s 2014 Global Shadow Banking Monitoring Report.
  - Follow-up measures included a permanent shadow banking working group (FDF, FINMA, SNB) and an expanded statistical survey of collective investment vehicles.
- Macroprudential arrangements and tools:
  - Partially Implemented. Authorities regularly assess the need to update the framework; strong cooperation between SNB, FINMA, and FDF is considered essential; MOUs facilitate cooperation.
  - Partially Implemented. LTV and LTI caps were introduced through self-regulation with banks; addition of further tools to the macroprudential toolkit is not planned.
- Real estate and mortgage market measures:
  - Partially Implemented. No new tools introduced since 2012 and none tightened since 2014; authorities enforced FINMA-approved self-regulation and required banks to apply (1) stricter amortization requirements; (2) stricter use of second incomes for financial sustainability evaluation; and (3) real estate values based on the lower of market value and purchase price.
  - Implemented. FINMA and SNB closely follow and analyze mortgage market developments; SBA tightened self-regulatory minimum standards for mortgage financing effective 1 September 2014.
  - Not Implemented. Existing measures could be tightened (e.g., higher capital requirements for high LTV loans); public consultation regarding adaptation of the Capital Adequacy Ordinance opened on April 5, 2019, proposing an increase in the risk-weights for IPRRE with LTV greater than 66 percent.
  - Partially Implemented. Loan-to-Income limitation was discussed in 2018 but not adopted.
  - Not Implemented. Authorities have not issued their own regulations targeting the demand side, for example LTV and DTI limits.
  - Not Implemented. Increased capital requirements targeted by region were not adopted; the SNB sees no strong case for more granular regional measures.
  - Implemented. Under art. 45 of the CAO, FINMA may impose additional capital requirements for institutions exhibiting high interest rate risk or high concentration of risk.
  - Implemented. No evidence of regulatory arbitrage across mortgage originators.
  - Partially Implemented. Parliamentary proposals to abolish taxation of imputed rents for owner-occupied housing failed; in 2019 parliament is expected to discuss new proposals for system change in taxation of home ownership.

*Source: IMF staff calculations based on the Federal Office for Statistics and the OAK BV.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1cheea2019007.pdf_