## _cr14143

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### Executive summary — Key findings and vulnerabilities
- Switzerland’s financial sector is one of the largest in the world, especially relative to GDP.
- Home to two G-SIFIs and one of the largest reinsurance companies.
- The two global banks account for 43 percent of Swiss banking sector deposits and 18 percent of capital.
- Banking sector composition: 24 cantonal banks (one a D-SIFI), newly licensed Postfinance, cooperative Raiffeisenbank, small private and regional banks.
- Two global banks—particularly UBS—were hard hit by the GFC; rest of sector emerged relatively unscathed.
- Key post-GFC actions:
  - FINMA operational in 2009.
  - Capital standards raised above Basel minima and ahead of Basel timetable.
  - Additional capital buffers on the two large banks; contingent capital instruments (CoCos) introduced.
  - Macroprudential instruments analyzed; a countercyclical capital buffer (CCB) targeting residential property mortgages took effect end-September 2013; an increase in the CCB was announced in January 2014, to take effect from June 2014.
  - Insurance industry subject to the Swiss Solvency Test (SST).
- Remaining vulnerabilities:
  - High international interconnectedness and exposure to EU volatility; safe-haven flows to the Swiss franc and exchange rate floor pressures.
  - Emerging real estate bubbles; macroprudential instruments limited and untested.
  - TBTF/TBTS work in progress.
  - Negative interest rates at some maturities threaten life insurance and pension business models; temporary SST alleviation through 2015.
  - Significant litigation risk from overseas tax authority actions and investigations (mortgage-backed securities, LIBOR/TIBOR, FX).

### Policy priorities and reform agenda
- Restore momentum of post-crisis reform and broaden focus beyond capital:
  - Impose a leverage ratio tougher than international minima; two global banks remain significantly more leveraged than many large international banks.
  - Further tighten and expand macroprudential measures; phase out any mortgage interest subsidies.
  - Finalize international agreements on cross-border resolution of G-SIFIs; additional measures to make resolution viable.
  - Enhance FINMA’s resolution powers for banks not pre-designated as SIFIs.
  - Overhaul deposit guarantee scheme (DGS): adequately funded, able to finance least-cost measures other than closure, simple for depositors.
  - Prepare for implications for life insurance industry of phase-out of amelioration measures in supervisory regime.
  - Bring FMIs into compliance with new international standards and establish crisis management arrangements between FMI authorities.

### Cantonal banks and governance
- Cantonal banks: highly concentrated exposures to mortgages and real estate; some exhibit weak governance.
- Some cantonal banks expanding nationally/cross-border; strains in one could spread to the group.
- Guarantees by cantons in some cases represent multiples of cantonal GDP (Zurich, Luzern, Basel Stadt); cantons should be encouraged to phase guarantees out.
- Governance recommendations: increase supervisory intensity; issue guidance based on best practice; reduce political interconnectedness; strengthen selection, independence, and incompatibility rules for boards.

### FINMA capacity, external auditors, and supervision gaps
- FINMA progress: high-quality staff recruited; strong compliance with many Basel Core Principles (BCPs) and Insurance Core Principles (ICPs); moderate compliance with IOSCO principles.
- Significant weaknesses and recommendations:
  - Heavy use of external auditors for onsite supervision offers benefits but needs stricter guidance, harmonization, and “deep dives” by FINMA.
  - Auditors should not be paid by supervised entities but from a FINMA-administered bank-financed fund; consider splitting regulatory and financial audit functions and periodic rotation.
  - Insurance supervision: high-quality off-site work but insufficient onsite inspections.
  - Securities market regulation requires forceful comprehensive reform; enhance conduct-of-business supervision.
  - FINMA constrained by a self-imposed headcount ceiling after substantial personnel increases; ceiling is unhelpful and additional skilled resources are necessary to increase intensity of supervision of mid-sized and smaller banks.

### Capital markets and market development
- Switzerland remains heavily reliant on banking; capital markets less developed.
- Authorities may review tax measures (e.g., bond issuance taxes) that deter capital market development and enhance consumer protection in securities markets.
- Further enhancement of FINMA’s securities supervision agenda recommended.

### Banking sector structure and systemic features
- Financial sector contributes about 10 percent to Swiss GDP and employs over 5 percent of labor force.
- Two large banks (UBS and Credit Suisse) rank among world’s top ten banks; Swiss Re is world’s second largest reinsurer.
- Switzerland has a global market share of more than 25 percent in cross-border private banking.
- Two large banks account for about one-half of the Swiss banking system’s global assets.
- Sector size fell by 16 percent since the peak of the crisis.
- Domestic banks growing rapidly, driven by mortgage finance growth.

### Credit, mortgages, and household debt
- Mortgage lending growth about 5 percent per year since 2009.
- Mortgage debt recently reached about 145 percent of GDP.
- Mortgages to households are well above 100 percent of GDP.
- Mortgages traditionally of fairly short maturity—frequent refinancing exposure if interest rates rise.
- Residential real estate prices elevated; owner-occupied apartment prices at all time high relative to CPI and substantially above long-run average relative to income.

### Private banking pressures
- UBS and CS: first and fifth largest assets under management globally.
- Switzerland ranks first in off-shore private banking, managing one-quarter of the world’s wealth.
- Private banking accounts for about half of Swiss banking sector revenues.
- Legal and compliance pressures: fourteen Swiss banks under U.S. DoJ investigation; U.S. proposals (August 2013) for non-prosecution agreements with substantial fines (up to 50 percent of assets under management); FATCA and withholding tax agreements, and expected automatic information exchange may reduce attractiveness of offshore accounts.
- Authorities should assess systemic risk in private banking and ensure orderly consolidation; quantify solvency and reputational risks from legal procedures.

### G-SIFIs, TBTF, leverage, and resolution strategy
- Basel III capital requirements introduced beginning of 2013; Swiss TBTF legislation requires additional buffers.
- UBS deleveraged balance sheet by more than 40 percent since 2008; CS shrunk by 21 percent.
- Combined balance sheets remain 2.3 times GDP (peak 4.6 times GDP).
- Two banks have low ratios of risk-weighted assets to total assets (i.e., high leverage).
- Resolution strategy considerations:
  - FINMA position paper outlines potential top-down (TD) / single point of entry advantages versus ring-fencing.
  - Key requirements for TD viability:
    - Sufficient loss-absorbing debt at point of failure with sufficient maturity so it does not roll off prior to bail-in; may need structural subordination.
    - Most G-SIBs’ senior debt is issued under foreign law and would need issuance under Swiss law or contractual provisions giving effect to Swiss bail-in powers.
    - Intragroup arrangements (cross guarantees) to transfer group losses to the issuer entity.
  - Authorities should continue work with banks and host supervisors; quantify costs and sequence reforms; consider pursuing TD and BU strategies in tandem carefully.

### Leverage ratio and transparency
- Leverage ratio needs strengthening above Basel minima.
- Switzerland imposed an early leverage ratio with an ambitious timetable, but calculation method may not guarantee comparability with Basel (inclusion of assets that would be Tier 2 under Basel III).
- Recommend additional leverage buffers given two G-SIFIs.
- More transparency on risk-weighted asset calculations recommended to restore confidence in banks’ internal models.
- CoCos provide an important add-on to common equity.

### Stress testing — scenarios, coverage, and key findings
- Three adverse scenarios:
  - Adverse Scenario 1: re-intensification of stress in euro area periphery; safe-haven flows to CHF; SNB recalibrates exchange rate floor allowing parity to euro in 2014 before returning toward end of horizon.
  - Adverse Scenario 2: severe global recession from disorderly UMP unwinding; broad-based valuation correction and sharp fall in real GDP growth.
  - Adverse Scenario 3: significant correction in residential house prices similar to early 1990s correction, potentially triggered by rise in real interest rates.
- Stress-test coverage:
  - Authorities’ TD tests on all licensed banks.
  - IMF FSAP team TD tests on 30 representative banks (~85 percent of system assets).
  - BU tests by the two large banks covering credit, market, contagion, liquidity, funding, operational risk.
- Data constraints:
  - Legal constraints prevented provision of bank-by-bank supervisory data to IMF mission; IMF tests used public data and staff proxies at aggregate “group” level—limiting institution-specific assessment confidence.
- Capital adequacy outcomes:
  - Using current Core Tier 1 phased-in definition, two large banks’ capital ratios comfortably exceed requirements under all scenarios; capital does not fall below 7 percent trigger.
  - Under Adverse Scenario 2, using “fully loaded” CET1 2019 definition, capital ratios could fall below 7 percent.
  - Implication: systemic banks well placed vis-à-vis Basel III introduction but should continue capital build-up.
- Liquidity results:
  - Almost all banks satisfy LCR in Swiss francs; nearly all exceed 100 percent LCR largely due to high deposits at SNB.
  - Medium-term need to substitute central bank deposits with other HQLA.
  - Average LCRs (without inflow cap): euro around 109 percent; U.S. dollars around 88 percent.
  - Several small banks show outflows over next 30 days and essentially zero HQLA in those currencies.
  - Prudential norms should account for limited supply of CHF-denominated Level 1 liquid assets.

### Insurance sector stress tests and vulnerabilities
- Coverage:
  - Non-life insurers: stress test covers over 60 percent of market.
  - Life insurers: stress test covered 80 percent of market.
- Non-life insurers:
  - Strong initial solvency: average ratio of 230 percent.
  - Global shock impacts: reduction in solvency ratio up to 46 percentage points short term for sector; one insurer faces 76 percentage points medium term; all five maintain solvency above 100 percent.
- Life insurers:
  - Weaker starting solvency for five life insurers; under severe scenarios some entities require substantial capitalization.
  - One entity’s solvency drops to close to half the required solvency ratio.
  - For three of the five insurers, solvency ratio drops below 100 percent in at least one medium-term shock.
  - Spread widening of around 260 basis points for lower-rated bonds (two-year global shock) causes a reduction of over 130 percent in solvency ratio of one insurer; others see >70 percent reductions.
  - Interest rate sensitivity: parallel downward shift of yield curve by 100 basis points results in capital hits ranging from 6 percentage points to 59 percentage points across the five life insurers.
  - Non-parallel (“twist”) moves produce impacts ranging from capital gains of 7 percentage points to loss of 8 percentage points.
  - Mortgage shocks produce drops in risk-based capital of less than two percentage points.
  - Liquidity risk for insurers: not high under current and stressed conditions due in part to large holdings of Swiss government bonds and short-to-medium term liquidity access.
- SST and APLIEM:
  - SST modified for 2013–2015; temporary “anti-persistent low interest rate environment measures” (APLIEM) introduced to dampen low-rate effects; recommended removal of APLIEM as scheduled in 2016.
  - Asset-liability mismatch vulnerability due to limited Sw F 80 billion federal government bonds vs. Sw F 1 trillion assets managed by life insurers and pension funds.

### Macroprudential framework, housing, and mortgage tools
- Institutional setup: powers split—SNB has financial stability mandate in monetary policy context; FINMA protects functioning of financial markets. MOUs exist among SNB, FINMA, and FDF.
- Real estate risks and measures:
  - Total mortgage debt above 140 percent of GDP.
  - Longstanding tax policies promoting home ownership likely amplified the boom.
  - Measures taken:
    - FINMA adopted mortgage financing minimum regulatory standards since mid-2012 (down payment and repayment time).
    - Federal Council required 100 percent risk-weight for non-compliant loans and from start-2013 increased risk weight for mortgages exceeding 80 percent of property value.
    - 2013: FINMA tightened risk-weighting for IRB mortgage banks.
    - CCB introduced requiring banks to hold 1 percent of associated RW positions as extra capital by end-September 2013; further increase of 1 percent announced January 2014, effective June 2014.
    - Statutory CCB authority: after consulting FINMA, the SNB can submit proposal to Federal Council requiring CCB in CET1 capital up to 2.5 percent of total RW positions in Switzerland.
- Policy recommendations:
  - Fully enforce existing measures, strengthen guidance to auditors, and enhance onsite inspections.
  - Consider demand-side tools (LTV and DTI limits), target affordability, increase household data collection, focus on commercial mortgage monitoring, and reconsider tax incentives encouraging large mortgages.

### Macroprudential institutional reform suggestions
- No clear single macroprudential mandate currently assigned.
- Medium-term recommendation: review arrangements and consider placing responsibility and powers with one institution or committee; strengthen transparency and accountability and better communicate cross-agency work.
- Draft FinfraG strengthens information access and exchange for SNB and FDF.

### Financial Market Infrastructures (FMIs) and crisis management
- FMIs concentrated in SIX Group AG operating SIC AG, SIX x-clear AG, SIX SIS AG in separate legal entities.
- Oversight: SNB oversees payment/clearing/settlement systems; FINMA supervises SIX x-clear AG and SIX SIS AG (licensed as banks).
- Implementation of new FMI principles at early stage; FDF legislation for OTC derivatives and revised FMI framework to enter into force in 2015.
- Recommendations:
  - Develop dedicated crisis management framework for FMIs under FDF-FINMA-SNB MOU; indicate roles, responsibilities, tools; test and update regularly; incorporate into MOUs with foreign authorities.
  - Realign risk management reporting to ensure independence of CCP/CSD risk functions.
  - Address interdependencies, establish comprehensive liquidity risk management for CCP and CSD.
  - Implement segregation and portability arrangements contractually and operationally.
  - Develop recovery plans for every FMI.

### Crisis management, resolution, ELA, and deposit insurance
- Resolution:
  - FINMA has broad early intervention and resolution powers; regime broadly aligns with international best practice but has weaknesses.
  - Key weakness: requirement to secure approval from majority of a bank’s creditors before resolving banks not previously designated as SIFIs—could hinder timely action if banks become systemic under stress.
  - Recommended reforms:
    - Adopt full range of resolution powers without creditor approval for all banks.
    - Introduce explicit statutory powers to override shareholders’ rights to effect merger/acquisition and to write down debt.
    - Enhance bridge bank powers.
    - Issue guidance for resolution and recovery planning for banks not designated as SIFIs.
- Emergency Liquidity Assistance (ELA):
  - SNB can provide ELA subject to sufficient collateral, bank solvency opinion from FINMA, and systemic status per SNB policy.
  - Ex ante parliamentary approval required for financial support Sw F 500 million or above.
  - SNB preparations include accepting mortgages as collateral.
  - Recommendations: SNB should review ELA framework and operational capacity to extend ELA rapidly to other banks; review communication policies to keep ELA covert when required; issue guidance on ELA collateral requirements.
- Deposit Guarantee Scheme — Esisuisse:
  - Privately run, ex-post funded, narrow pay-box scheme; cannot finance resolution measures such as deposit transfers.
  - Esisuisse must collect funds to pay insured deposits within 20 days of a failure; FINMA-appointed liquidator aims to pay insured deposits within 30 days but payouts have taken significantly longer in practice.
  - All licensed banks and securities dealers (including branches) are members; deposits booked in Switzerland up to Sw F 100,000 are preferred and insured.
  - Two deposit-takers with total Sw F 4.9 billion of eligible deposits lack banking licenses and are not regulated or Esisuisse members.
  - System-wide cap of Sw F 6 billion could create impression that some insured deposits might not be reimbursed; Sw F 6 billion equals 1.4 percent of insured deposits and would cover insured deposits of any individual bank failure except the ten largest banks.
  - Recommended reforms:
    - Introduce paid-in fund with target level based on failures of a number of midsize institutions, supplemented by back-up lending from authorities.
    - Adopt fixed deadlines for paying insured deposits, preferably within seven days for initial payments, full payout no later than 20 days.
    - Ensure at least six board members of Esisuisse independent of banking industry.
    - Require the two exempt deposit-takers to become regulated Esisuisse members.
    - Widen Esisuisse’s mandate to finance resolution measures; accompany with governance and resource reforms (powers to collect information, effect payouts, participate in Financial Stability Committee).
  - Measures adopted during GFC:
    - Deposit insurance limit increased from Sw F 30,000 to Sw F 100,000.
    - Cap on maximum contributions increased to Sw F 6 billion; members required to hold 50 percent of potential contribution as extra liquidity.
    - Esisuisse mandated to provide funds to liquidator within 20 days after FINMA orders protective measures or initiates insolvency.
    - Banks required to hold assets equivalent to 125 percent of insured deposits in Switzerland.

### AML/CFT and international standards
- 2005 FATF assessment: framework largely compliant with key deficiencies; authorities have taken steps to address shortcomings.
- Recommendations: effectively implement revised FATF standard, notably inclusion of tax crimes as predicate offenses and transparency of beneficial ownership of legal persons.
- Switzerland tentatively scheduled for next assessment in 2015.

### Selected data, indicators, and risk matrix highlights
- Financial sector contributes about 10 percent to GDP; employs over 5 percent of labor force.
- Key numeric indicators (preserved as reported):
  - Mortgage debt recently reached about 145 percent of GDP.
  - Total mortgage debt above 140 percent of GDP.
  - Countercyclical capital buffer: 1 percent required by end-September 2013; further increase of 1 percent announced January 2014, effective June 2014; statutory CCB authority up to 2.5 percent of total RW positions in Switzerland.
  - Banking sector deleveraging: combined balance sheets of two large banks amount to 2.3 times GDP (peak 4.6 times GDP).
  - Stress-test trigger: 7 percent CET1 ratio used as trigger for recovery measures (and for high-trigger CoCos) from a transitional capital viewpoint.
  - Average non-life insurer solvency ratio: 230 percent initial.
  - Insurance assets: Sw F 460 billion total assets; life insurance assets Sw F 311,237 (2012).
  - Esisuisse cap of Sw F 6 billion equals 1.4 percent of insured deposits; two exempt deposit-takers hold Sw F 4.9 billion of eligible deposits.
  - Emergency financial support threshold requiring ex ante parliamentary approval: Sw F 500 million.
  - Banking sector LCR averages (without inflow cap): euro around 109 percent; U.S. dollars around 88 percent.
  - Mortgage lending growth: about 5 percent per year since 2009.
  - Owner-occupied apartment prices at all-time highs relative to CPI.
  - Financial soundness indicators and tables provided with historical series (e.g., regulatory capital as percent of RWAs and ROAE/ROAA series preserved in Appendix II).

### Selected policy recommendations (Table 1 — selected, with timing)
- Impose a leverage ratio on the banks that is tougher than international minima. — Short term
- Remain alert to the build-up of risks in domestic real estate and mortgage markets. Fully enforce self-regulation, and consider further raising the CCB and introducing additional tools (e.g., debt-to-income (DTI) and loan-to-value (LTV) limits). — Short term
- Reach agreement with partner supervisors as to the resolution of the country’s G-SIFIs. — Medium term
- Make available the full range of best practice resolution powers to handle any bank deemed systemic at the time. — Medium term
- Overhaul the deposit insurance scheme: make its provisions more transparent; reform its governance; and build up dedicated ex ante funding with a back-up line of support. Make deposit insurance funds available to finance resolution measures on a least-cost basis. — Short term
- Monitor closely the condition of the life insurance firms in advance of the prospective elimination of the palliative measures protecting the companies from the effects of low interest rates, and enhance public understanding of the SST. — Medium term
- Issue guidance on the cantonal banks’ governance, based on their best practice, including reducing political interconnectedness. Issue guidance on guarantees for cantonal banks, to enhance transparency and create a level playing field both across the cantonal banks and with the rest of the banking sector. — Short term
- Ensure that the likely consolidation among the private banks in response to U.S. tax pressures proceeds smoothly. — Short term
- Issue guidance to auditors to ensure consistency of supervision, and undertake more “deep dives” into particular areas of concern. Increase the intensity of onsite supervision, including of middle-sized and smaller banks. — Short term
- Increase FINMA’s resources so it can carry out its agenda for supervisory enhancement. The resource pool for highly qualified staff could be expanded. — Short to Medium term
- Prioritize regulatory reform of securities markets, to bring arrangements up to international standards. Enhance focus on conduct of business supervision of banks and securities dealers. — Medium term
- Pursue legislation to improve policyholder protection, enhance brokers’ supervision, and increase the level of public disclosure. — Medium term
- Bring FMIs into compliance with new international principles and establish crisis management arrangements between the authorities of FMIs. — Short term
- Establish transparency in the financial sector as a core element of the Swiss “brand,” in particular through heightening banks’ disclosure requirements, including as regards capital weighting and providing data for adequate risk analysis. — Short term

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14143.pdf*

### EXECUTIVE SUMMARY ___________________________________________________________________________  6

### _cr14143 - EXECUTIVE SUMMARY ___________________________________________________________________________  6

### EXECUTIVE SUMMARY — Key findings and vulnerabilities
- Switzerland’s financial sector is one of the largest in the world, especially relative to GDP.
- It is home to two of the largest banks, which are designated as globally systemically important financial institutions (G-SIFIs), and one of the largest reinsurance companies.
- The two global banks account for 43 percent of Swiss banking sector deposits and 18 percent of capital.
- The banking sector also includes 24 cantonal banks (one designated a domestically systemically important financial institution (D-SIFI)), the newly licensed Postfinance, a cooperative Raiffeisenbank, and small private and regional banks.
- The two global banks—particularly UBS—were hard hit by the recent global financial crisis (GFC); the rest of the banking sector emerged relatively unscathed.
- Swiss authorities took forceful action after the GFC:
  - FINMA became operational in 2009.
  - Capital standards were raised above Basel minima and ahead of the Basel implementation timetable.
  - Additional capital buffers were imposed on the two large banks, and contingent capital instruments (CoCos) introduced.
  - Macroprudential instruments were analyzed; a countercyclical capital buffer (CCB) targeting residential property mortgages took effect end-September 2013; an increase in the CCB was announced in January 2014, to take effect from June 2014.
  - The insurance industry became subject to the Swiss Solvency Test (SST).
- Stress tests indicate that banks are robust against even severe shocks:
  - Banks have increased their capital.
  - The two global banks have achieved substantial deleveraging.
  - Legal constraints prevented Swiss authorities from providing regulatory data at the individual bank level, hindering identification of individual bank risk and outliers in stress-test performance.
- Remaining important vulnerabilities and challenges to financial stability:
  - The Swiss economy is among the most interconnected in the world and is deeply exposed to volatility in the European Union (EU); stresses in the euro area periphery led to “safe haven” flows to the Swiss franc, putting sustained upward pressure on the rate, which the authorities seek to counter through maintaining an exchange rate floor.
  - Real estate bubbles appear to be emerging; with monetary instruments not available, macroprudential instruments are being introduced, but so far are limited and untested.
  - While important progress has been made in addressing too-big-to-fail (TBTF) and too-big-to-save (TBTS) issues, this is still a work in progress.
  - Interest rates are negative at some maturities, threatening the business models of life insurance and pension companies. Temporary alleviation from the SST is in effect through 2015.
- Litigation risk is a significant vulnerability:
  - Overseas tax authorities have challenged Swiss banks over services to foreign citizens for apparent tax avoidance, forcing withdrawals and potentially threatening business models, particularly of some private banks.
  - Large Swiss banks face investigations related to mis-selling of mortgage-backed securities, LIBOR and TIBOR scandals, and foreign exchange manipulation.

### Policy priorities and the reform agenda
- Restore momentum of post-crisis financial sector reform:
  - Switzerland initially established prudential standards tougher than international peers, but early focus on regulatory bank capital has not been matched by equal focus on other measures of bank strength, particularly the leverage ratio. The two global banks remain significantly more leveraged than many other large international banks.
  - Further tightening and expansion of macroprudential measures is warranted; any mortgage interest subsidies should be phased out.
  - International agreements on cross-border resolution of G-SIFIs are under discussion; additional measures are required to make resolution viable.
  - FINMA’s resolution powers have been enhanced, but may not be quickly available for handling banks not pre-designated as systemically important financial institutions (SIFIs).
  - The deposit guarantee scheme (DGS) needs overhaul: adequately funded, able to finance measures other than bank closure if these are cheaper, and simple for depositors to understand.
  - Careful preparations are needed for handling implications for life insurance industry of the phase-out of amelioration measures in the supervisory regime.
  - Financial market infrastructures (FMIs) should comply with new international standards, and crisis management arrangements should be established between the authorities of FMIs.

### Cantonal banks and governance issues
- Cantonal banks have highly concentrated exposures, largely on mortgages and real estate; some exhibit weak governance.
- Some cantonal banks are increasing national and cross-border business while others remain locally based; difficulties in one could spread to the group as a whole.
- Most have portfolios highly concentrated in local real estate; interrelationships between the banks and their cantons may threaten banks’ soundness.
- Recommendations include increasing intensity of supervision and adoption of “best practices” in governance throughout the system.

### Financial market supervision and FINMA capacity
- FINMA has made marked strides: high-quality staff recruited; strong compliance with many Basel Core Principles (BCPs) and Insurance Core Principles (ICPs); compliance with IOSCO Objectives and Principles of Securities Regulation is more moderate.
- Significant weaknesses remain:
  - FINMA’s use of external auditors for onsite supervision of banks and securities companies provides benefits but needs careful application: provide more guidance to auditors; ensure greater supervisory harmonization; complement auditors’ work with more “deep dives”; auditors should not be paid by supervised entities but from a FINMA-administered bank-financed fund; consider splitting regulatory and financial bank audit functions and periodic rotation of audit firms.
  - Insurance supervision: high-quality off-site work lacks sufficient complementary onsite inspections.
  - Securities market regulation was not the first priority; envisaged comprehensive reform agenda should be taken forward forcefully.
- FINMA cannot carry out critical enhancement plans without augmentation of resources:
  - FINMA observes a self-imposed headcount ceiling following substantial personnel increases; the ceiling is unhelpful.
  - Supervision of mid-sized banks is significantly less intensive than that of large banks; addressing this will require augmentation of resources.
  - FINMA could enhance resource breadth, including increasing exchange of staff with supervisory agencies abroad or pre-entry training.

### Capital markets and market development
- Switzerland remains heavily reliant on the banking sector; capital markets are relatively less developed.
- Authorities may wish to review the extent to which taxes (for instance on bond issuance) deter capital market development and enhance consumer protection in securities markets to give confidence in market soundness.
- Further enhancement of FINMA’s agenda for improving supervision of securities markets would be helpful.

### Table 1: Key Recommendations (selected, with timing)
- Impose a leverage ratio on the banks that is tougher than international minima. — Short term
- Remain alert to the build-up of risks in domestic real estate and mortgage markets. Fully enforce self-regulation, and consider further raising the CCB and introducing additional tools (e.g., debt-to-income (DTI) and loan-to-value (LTV) limits). — Short term
- Reach agreement with partner supervisors as to the resolution of the country’s G-SIFIs. — Medium term
- Make available the full range of best practice resolution powers to handle any bank deemed systemic at the time. — Medium term
- Overhaul the deposit insurance scheme: make its provisions more transparent; reform its governance; and build up dedicated ex ante funding with a back-up line of support. Make deposit insurance funds available to finance resolution measures on a least-cost basis. — Short term
- Monitor closely the condition of the life insurance firms in advance of the prospective elimination of the palliative measures protecting the companies from the effects of low interest rates, and enhance public understanding of the SST. — Medium term
- Issue guidance on the cantonal banks’ governance, based on their best practice, including reducing political interconnectedness. Issue guidance on guarantees for cantonal banks, to enhance transparency and create a level playing field both across the cantonal banks and with the rest of the banking sector. — Short term
- Ensure that the likely consolidation among the private banks in response to U.S. tax pressures proceeds smoothly. — Short term
- Issue guidance to auditors to ensure consistency of supervision, and undertake more “deep dives” into particular areas of concern. Increase the intensity of onsite supervision, including of middle-sized and smaller banks. — Short term
- Increase FINMA’s resources so it can carry out its agenda for supervisory enhancement. The resource pool for highly qualified staff could be expanded. — Short to Medium term
- Prioritize regulatory reform of securities markets, to bring arrangements up to international standards. Enhance focus on conduct of business supervision of banks and securities dealers. — Medium term
- Pursue legislation to improve policyholder protection, enhance brokers’ supervision, and increase the level of public disclosure. — Medium term
- Bring FMIs into compliance with new international principles and establish crisis management arrangements between the authorities of FMIs. — Short term
- Establish transparency in the financial sector as a core element of the Swiss “brand,” in particular through heightening banks’ disclosure requirements, including as regards capital weighting and providing data for adequate risk analysis. — Short term

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14143.pdf*

### 1.      The Swiss economy has regained momentum. Driven by robust domestic demand, the

### 1.      The Swiss economy has regained momentum. Driven by robust domestic demand,

### Economic overview
- Recovery is gathering pace, driven by robust domestic demand.
- Inflation is slightly positive and unemployment low.
- The exchange rate floor was introduced in September 2011 and has helped safeguard macroeconomic stability.
- The fiscal position is strong.

### Financial sector importance and composition
- The financial sector is systemically important to global markets and contributes about 10 percent to Swiss GDP and employs over 5 percent of the labor force.
- Sector composition includes several significant global players in banking and insurance, 24 cantonal banks, regional financial institutions, private banks, foreign banks, internationally oriented insurance companies, and many pension funds.
- The two large banks—UBS and Credit Suisse (CS)—rank among the world’s top ten banks and are designated as G-SIFIs.
- Swiss Re is the world’s second largest reinsurance company.
- Switzerland has a global market share of more than 25 percent in cross-border private banking.

### Concentration in banking and insurance
- The two large banks account for about one-half of the Swiss banking system’s global assets.
- Two life insurers and three non-life insurers account for over 50 percent of the market.
- About 65 percent of total premiums are booked abroad, and 95 percent of reinsurance premiums relate to foreign business.

### Banking sector balance-sheet dynamics
- The size of the sector has fallen by 16 percent since the peak of the crisis.
- Large banks have engaged in substantial deleveraging while domestic banks are growing rapidly.
- Domestic banks’ expansion is driven by strong growth in mortgage finance.

### Credit, mortgages, and household debt
- Mortgage lending growth has been about 5 percent per year since 2009.
- Mortgage debt recently reached about 145 percent of GDP.
- Mortgages to households are well above 100 percent of GDP.
- Mortgages are traditionally of fairly short maturity, implying frequent refinancing and exposure if interest rates rise from current very low levels.
- Residential real estate prices are elevated; owner-occupied apartment prices are at an all time high compared to the consumer price index and are substantially above their long-run average relative to income.
- Figures referenced: Figure 1 (Switzerland: Total Mortgages, In percent of GDP) and Figure 2 (Switzerland: Real Residential Real Estate Prices, Index).

### Bank profitability and income mix
- Swiss banks’ profitability has recovered sharply since the crisis.
- Since 2008, low interest rates and the flat yield curve narrowed interest margins and reduced net interest income’s contribution to gross income.
- Fee-based and trading income more than doubled and more than offset the reduction in net interest income.

### Insurance sector challenges
- The insurance industry is in a transitional phase in a challenging low-rate environment.
- Life insurers struggle and some take excessive risks as yields on safe assets are very low.
- Non-life insurers’ business performance is better than that of life insurers, but competition is high.

### Systemic risks from low rates and real estate
- Historically low interest rates and abundant liquidity are fueling house price appreciation, heightening vulnerability to price corrections and interest rate increases.
- Evidence of bubble-like dynamics exists in some regions and market segments, raising concerns about overly leveraged borrowers and growing bank exposure to a price correction or an interest rate increase.

### Large banks, TBTF framework, and restructuring
- The two large banks are undertaking capitalization and restructuring plans, but leverage remains high.
- Basel III capital requirements were introduced at the beginning of 2013.
- Swiss too-big-to-fail (TBTF) legislation requires large banks to hold additional buffers.
- The two large banks started downsizing their investment banking business.
- Swiss authorities have no plans to introduce structural measures along the lines of the Volcker, Vickers and Liikanen proposals, though subsidiaries of both banks in affected countries are adjusting business models.

### Cross-border exposures and vulnerabilities
- Swiss banks remain vulnerable to cross-border spillovers; foreign exposure is among the highest in advanced economies.
- Exposure to periphery euro area countries is limited; Swiss banks are most exposed to the United States and the United Kingdom.

### G-SIFIs: past shocks, reforms, and unresolved challenges
- UBS was rescued by a large government package during the GFC that included purchasing impaired assets and a government capital injection.
- A new regulatory framework for TBTF banks was enforced from January 2013, with phase-in arrangements over five years, setting tougher standards than Basel III on capital, liquidity, diversification, and resolution.
- Switzerland is an early adopter of new Basel capital rules without exceptions.
- Authorities have made commendable progress on a resolution regime aligned with the FSB’s Key Attributes of Effective Resolution Regimes.
- Since 2008 UBS has deleveraged its balance sheet by more than 40 percent; CS has shrunk by 21 percent.
- Despite deleveraging, combined balance sheets still amount to multiples of Swiss output: 2.3 times GDP (against a peak at 4.6 times GDP).
- The two banks have some of the lowest ratios of risk-weighted assets to total assets among major banks (i.e., high leverage).

### Resolution strategy considerations for G-SIBs
- Banks have announced operational and structural reforms to preserve systemic operations in Switzerland in the event of failure.
- FINMA has issued a position paper noting potential benefits of a “top down” (TD) or “single point of entry” strategy versus ring-fencing.
- Key requirements to make a TD strategy viable in practice include:
  - Sufficient loss-absorbing debt at the point of failure with sufficient maturity so it does not roll off prior to bail-in; it may need to be structurally subordinated (e.g., issued out of a holding company).
  - Most G-SIBs’ senior debt is issued under foreign law and would need to be issued under Swiss law or have contractual provisions giving effect to Swiss bail-in powers.
  - Intragroup arrangements (e.g., cross guarantees) would be needed to transfer group losses, including in group entities in other jurisdictions, to the entity which issued the debt.
- The authorities should continue to work with banks and key host authorities to finalize viable resolution strategies.
- Pursuing both TD and “bottom up” (BU) strategies in tandem might have benefits but could be costly; authorities were recommended to quantify potential costs and carefully sequence necessary reforms to ensure robust implementation and timely cooperation agreements.

### Capital buffers and transparency
- High capital buffers are crucial to support the Swiss brand in wealth management and to provide protection for TBTF resolution and limit leverage.
- CoCos provide a critical add-on to common equity (Figure 3).
- More transparency on risk-weighted asset calculations should be provided to the public to restore confidence in banks’ internal models.

### Leverage ratio concerns
- The leverage ratio needs to be strengthened above Basel minima.
- Switzerland imposed a leverage ratio early and has a timetable for implementation more ambitious than anticipated under Basel III, but its method of calculating the ratio may not guarantee comparability with Basel due to inclusion of assets that would be Tier 2 under Basel III.
- Given Switzerland’s position as home of two G-SIFIs, additional buffers on leverage are warranted.
- Figure 4 referenced: Switzerland: Risk-Weighted Assets/Total Assets (As of Sep. 2013).

### Cantonal, Raiffeisen, and private banks: structure and risks
- Three main categories beyond the two major banks: (i) cantonal banks (largely owned by local authorities), (ii) cooperatives (Raiffeisen) and regional banks, and (iii) private and wealth management banks.
- Domestically oriented banks include cantonal and Raiffeisen/regional banks.
- Figure 5 referenced: Market Shares in Domestic Mortgage Loans (In percent).

### Domestically oriented banks: asset quality and governance
- Exposure to mortgage loans in Switzerland is close to nine times their equity capital, making them vulnerable to a real estate price correction and interest rate risk (Swiss National Bank (SNB, 2013)).
- Political appointments in cantonal banks weaken bank governance in several cases; remedial measures suggested include nominating expert committees to select candidates, strengthening rules for independent board members (no party affiliation), tightening incompatibility regimes (no political mandates), and improving market discipline by inviting representatives of minority shareholders.
- Some cantonal banks have become larger than their guarantor, raising doubts about the credibility of guarantees; guarantees in some cases account for a multiple of the cantonal GDP (Zurich, Luzern, and Basel Stadt). Cantons should be encouraged to phase guarantees out.
- Large cooperative groups apply caps on ownership and voting rights, reducing members’ ability to exert oversight and hindering access to external capital; capital ratios have remained stable or declined and these banks pursued very high real estate lending growth since 2008.

### Private banking: significance and pressures
- Private banking is a key element of the Swiss financial system and leads in assets under management worldwide.
- UBS and CS have the first and fifth largest value of assets under management of any bank in the world, respectively (Figure 6).
- Switzerland ranks first in off-shore private banking, managing one-quarter of the world’s wealth.
- Private banking accounts for about half of the Swiss banking sector’s total revenues.
- Business model challenged by uncertainties related to Swiss banking secrecy laws: fourteen Swiss banks are under investigation by the U.S. Department of Justice (DoJ).
- For banks not yet under investigation, U.S. authorities proposed non-prosecution agreements (August 2013) with substantial fines (up to 50 percent of assets under management).
- New compliance requirements (U.S. Foreign Account Tax Compliance Act), withholding tax agreements with several European countries, and expected automatic exchange of information among tax authorities may reduce attractiveness of Swiss offshore accounts.
- Authorities should assess systemic risk in private banking and ensure weakest institutions run off smoothly; systemic risk from future legal procedures by the DoJ (direct solvency impact or indirect reputational risk) needs quantification and buffering.
- Authorities should examine the possibility of similar follow-on initiatives by other countries and develop a financial sector strategy to ensure smooth consolidation; some consolidation has started (e.g., banks surrendered banking licenses to focus on asset management, or merged, as in Wegelin).

### Financial sector resilience and stress testing
- Three adverse scenarios were considered for the stress tests:
  - Adverse Scenario 1: re-intensification of stress in the euro area periphery, with Switzerland seen as a safe haven; capital inflows intensify, SNB “recalibrates” the exchange rate floor, allowing the exchange rate to “overshoot” (reaching parity to the euro in 2014) before returning to current levels toward the end of the stress test horizon.
  - Adverse Scenario 2: a severe global recession, potentially from the disorderly unwinding of unconventional monetary policies (UMP), affecting global financial markets and the global economy; mispricing of risk assets leads to a broad-based correction in valuations and real GDP growth falls sharply owing to Switzerland’s real and financial linkages to the rest of the world.
  - Adverse Scenario 3: a significant correction in residential house prices, of a magnitude in line with the early 1990’s house price correction, potentially triggered by a rise in real interest rates.
- Stress tests covered the majority of the Swiss banking system: TD balance sheet stress tests were conducted by authorities on all licensed banks and by the IMF FSAP team on 30 representative banks (about 85 percent of the system’s total assets).
- BU stress tests were conducted by the two large banks covering additional risk factors including credit, market, contagion (through interbank exposures), liquidity, funding, and operational risk.
- No bank-by-bank supervisory data were provided to the mission due to legal constraints; IMF FSAP stress tests used publicly available data and staff-estimated proxies at an aggregate “group” level, limiting confidence for institution-specific assessment.
- Table 2 summarizes macroeconomic scenarios and notes that Adverse Scenario 2 is more severe in terms of losses in the level of output than experienced during the GFC (2008–09) and the early 1990’s recession.

*Source: IMF staff summary of the IMF FSAP material on Switzerland in the provided content.*

### 29.       Stress test results suggest that the banking system as a whole is sufficiently

### _cr14143 - 29.       Stress test results suggest that the banking system as a whole is sufficiently

### Banking system stress tests — capital adequacy
- Using the current Core Tier 1 capital definition (i.e., allowing for the phase-in transition period embedded in Basel III rules) as starting point, the two large banks’ capital ratios comfortably exceed capital requirements under all scenarios, and capital does not fall below the 7 percent threshold.
- Under the most severe macroeconomic scenario (Adverse Scenario 2), using the “fully loaded” common equity tier 1 (CET1) capital 2019 definition (under Basel III), capital ratios could fall below the 7 percent threshold.
- Implication: systemic banks are well placed vis-à-vis the introduction of Basel III, but should continue decisively with their capital build-up to further enhance their resilience.

Key numbers and definitions
- 7 percent: CET1 ratio used as a trigger level for recovery measures (and for high-trigger CoCos) from a transitional capital viewpoint.
- Capital definitions explicitly distinguished: “phased-in” CET1 (PI) vs. “fully loaded” CET1 (FL) using the 2019 Basel III definition.

### Banking system liquidity
- Almost all banks satisfy the liquidity coverage ratio (LCR) requirement in Swiss francs; nearly all banks exceed the 100 percent mark for the LCR, largely due to high deposits at the SNB.
- Over the medium term, banks need to substitute central bank deposits with other sources of high-quality liquid assets (HQLA).
- Average LCRs in euro and U.S. dollars:
  - euro: around 109 percent (without inflow cap)
  - U.S. dollars: around 88 percent (without inflow cap)
- Several small banks show outflows over the next 30 days and essentially have zero HQLA in those currencies.
- Prudential liquidity norms need to account for the limited supply of Swiss franc-denominated Level 1 liquid assets (i.e., Swiss government bonds).

### Insurance sector stress tests — solvency and sensitivity
Coverage and scenarios
- Non-life insurers: stress test covers over 60 percent of the non-life insurance market.
- Life insurers: stress test covered 80 percent of the market.
- Scenarios used: the three macro scenarios defined in Section A, complemented by an extreme natural catastrophic scenario for non-life insurers, a pandemic scenario for life insurers, sensitivity to interest rate and real estate price moves, and market-wide liquidity stress testing.

Non-life insurers
- Strong initial solvency: average ratio of 230 percent.
- Global shock scenario impacts:
  - Reduction in solvency ratio of up to 46 percentage points in the short term for the sector.
  - Reduction of 76 percentage points for one insurer in the medium term.
- Despite large impacts, all five non-life insurers maintain solvency levels above 100 percent given the strong starting position.

Life insurers
- Weaker starting solvency for five life insurers: under the most severe scenarios some entities require substantial capitalization.
- Outcomes:
  - One entity’s solvency position drops to close to half of the required solvency ratio.
  - For three of the five insurance companies the solvency ratio drops below the 100 percent requirement in at least one of the medium term shock scenarios.
- Search for yield and spread risk:
  - Spread widening of around 260 basis points for lower-rated bonds (two-year global shock) causes a reduction of over 130 percent in the solvency ratio of one insurer.
  - Other life insurers see reductions in solvency ratio of over 70 percent from this spread shock.
- Interest rate sensitivity:
  - Parallel downward shift of yield curve by 100 basis points results in capital hits ranging from 6 percentage points to 59 percentage points across the five life insurers.
  - Non-parallel (“twist”) moves produce impacts ranging from capital gains of 7 percentage points to a loss of 8 percentage points.
- Mortgage and liquidity effects:
  - Domestic crisis scenario: shocks on mortgage portfolios produce drops in risk-based capital of less than two percentage points.
  - Liquidity risk for insurers: not high under current and stressed conditions, owing in part to large holdings of Swiss government bonds and short-to-medium term access to liquidity.

### Systemic risk sources, contagion, and interlinkages
Cross-financial sector contagion within Switzerland
- Contagion analysis covered: the two large banks, two large insurance companies, five cantonal banks, and an important bank specialized in securities and asset management.
- Direct interbank exposures: contagion risks appear to be contained, with only moderate effects from hypothetical default of any one Swiss bank, consistent with large exposure rules.
- Caveat: analysis limited to direct interconnectedness via interbank exposures; indirect linkages through common risk factors not covered.
- Rising systemic risk from domestically oriented banks: market-based indicators, the marginal contribution to systemic risk (MCSR), and the Vulnerability Index (VI) suggest increased systemic risk from domestically oriented banks, many of which have increased in size and have large exposures to real estate.
- Observed additional vulnerabilities: noticeable falls and increased volatility in some banks’ stock prices, likely linked to concerns including U.S. investigations regarding tax avoidance.

Vulnerabilities among Swiss and foreign G-SIFIs
- Market-based indicators show contagion between Swiss and foreign SIFIs has decreased.
- Swiss G-SIFIs’ vulnerability was relatively high at the outset of the Global Financial Crisis (GFC) but decreased subsequently; decreased vulnerabilities are consistent with recent increases in capital ratios.
- Nonetheless, Swiss G-SIFIs remain susceptible to external factors due to large exposures abroad.

Sovereign-financial interlinkages
- Contagion from banks to sovereigns peaked around early 2009; contagion from banks to sovereigns has decreased significantly more recently owing to stronger capital buffers, the OMT facility, and lower risk aversion.
- Panel analysis (quarterly data 2005:Q1–2012:Q4) finds that during the GFC the increase in financial-sovereign contagion was mainly associated with increased market price of risk, deterioration in price-to-book of Swiss banks, and deterioration of the growth forecast; more recently, the European sovereign crisis and decreased risk aversion/OMT had significant downward effects on contagion. 

### Macroprudential policy framework and housing/mortgage vulnerabilities
Institutional setup
- Macroprudential powers split across agencies: SNB has a financial stability mandate in the context of monetary policy; FINMA is responsible to protect functioning of financial markets.
- MOUs exist between FINMA and the SNB, and between the Federal Department of Finance (FDF), FINMA, and the SNB.

Real estate and mortgage risks
- Total mortgage debt above 140 percent of GDP.
- Housing prices have been rising, particularly in certain market segments. Longstanding tax policies promoting home ownership likely amplified the real estate boom.
- Authorities’ measures taken:
  - FINMA adopted new mortgage financing requirements (drawn up by the Swiss Bankers Association) as minimum regulatory standards in effect since mid-2012 (including down payment and repayment time).
  - Federal Council required a risk-weight of 100 percent for non-compliant loans and, from start-2013, an increase in the risk weight for the part of mortgages exceeding 80 percent of property value.
  - In 2013, FINMA tightened rules for risk-weighting mortgages for banks using internal ratings-based approaches.
  - A countercyclical capital buffer (CCB) was introduced targeting residential property by requiring banks to hold 1 percent of their associated risk-weighted positions as extra capital by end-September 2013.
  - A further increase of 1 percent was announced in January 2014, effective June 2014.
- Statutory CCB authority: after consulting FINMA, the SNB can submit a proposal to the Federal Council requiring banks to hold a CCB in the form of CET1 capital at up to 2.5 percent of their total risk-weighted positions in Switzerland.

Policy recommendations and gaps
- Existing measures, partly based on self-regulation, must be fully enforced (including strengthened guidance to auditors and enhanced onsite inspections).
- Further tightening and additional tools are needed, with emphasis on demand-side measures to complement supply-side measures:
  - Consider regulations targeting the demand side, for example LTV and DTI limits.
  - Target affordability and closely monitor households’ financial status, facilitated by increased data collection.
  - Increase attention on mortgages for commercial purposes.
  - Actively contain systemic risk from banks’ exposures in areas where large real estate price corrections appear especially likely.
  - Reconsider tax incentives that encourage taking on large mortgages.

*Source: IMF staff calculations.*

### 47.       Reforms of the framework could be considered. While the present structure seems to

### _cr14143 - 47.       Reforms of the framework could be considered. While the present structure seems to 

### Macroprudential framework
- No clear macroprudential mandate is assigned to any institution.
- Powers over specific policy instruments are clear, but not where the overarching responsibility for the financial stability outcome lies.
- Medium-term recommendation:
  - Review macroprudential arrangements with consideration to placing responsibility and powers for macroprudential policies with one institution or committee.
  - Strengthen transparency and accountability by better highlighting cross-agency work to the public.
- Regarding transparency, the draft Swiss Financial Market Infrastructure Act (FinfraG) legislation strengthens information access and exchange for the SNB and the FDF.

### Financial sector oversight — A. Banking
- Supervisory model:
  - Switzerland utilizes extensive resources of audit firms on FINMA’s behalf.
  - FINMA has a high level of compliance with BCPs.
  - Basel III rules adopted; significantly higher requirements applied to TBTF banks.
  - Licensing process actively used; transfer-of-ownership regime well developed.
  - Extensive use of general corrective and remedial powers.
  - Consolidated supervision is of high quality; legal framework should be enhanced.
- Use of external auditors:
  - Leverages auditors’ expertise and global networks.
  - FINMA materially enhanced supervisory processes and practices in the past three years.
  - Enhancements require auditors to be more forward-looking and effective; increase FINMA’s own supervisory work and interventions.
- Remaining weaknesses and recommendations:
  - Some areas where BCP compliance remains weak due to the recent start of the enhancement process.
  - Need heightened efforts to provide guidance to auditors, validate their work, ensure consistency, and dampen conflicts of interest.
  - Switzerland remains heavily principles-based, focused on capital and liquidity metrics, less on qualitative elements of risk management and internal controls.
  - Enhance FINMA’s ability to assess the quality and completeness of information from auditors; create incentives for auditors to perform more consistently.
  - FINMA’s oversight of auditors needs to be further enhanced to meet international standards:
    - Increase FINMA off-site staff ability to direct, monitor, and compare audit work.
    - Make risk assessments more forward-looking, granular, and consistent across audit firms.
    - Rapidly phase out differences in banks’ accounting practices (International Financial Reporting Standards (IFRS), U.S. Generally Accepted Accounting Principles (GAAP), and local GAAPs).
    - Increase “deep dive” onsite work by FINMA selectively assessing risk management, governance, and internal control systems.
    - FINMA staff should participate more frequently in foreign supervisory reviews of the major Swiss banks.
  - Resource and governance recommendations:
    - Additional skilled resources are necessary; recent increases subject to a self-imposed headcount cap which should be relaxed so medium and small banks can be supervised comparably to large banks.
    - Responsibilities and objectives of FINMA (protecting creditors, investors, and insured persons; ensuring proper functioning of the financial market) should be clearly stated in legislation as preeminent.
    - FINMA has operational independence enshrined in legislation; attention given to avoiding conflicts of interest.
  - Qualitative guidance improvements:
    - Guidance on enterprise-wide risk measurement and risk management should be developed.
    - Provide improved guidance and instructions to regulatory auditors to assist consistency.
    - Complement enhanced liquidity framework with close dialogue with mid-size and smaller banks and regulatory auditors.
    - Expand application of basic qualitative requirements of operational risk and incorporate operational risk into FINMA’s supervisory rating system.

### Financial sector oversight — B. Insurance
- Industry size and structure:
  - Insurance penetration is the fourth highest in the world with gross premiums of 14.1 percent of GDP, above the EU average of 7.8 percent.
  - Total premiums in 2012 amounted to Sw F 83 billion.
  - Total assets of the sector are Sw F 460 billion or 15 percent of the financial sector assets, of which two-thirds correspond to life insurance.
  - Two firms are responsible for 54 percent of the life insurance business; top 10 life insurers account for 97 percent of the market.
  - Swiss insurance groups write, on average, around 75 percent of their premiums outside Switzerland and over 50 percent of their assets are related to foreign business.
- Regulatory and supervisory framework:
  - Significant reforms since 2003; FINMASA (Financial Market Supervisory Authority Act of June 22, 2007) and related ordinances established FINMA.
  - New insurance law effective January 2006 and introduction of the SST reoriented focus to risk-based supervision with a strong risk-sensitive solvency regime.
- Supervisory focus and practices:
  - Supervision focuses on sufficiency of liquid assets to meet policy liabilities.
  - Statutory accounting determines technical provisions and value of assets on prudent basis for “tied asset” purposes; required earmarking and ring-fencing of tied assets subject to a liquidity test.
  - Triple focus: adequacy of technical provisions, liquidity and safety of tied assets, and adequacy of capital.
  - FINMA strong in quantitative analysis and group supervision; risk management, internal control, and governance requirements are relatively new.
  - Swiss Qualitative Assessment (SQA) introduced in 2008 covers all insurers and assesses governance, risk management, compliance, and internal controls.
- Onsite supervision and disclosure:
  - Intensity of onsite supervision needs enhancement; current onsite inspections tend to be narrow and less frequent.
  - More in-depth onsite inspections would improve understanding of insurers’ operations and risk ratings.
  - FINMA’s review of expanding public disclosure requirements should bring Switzerland more in line with international standards.
- Conduct, reinsurance, and branches:
  - FINMA has yet to articulate specific rules on business conduct; legislative effort needed to improve policyholder protection and enhance broker supervision.
  - Requirements on investments of reinsurers need strengthening; lack of requirement for tied assets backing reinsurance liabilities could weaken asset quality and FINMA’s ability to liquidate reinsurers.
  - Branches of companies headquartered outside Switzerland and conducting only reinsurance business are exempted from supervision; FINMA encouraged to more actively communicate its supervisory approach regarding these institutions.
- SST and low interest rate measures:
  - FINMA modified SST requirements for 2013 to 2015.
  - The SST is a state-of-the-art solvency regime implemented ahead of any jurisdiction.
  - Temporary “anti-persistent low interest rate environment measures” (APLIEM) were introduced to dampen low interest rate effects; these measures have reduced transparency and could delay supervisory actions.
  - Recommendation: remove APLIEM as scheduled in 2016.
- Asset-liability mismatch vulnerability:
  - Lack of Swiss government bonds to match long-term liabilities could be a source of vulnerability.
  - Sw F 1 trillion of assets managed by life insurers and pension funds vs. Sw F 80 billion outstanding bonds managed by the federal government; liabilities are matched by overseas assets or riskier assets.
- Key insurance sector statistics (2008–2012)
  - Gross premiums:
    - Life: 32,372; 32,180; 32,651; 32,760; 33,484
    - Nonlife: 52,537; 51,717; 51,007; 46,712; 49,876
    - Total: 84,909; 83,897; 83,658; 79,472; 83,360
  - Assets:
    - Life: 280,611; 281,706; 291,265; 299,151; 311,237
    - Nonlife: 153,648; 147,891; 147,157; 148,198; 148,581
    - Total: 434,259; 429,597; 438,422; 447,349; 459,818
  - Penetration*: 15.0; 15.1; 14.6; 13.5; 14.1
  - Density**: 11,183; 10,775; 10,630; 9,990; 10,372
  - Note: Premiums correspond exclusively to domestic business. Only life and non-life assets are included. *Measured as total premium as a percentage of GDP. **Measured as total premium per capita.
- International participation of top insurance groups (2012)
  - Top 10 Insurance Groups: Consolidated assets and domestic operations detail provided in original table.
  - Total consolidated assets for top 10: 885,102; Domestic operations*: 452,913; 51.2% domestic share.
  - Total consolidated premiums for top 10: 106,298; Domestic operations*: 26,166; 24.6% domestic share.
  - *Total assets of regulated Swiss entities. Foreign branches of Swiss legal entities not included.
- Systemic risk and G-SIIs:
  - Possible systemic risk needs to be addressed; implement the FSB’s KAs as finalized for insurers.
  - FINMA is host supervisor of G-SII subsidiaries and expected to become home supervisor of one G-SII as designation methodology for reinsurers is completed in 2014.
  - Emergency plans compliant with IAIS Principle 26 have been developed for FINMA-led colleges; plans tested and improved.
  - FINMA requested and discussed recovery and resolution plans for the three largest insurer groups; plans have produced concrete actions including dialogue with foreign supervisors.

### Financial sector oversight — C. Securities
- Progress and recent reforms:
  - Progress addressing IOSCO 2001–02 FSAP recommendations.
  - Established Federal Audit Oversight Authority (FAOA) to supervise audit quality and independence.
  - Collective Investment Schemes Act (CISA) revised; strengthened framework for collective investment schemes (CIS).
  - Regulation of independent asset managers, offers of unlisted securities, and other currently unregulated products to be addressed in upcoming Federal Financial Services Act (FFSA).
  - Preparation of new legislative framework for operators of financial market infrastructures and exchanges.
  - Recommendation: FDF should ensure proposals are taken forward as soon as possible.
- FINMA supervisory approach and consistency:
  - FINMA has developed a risk-based supervisory system for securities entities.
  - Less systemic/less risky entities subject to less intrusive supervision; reliance on annual audits by auditors.
  - FINMA gradually increasing direct supervision of more systemic and riskier entities.
  - Approaches differ across FINMA divisions; e.g., non-bank securities dealers subject to limited supervision, while fund management companies and CIS asset managers expected to face more intrusive supervision.
  - FINMA largely yet to introduce its own supervisory reviews apart from some thematic bank securities reviews.
  - Recommendation: ensure supervisory approach covers all supervised entities with similar risk characteristics consistently and enhance conduct-of-business supervision of banks and securities dealers.
- Enforcement and sanctions:
  - FINMA’s enforcement powers enhanced with specific prohibitions on insider trading and market manipulation.
  - Enables administrative enforcement complementing criminal market abuse provisions.
  - Cooperation with the Attorney General’s Office and FDF Legal Services Department has progressed; MOU signed in 2011.
  - Question remains whether Swiss administrative and criminal authorities have sufficiently dissuasive sanctions.
  - Example limitation: FINMA can address market abuse by unsupervised entities only through issuance and possible publication of decrees, and orders for disgorgement of profits.
  - Recommendation: explore possibility of introducing power to levy administrative fines.
- Resource and organizational challenge:
  - Upcoming securities regulatory overhaul will require new tasks: regulation/supervision of unlisted securities, FMIs, independent asset managers, and business conduct of banks and securities dealers.
  - New international regulatory challenges (e.g., shadow banking) will emerge.
  - Recommendation: assess impact on FINMA resources and organization; consider strengthening conduct-of-business supervision.

### Financial sector oversight — D. Financial Market Infrastructures (FMIs)
- FMI landscape and concentration:
  - FMIs in Switzerland are well developed and stable; operated smoothly without substantial outages.
  - Provision of FMI services concentrated in one private entity, SIX Group AG, which operates SIC AG, SIX x-clear AG, and SIX SIS AG within separate legal entities.
  - Figures illustrate roles and simplified legal structure of SIX Group AG (June 2013).
- Oversight and supervision:
  - FMIs subject to oversight by the SNB and supervision by FINMA based on statutory law.
  - SNB oversees payment, clearing, and settlement systems and applies minimum requirements to systemically important FMIs.
  - FINMA supervises SIX x-clear AG and SIX SIS AG, which are licensed as banks.
- Implementation of new FMI principles:
  - Major reform: SNB revised its National Bank Ordinance in July 2013 to translate new international principles into national legislation and regulation.
  - FDF developed legislation establishing regulatory framework for OTC derivatives, including revised framework for FMIs, to enter into force in 2015.
  - Implementation by FMIs is at an early stage; reform agenda is substantive.
  - Recommendation: implementation should include public disclosure of information according to the CPSS-IOSCO disclosure framework for FMIs.
  - SNB and FINMA encouraged to take a firm stance on full implementation of the new principles.
- Governance and competitive pressures:
  - SIX’s organization may not optimally support explicit public interest considerations; the board divides attention between FMIs and mainly commercial activities.
  - CSD and particularly the CCP operate in a highly competitive environment.
  - As collateral is costly, the CCP may face market pressure to compromise on certain features of its risk management framework.

*International Monetary Fund staff report content as provided.*

### 71.      The SNB and FINMA should upgrade their cooperation arrangements to handle

### _cr14143 - 71.      The SNB and FINMA should upgrade their cooperation arrangements to handle

### Crisis management for FMIs (paragraphs 71–72)
- Finding: Domestic cooperation arrangements between the SNB and FINMA "work relatively well in normal circumstances," but "the absence of a lead supervisor or overseer may prove problematic during crisis."
- Recommendation: Develop a dedicated crisis management framework for Financial Market Infrastructures (FMIs), for instance under the umbrella of the FDF-FINMA-SNB MOU, that:
  - Indicates roles, responsibilities, and potential tools to manage crisis events affecting the FMIs.
  - Is regularly tested and updated.
  - Is incorporated into MOUs with foreign authorities.
- Finding: FMI risk management frameworks are well developed but have gaps.
- Recommended improvements to FMI risk management frameworks:
  - Realign risk management reporting lines to ensure the independence of the risk management functions of the CCP and CSD.
  - Explicitly address interdependencies, such as risks from participants active in more than one FMI or business area of the group.
  - Establish a comprehensive liquidity risk management framework for the CCP and the CSD.
  - Fully contractually and operationally implement segregation and portability arrangements for a participant’s positions and collateral, and for policies regarding segregation and portability for a participant’s client’s positions and collateral at the CCP.
  - Develop a recovery plan for every FMI in line with ongoing international guidance ensuring continuation of critical operations in extreme circumstances.

### Financial safety nets, crisis management, and resolution framework — Bank intervention and resolution (paragraph 73 and recommendations)
- Finding: FINMA has a broad range of early intervention and resolution powers; the resolution regime "broadly aligns with international best practice" but has weaknesses.
- Key weakness identified: Requirement to secure approval from a majority of a bank’s creditors before resolving banks not previously designated as SIFIs; this could hinder timely action where such banks become systemic under stress.
- Recommended reforms:
  - Adopt the full range of resolution powers, without requiring creditor approval, for all banks.
  - Introduce explicit statutory powers to override shareholders’ rights in order to effect a merger or acquisition and to write down debt.
  - Enhance bridge bank powers.
  - Issue guidance for resolution and recovery planning for banks not designated as SIFIs.

### Official support and Emergency Liquidity Assistance (paragraph 74)
- Finding: The regime does not explicitly establish arrangements for exceptional support, but the Federal Constitution allows extraordinary measures in exceptional circumstances.
- Functional arrangements:
  - Ex ante approval is required from Parliament’s financial committee for financial support of Sw F 500 million or above.
  - The SNB can provide Emergency Liquidity Assistance (ELA) to domestic banks, subject to sufficient collateral, the bank being deemed solvent (on which an opinion is sought from FINMA) and systemic, according to published SNB policy.
  - The SNB has undertaken significant preparations with the two large banks to enable it to take mortgages as collateral.
- Recommendations:
  - SNB should review its framework and operational capacity to make ELA available at short notice to other banks.
  - SNB should review its communication policies to ensure that ELA could remain covert when required.
  - Example action: SNB should issue guidance on ELA collateral requirements.

### Deposit Guarantee Scheme — Esisuisse (paragraphs 75–77 and Table 5)
- Description: Esisuisse is a privately run, ex-post funded, narrow pay box scheme; it cannot be used to support resolution measures such as a transfer of deposits to another bank.
- Operational features and issues:
  - Esisuisse must collect from its members the funds to pay out insured deposits within 20 days of a failure.
  - A FINMA appointed liquidator is responsible for determining and making insurance payouts, with the aim (but not the obligation) to pay insured deposits within 30 days. In practice payouts have taken significantly longer.
  - All licensed banks and securities dealers (including branches) in Switzerland are members, and all deposits booked in Switzerland up to Sw F 100,000 are preferred and insured.
  - Two deposit-takers with total Sw F 4.9 billion of eligible deposits do not have banking licenses and are neither regulated nor members of Esisuisse.
  - The system-wide cap of Sw F 6 billion could create the impression that at times of stress some insured deposits would not be reimbursed. (Sw F 6 billion is equivalent to 1.4 percent of insured deposits and would cover the insured deposits of any individual bank failure, except for the ten largest banks.)
- Recommended reforms to strengthen and simplify the scheme:
  - Introduce a paid-in fund with a target level of funding based upon the failures of a number of midsize institutions, supplemented by back-up lending from the authorities.
  - Adopt a fixed deadline for paying insured deposits, preferably within seven days (at least for initial payments, with full payout no later than 20 days). Timelines should be based on when insured deposits are reimbursed not when funding is available from Esisuisse.
  - Ensure at least six board members of Esisuisse are independent of the banking industry (currently most board members are active bankers, and most large banks are represented).
  - Require the two exempted deposit-takers to become regulated members of the scheme.
  - Widen Esisuisse’s mandate to allow it to finance resolution measures; accompany widening with reforms to ensure Esisuisse could not incur greater costs than in liquidation, remove active bankers from governing bodies, and provide wider responsibilities and more resources (including powers to collect information from banks, directly effect payouts, and participate in the Financial Stability Committee).

- Measures adopted during the GFC (Table 5):
  - The deposit insurance limit was increased from Sw F 30,000 to Sw F 100,000.
  - The cap on maximum contributions from Esisuisse members was increased to Sw F 6 billion, and members were required to hold 50 percent of their potential contribution as extra liquidity.
  - Esisuisse was mandated to provide the funds to a liquidator within 20 days after FINMA orders protective measures or initiates insolvency.
  - Banks were required to hold assets equivalent to 125 percent of their insured deposits in Switzerland.

### Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) (paragraph 78)
- Finding: The 2005 FATF assessment found Switzerland’s AML/CFT framework largely compliant but with key deficiencies; authorities have since taken steps to address shortcomings.
- Recommendation: Authorities are encouraged to effectively implement the revised FATF standard, notably with respect to:
  - Inclusion of tax crimes as predicate offenses to money laundering.
  - Transparency of beneficial ownership of legal persons.
- Note: Switzerland is tentatively scheduled to undergo its next assessment in 2015.

*IMF staff report content unit _cr14143 - 71 (selected excerpts).*

### Appendix II. Selected Data

### Appendix II. Selected Data

### Selected Economic Indicators (Table 10)
- Sources: Haver Analytics; IMF’s Information Notice System; SNB; and IMF staff estimates.
- Notes:
  - 1/ Contribution to growth.
  - 2/ Reflects new Government Financial Statistics Manual (GFSM) 2001 methodolgy, which values debt at market prices.
  - 3/ Based on relative consumer prices.

### Financial Soundness Indicators (Table 11)
- Source: SNB.
- Consolidation and definitions:
  - 1/ Based on parent company consolidation. This consolidation basis equals the CBDI approach defined in the financial soundness indicators (FSI) compilation guide plus foreign bank branches operating in Switzerland, and minus overseas deposit-taking subsidiaries.
  - 2/ Until 2004, general loan-loss provisions were made; as of 2005, specific loan-loss provisions have been carried out.
  - 3/ From 2008 onwards broader criteria pursuant to national accounting regulations (FINMA-RS 08/2 Art. 228b) has been applied for defining non-performing loans.
  - 4/ As percent of total credit to the private sector.
  - 5/ Mining and extraction, production and distribution of electricity, natural gas and water, financial intermediation, social security, ex-territorial bodies and organizations, other.
  - *These ratios were calculated from numbers that originate from the Basel I as well as from the Basel II approach. Therefore, interpretation must be done carefully since they can vary within +/- 10%.
- Key time series excerpts (selected indicators and exact values as reported):
  - Regulatory capital as percent of risk-weighted assets 1/: #12.4 12.6 12.4 12.6 12.4 13.4    12.1 * 14.76 *   17.9 17.3 16.7 16.9 16.4 5
  - Regulatory Tier I capital to risk-weighted assets 1/: 12.6 13.1 13.5 13.3 13.0 13.4    11.6 * 12.29 *   15.2 15.6 15.5 15.8 15.1 4
  - Non-performing loans net of provisions as percent of capital 2/,3/: #2.0 0.6 -0.5 -1.2 -1.0 -1.0 -0.9 6.5 6.9 5.4 4.8 4.4 nav
  - Non-performing loans as percent of gross loans 3/: 2.1 1.8 1.3 0.9 0.5 0.3 0.3 0.9 1.0 0.9 0.8 0.8 nav
- Sectoral distribution of bank credit to the private sector (percent) 4/ (selected sectors, exact annual values across the series):
  - Households: 58.1 60.8 63.7 65.2 66.6 68.5 71.5 65.4 67.1 68.3 68.8 65.6 66
  - Commercial real estate, IT, R&T: 12.8 12.5 12.3 12.2 12.1 11.0 5.9 11.0 11.4 12.0 12.4 13.9 14.5
  - Other (5/): 0.5 0.5 0.5 0.5 0.5 0.6 0.6 0.6 7.6 5.3 5.0 5.7 5.2
- Earnings and profitability (selected):
  - Gross profits as percent of average assets (ROAA): 0.6 0.5 0.7 0.8 0.9 0.9 0.7 0.3 0.5 0.7 0.7 0.6 0.8
  - Gross profits as percent of average equity capital (ROAE): 10.0 8.9 11.7 14.3 18.0 17.7 15.4 5.4 14.5 21.0 19.7 18.4 24.2
  - Net interest income as percent of gross income: 34.8 34.9 40.2 36.4 30.9 27.4 28.1 36.3 30.4 27.9 31.1 31.6 30.4
  - Non-interest expenses as percent of gross income: 63.3 61.7 63.5 62.7 59.2 63.0 70.4 85.5 80.1 73.3 72.0 73.7 69.2
- Liquidity (selected):
  - Liquid assets as percent of total assets: 24.6 23.2 26.7 24.5 24.7 25.2 27.1 29.2 27.7 23.5 26.6 27.6 28.3
  - Liquid assets as percent of short-term liabilities: 63.2 61.5 63.7 59.6 59.4 60.4 63.9 67.1 64.3 53.8 58.8 55.8 58.9
  - Net long position in foreign exchange as a percentage of tier I capital: 34.1 32.3 30.1 15.5 30.6 21.9    13.7 *  -16.1 * -23.2    -41.1    -61.2    -47.6 -55.9

### Financial System Structure, 2008–2012 (Table 12)
- Sources: SNB; Swiss Federal Statistical Office; and Annual Reports.
- Assets (In billions of Swiss francs) — selected entries and exact values as reported:
  - All financial institutions: 421 438 61    393 340 16    4022
  - Banks: 3080 2668    2715 2793    2778 2895
  - Cantonal banks: 389 404 422 449 482 490
  - Large banks: 1885 1445    1482 1467    1365 1340
  - Raiffeisen banks: 132 140 147 156 165 191
  - Foreign controlled banks: 332 328 313 306 312 312
  - Branches of foreign banks: 24 24 25 57 94 72
  - Insurance Companies (total): 596 593 597 598 614
  - Life insurance: 281 282 291 299 311
  - Nonlife insurance: 315 312 306 299 303
  - Pension funds 1/: 539 599 621 625 629
- Shares (In percent of total) — selected entries and exact values as reported:
  - Banks: 73.1 69.1 69.0 69.5 69.5 69.1
  - Large banks: 44.7 37.4 37.7 36.5 33.9
  - Foreign controlled banks: 7.9 8.5 8.0 7.6 7.8
  - Insurance Companies: 14.1 15.4 15.2 14.9 15.3
- Note: 1/ 2012 numbers are based on 2011 growth rates.

### Risk Assessment Matrix (Appendix III, Table 13)
- Purpose: Events that could materially alter the baseline path; relative likelihoods are staff subjective assessments ("low" <10 percent; "medium" 10–30 percent; "high" ≥30 percent).
- Overall level of concern: High for several global risks; medium for multiple regional and sectoral risks.
- Main identified risks, likelihoods, and expected impacts (exact wording and values preserved):
  - Side-effects from global financial conditions:
    - Nature/Triggers: Surges in global financial market volatility (related to UMP exit), leading to economic and fiscal stress, and constraints on country policy settings.
    - Likelihood: High
    - Expected impact: Medium — Bouts of market volatility and higher-than-expected increases in long-term rates could occur as a result of advanced countries exiting from UMP. Disorderly unwinding of UMP might cause renewed safe haven inflows into Switzerland, forcing the SNB to intervene again to defend the floor. Pressures on the housing market may also intensify.
  - Protracted period of slower growth in advanced and emerging economies:
    - Nature/Triggers: Advanced economies: larger than expected deleveraging or negative surprises on potential growth. Emerging markets: earlier maturing of the cycle and incomplete structural reforms leading to prolonged slower growth.
    - Likelihood: High for Europe; Medium for elsewhere
    - Expected impact: Low — Europe is the main trading partner of Switzerland; a protracted period of slower European growth would dampen economic growth and possibly cause a recession.
  - Financial stress in the euro area re-emerges:
    - Likelihood: Medium
    - Expected impact: Medium — Given close trade links, stress would slow economic growth. Safe haven capital inflows would resume, requiring intervention. Pressures on the housing market may also intensify. Direct financial sector exposure to euro area countries under market pressure is moderate. Indirect exposures could become problematic in a tail risk situation.
  - Sharp correction in the housing market:
    - Likelihood: Medium
    - Expected impact: Medium — Low interest rates and ample liquidity continue to drive prices higher. A price correction is likely once interest rates return to normal levels. A sharp correction would weaken household balance sheets and slow growth. The banking and insurance industries would suffer. Domestically focused banks are particularly vulnerable, though they are well capitalized on average.
  - Bond market stress from a reassessment in sovereign risk:
    - Likelihood: Medium
    - Expected impact: Low (Japan) to Medium (United States) — Global asset managers may shift allocations to safe havens, including Swiss franc assets, putting the currency under pressure and possibly re-exacerbating housing market pressures.
  - Risks from incomplete regulatory reforms:
    - Likelihood: Medium
    - Expected impact: Medium — Uncertainties about future global regulatory landscape and slow progress in crisis resolution mechanisms hinder business model development. Large banks are highly leveraged and dependent on wholesale funding, posing spillover risks.
  - Increasing geopolitical tensions surrounding Ukraine:
    - Likelihood: Medium
    - Expected impact: Medium — Direct impact limited, but contagion and heightened volatility may trigger renewed safe haven flows.

### Banking Sector Stress Tests (Appendix IV; Tables 14–16)
- Table 14: Main Macroeconomic Variables for the Swiss Economy — Source: IMF staff calculations.
  - Note: 1/ Average of for rent, owner-occupied house, and single-family house prices.
- Table 15: Solvency Stress Test Matrix (summary of approaches and assumptions)
  - Institutions included:
    - Bottom-Up by Banks: 2 banks (market share: Percentage of total sector assets: 60)
    - Top-Down by Authorities: All banks (market share: Percentage of total sector assets: 100)
    - Top-Down by IMF Team: 30 Banks (market share: Percentage of total sector assets: 85)
  - Data and baseline date:
    - Banks’ own data; Supervisory data; Publicly available data; Supervisory data aggregated along bank groups only.
  - Methodology:
    - Combination of banks’ own models and pre-defined benchmarks; SNB stress testing framework (including the building block analysis (BBA)); IMF stress testing framework (tailor-made for the Swiss FSAP).
  - Stress test horizon:
    - Bottom-Up: 2 years (translated to 5 years using results from the LPA)
    - Authorities and IMF Top-Down: 5 years (2013–2017)
  - Shocks:
    - Shocks based on GDP trajectories and other relevant macroeconomic variables; three adverse scenarios: moderate external shock (1.2 standard deviation (StD) in historical terms); severe external shock (3 StD in historical terms); domestic shock (protracted low growth).
  - Risks/factors assessed (coverage):
    - Credit, market, income risks, fixed-income holdings (incl. of “peripheral Europe”), funding, concentration, contagion, operational risk.
  - Calibration of risk parameters:
    - Credit losses, pre-impairment income (components), and funding costs based on internal models, supervisory models, satellite models, and the BBA.
    - PDs for credit risk based on Moody’s KMV expected default frequencies (EDFs), matched to average supervisory PDs. LGDs based on average supervisory LGDs. Asset correlations based on internal risk-based (IRB) formulae.
  - Behavioral adjustments and regulatory standards:
    - Changes in RWAs take into account credit growth and changes in risk weights based on internal/authorities’/IRB models. Constant balance sheet composition. Dividend payout rules vary by approach. No management actions considered in some approaches.
    - Hurdle rates based on Basel III and Swiss regulatory minimum for CET1 capital ratios; Basel II/III IRB rules applied where specified.
  - Results reported:
    - Capital adequacy ratio (CAR), shortfall (if applicable), buffer changes; pass or fail metrics; system-wide and by bank type.
- Table 16: Liquidity Risk Stress Test Matrix (summary)
  - Institutions included:
    - Bottom-Up by Banks: N/A
    - Top-Down by Authorities: All banks (Percent of total sector assets: 100)
    - Top-down by IMF: 30 banks (Percent of total sector assets: 85)
  - Methodology and metrics:
    - Basel III ratio (LCR) proxy; bank-run type tests (bank-run scenarios based on expert judgment).
  - Risks: Funding and market liquidity, maturity mismatches.
  - Results: Pass rate, remaining buffers; system-wide and by bank type.
- Source for stress test matrices: IMF staff.

*Source: IMF staff; SNB; Haver Analytics; IMF’s Information Notice System; and IMF staff estimates.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14143.pdf_