## 1. Guaranteed Rate of Return in Swiss Pension Funds ## Source details **Canonical URL:** [1. Guaranteed Rate of Return in Swiss Pension Funds](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15132.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15132.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15132.pdf.json) --- ### Macroeconomic context and outlook - Switzerland faced exchange rate overvaluation, slower near-term growth, and deflation following the exit from the exchange rate floor. - Growth and inflation are expected to recover gradually over the medium term, to around 2 percent and 1 percent, respectively. - Key risk: operating in a low inflation environment may prove more difficult than assumed in the central scenario. ### Pension system structure (context for the guaranteed rate) - First pillar: - Universal old age, survivors, and disability insurance; pay-as-you-go. - Contributions: employees and employers both pay 4.2 percent of the employee’s income. - Second pillar: - Fully funded, occupation-based pension plans; compulsory for employees. - Employer contribution must be at least as large as employee contribution. - Third pillar: - Private voluntary pension schemes. ### Findings on the guaranteed nominal rate of return (Box 1) - The required rate is set administratively each year. - During 2003–09, the average nominal required rate broadly matched the average yield on 10-year Swiss government bonds. - After 2010, the required rate did not decline in line with declines in headline inflation, producing a large increase in required real returns. - In 2015, the real guaranteed return stands around 3 percent—by far the highest in the last decade. ### Consequences and risks of a high required rate - Risks insolvency of pension funds. - May encourage excessive risk-taking. - Could lead to refunding, requiring additional payments from employers and employees and/or reductions in pension benefits. ### Policy advice and staff recommendations - Short run: - Consider lowering the nominal guaranteed rate of return at the next review to bring it more into line with market yields. - Medium/long run: - Consider linking the nominal guaranteed rate of return more closely and automatically to market-based measures of achievable returns. - Administrative note: - The guaranteed rate is reviewed annually; next review was scheduled for autumn of 2015. - Staff recommendation (second pillar): - Reduce the minimum guaranteed return on invested assets, given the low interest-rate environment. ### Related pension reform measures (broader fiscal sustainability context) - Government reform proposal submitted to parliament includes: - Equalize retirement ages for men and women (currently 65 years for men and 64 years for women). - Reduce the rate at which pension savings are converted into pension annuities by reducing this conversion rate from 6.8 to 6.0 percent per annum. - Increase VAT rates by 2 percentage points by 2029 to ensure more stable funding for the pension system. - Expected outcome: - Help ensure sustainability of the social safety net and its continued availability for future generations. *Source: IMF staff report excerpt (Switzerland — selected pages).* ### 1. Guaranteed Rate of Return in Swiss Pension Funds ___________________________________________ 20 ### 1. Guaranteed Rate of Return in Swiss Pension Funds ### Macroeconomic context and outlook - Switzerland faced exchange rate overvaluation, slower near-term growth, and deflation following the exit from the exchange rate floor. - Both growth and inflation are expected to recover gradually over the medium term, to around 2 percent and 1 percent, respectively. - Key risks: operating in a low inflation environment may prove more difficult than assumed in the central scenario. ### Recent economic developments (2014–15) - 2014 performance: - Output expanded by 2.0 percent, driven by strong external demand and private consumption. - Output gap narrowed to around -0.3 percent. - Capacity utilization nearing its historic average. - Unemployment rate stabilized at 3.2 percent. - 2015 policy shift and exchange rate developments: - The exchange rate floor of 1.2 francs per euro had been in place since 2011. - In December 2014 the SNB cut the interest rate on SNB deposits from zero to -0.25 percent (effective January 22, 2015). - On January 15, 2015 the SNB exited the floor and on January 22, 2015 cut its effective policy rate from -0.25 percent to -0.75 percent. - The policy rate applies on deposits at the SNB that exceed a high threshold (for domestic banks, the threshold is 20 times a bank’s required reserves as of the reporting period ending November 19, 2014; minus (plus) any increase (decrease) in cash held). - Following purchases of roughly CHF 40 billion, or 6 percent of GDP, during the subsequent two weeks, the franc has since hovered between 1.00 and 1.10 per euro, with limited intervention since end-January. - Near-term indicators and inflation: - KOF survey indexes and manufacturing PMI declined sharply after the exit from the exchange rate floor; the current climate index hit its lowest level since the 2009 recession. - Headline CPI inflation fell to -0.9 percent in March 2015. - CPI components: domestically produced goods inflation at 0.3 percent; foreign goods inflation at -4.3 percent. - Core inflation was -0.2 percent at end-March. - Unit labor cost growth remained muted near zero. ### Monetary and financial sector implications - SNB actions and interest rates: - Negative policy rate of -0.75 percent creates incentives to shift out of franc deposits while limiting effect on bank profits via the high threshold on taxed deposits. - Financial market responses: - Stock market and major bank stock prices returned to levels similar to before the immediate sharp drop after the floor exit; CDS spreads for the major banks did not move much. - It is too early to clearly see full effects on the financial sector. - Banks and heterogeneous impacts: - The effect of negative interest rates on banks’ profits is mitigated because (i) the rate applies only on deposits at the SNB over a high threshold (20 times reserves) and (ii) banks are passing on the negative rates to wholesale depositors. - Some smaller banks may be more adversely affected than larger global banks. - Most affected segments: - Life insurers: - Have been under pressure due to a low-yield environment for several years. - Reported stronger positions on average in FINMA’s latest Solvency Stress Test (based on end-2013 data) relative to two years earlier, but the recent drop in yields will create further challenges. - Authorities should remain vigilant and support consolidation as needed. - Private banks: - Significant revenue in foreign currency while most costs are in Swiss franc. - Already facing pressure from international initiatives (e.g., automatic exchange of tax information and AML/CFT-related initiatives). - Fallout on smaller Swiss private banks from the 2015 policy changes appears more limited than initially feared, but requires continuous monitoring. ### External spillovers and external assessment - Outward spillovers: - Franc appreciation affected economies with franc-denominated housing loans, notably: - Croatia: franc-denominated housing loans accounted for 6.3 percent of GDP. - Poland: franc-denominated housing loans accounted for 7.7 percent of GDP. - Immediate macroeconomic impact on these countries appears somewhat limited and partly offset by lower franc interest rates. - Example policy response: the Croatian government temporarily prevented pass-through to borrowers by fixing the applicable exchange rate at the pre-appreciation parity while negotiating a permanent solution. - Supervisory actions in some Eastern European countries had earlier halted provision of new franc-denominated mortgages; Hungary mandated conversion of all FX mortgages into domestic currency in November 2014. - The exit from the exchange rate floor might modestly affect aggregate demand in trading partners; positive effects are likely modest given Switzerland’s size of only 0.5 percent of global GDP on a PPP basis. - Long-run external position: - Over the last 15 years, Switzerland’s current account surplus has averaged around 10 percent of GDP. - These surpluses are influenced by non-traditional flows (merchanting activities, commodity trading, financial and insurance services, net FDI earnings) tied to large multinationals, financial firms, and wealthy foreigners centralizing income and assets in Switzerland. - Statistical biases: - An estimated upward statistical bias to the current account of about 3 percent of GDP arises because part of Swiss multinationals’ retained earnings belong to foreign shareholders. *Source: IMF staff report excerpt on Switzerland (selected pages).* ### 9. Staff views Switzerland’s external position as having been broadly in line with ### 9. Staff views Switzerland’s external position as having been broadly in line with ### External position assessment (2014) - The External Balance Assessment’s (EBA) current account regression methodology suggests a current account norm for Switzerland of about 6¾ percent of GDP, reflecting Switzerland’s financial center structure, demographics, and high per capita income. - Preliminary estimates of Switzerland’s cyclically-adjusted current account surplus in 2014: 7½ percent of GDP. - Implication: the EBA norm is slightly below the 2014 cyclically-adjusted surplus, implying a slightly strong current account and slight undervaluation of the exchange rate per that comparison. - EBA methodology limitations: - Does not fully take into account special factors and anomalies in Switzerland’s current account statistics. - EBA-based estimates of REER overvaluation in 2014 (text table) suggest a moderate degree of overvaluation, not undervaluation. - Switzerland’s NIIP dynamics: - Lack of a trend in Switzerland’s net international investment position (NIIP) to GDP ratio over the last 10 years suggests large current account surpluses have not produced explosive NIIP dynamics. - Large NIIP size is partly explained by volatility of capital flows and statistical issues (retained earnings of Swiss multinationals boost the current account but not NIIP). ### Staff assessment and uncertainty - Adjusted staff assessment for 2014: - Current account gap for 2014 centered close to zero. - Uncertainty band for the estimated gap: from -3½ percent of GDP to 2½ percent of GDP, reflecting significant uncertainty due to idiosyncrasies of Switzerland’s external statistics (Annex 1). - Staff assesses the franc to have been broadly in line with fundamentals in 2014, with significant uncertainty. ### REER and exchange rate developments (early 2015) - As of April 2015, the REER has appreciated by about 10 percent relative to its average 2014 value. - Effect: likely to reduce net exports due to lessened competitiveness and has likely left the franc overvalued. - Overvaluation partly reflects a policy gap of insufficiently easy monetary policy—simple Taylor rules suggest an optimal policy rate well below current levels—owing to operational challenges of unconventional monetary policy. ### Outlook and key macro projections (2015–16 and medium term) - Growth: - Staff and consensus forecasts expect real GDP growth to slow to around ¾ percent in 2015 and 1¼ percent in 2016, mainly due to weaker net exports. - Unemployment: - Expected peak at 3½ percent in 2015; rise is expected to be modest due to widespread use of short-time working arrangements. - Output gap: - Almost closed at end-2014; projected to widen in 2015 and close again over the medium term. - Medium-term dynamics: - Growth expected to rise gradually as the economy adjusts and as divergence in monetary policy (gradual increases in other major advanced economies) helps ease appreciation pressure on the franc. ### Inflation outlook - Headline inflation projection: - Projected to fall near -1½ percent by late 2015. - Projected to gradually rise back into positive territory by early 2017 as one-off effects dissipate. - Market-based inference: - If real yields are similar to other safe havens, Switzerland’s nominal government bond yields imply markets expect inflation to be roughly 1 percent 3–4 years from now. - Phillips curve/core inflation evidence: - Analysis suggests the Phillips curve crosses the vertical axis around ½ percent, implying steady-state inflation expectations anchored around that level. - Staff medium-term projection assuming unchanged monetary policy: - Medium-term inflation in the range of ½–1 percent. - Consistent with SNB’s definition of price stability of “less than 2 percent”. ### Key risks to the central scenario - Risks related to low inflation: - Operating in very low inflation may constrain monetary policy’s ability to reduce real interest rates (liquidity trap risk). - Global drop in equilibrium real interest rates may heighten this risk. - Low equilibrium nominal rates pose challenges for defined-benefit pension plans and life insurers; may impede nominal wage and price adjustments. - Uncertainty about EU relations and immigration: - Vote to move away from free movement of labor with the EU creates uncertainty about labor force growth, recruitment, fiscal aging challenges, investment, and access to EU markets. - Global economic environment: - Downside: weaker global growth or market risk aversion (e.g., protracted turmoil in Greece, geopolitical events) could fuel franc appreciation and deflationary pressures. - Upside: stronger-than-expected growth in Europe could support a more competitive franc, faster Swiss growth, and quicker exit from deflation. - Financial sector risks: - UBS and Credit Suisse remain highly leveraged relative to many other global systemically important banks and retain large investment banking operations, posing outward spillover risks and vulnerability to global market instability. - Housing market risks: - House prices had a rapid run-up over the last decade; mortgage debt is high as percent of GDP. - Sharp house-price declines could weaken household balance sheets, impede growth, and adversely affect banking and insurance sectors. ### Authorities’ views (on macro assessment and policies) - Authorities broadly agreed with staff’s assessment of macro developments and risks and agreed the franc was overvalued. - On low inflation, authorities noted domestic inflation was still positive, viewed current deflation as transitory (driven by lower energy prices and currency appreciation), and projected inflation to return to positive territory over the medium term. - On spillovers to Eastern Europe, SNB noted that authorities in Eastern Europe had long been aware of risks related to franc-denominated mortgages. - SNB’s policy stance: - Agreed monetary conditions were too tight and that preannounced foreign asset purchases were an option. - Preferred to allow more time to observe how the outlook develops before undertaking further monetary action. - Did not see a strong case for announcing a preference to move inflation closer to 2 percent; considers inflation in the range of 0–1 percent consistent with its framework. ### Policy recommendations and considerations - Monetary policy: - Further monetary easing via purchases of (mainly foreign) assets and strong communication of the SNB’s objective to boost inflation over the medium term could lessen near-term growth slowdown, reduce risks of entrenching low inflation, and limit franc overvaluation. - With policy rate at -0.75 percent, room for conventional easing is limited; policy rate should remain at current negative level for now. - Additional deep policy rate cuts could risk adverse nonlinear effects (e.g., increased cash hoarding), potentially reducing financial intermediation. - Pre-announced program of foreign-asset purchases recommended as a tool: - Fixed-quantity purchases (e.g., X billion per month until further notice) could be used and adjusted to achieve inflation objectives. - Advantages versus exchange-rate floor: would not unduly suppress exchange rate volatility, reduce “one-way bet” risk, and avoid unlimited balance-sheet commitment. - Pre-announcement could signal dovishness, raise inflation expectations, spur franc depreciation, and support higher inflation. - Purchases of domestic assets could be considered but scope is limited given very low domestic yields and limited supply of domestic assets (outstanding federal government bonds = 12 percent of GDP). - SNB should enhance communication and articulate medium-term objectives; staff suggests indicating a preference for moving inflation nearer the upper end of the target range (closer to 2 percent) to re-anchor expectations. - SNB capital buffers: prioritize provisioning over transfers to distribution reserve and maintain prudent profit distribution policy given large and volatile balance sheet and mark-to-market profits. - Fiscal policy: - Switzerland’s “debt brake” rule (in place since 2003) requires federal budget structural balance ex ante; helped limit general government gross debt to 46 percent of GDP at end-2014. - Recommendation: continued compliance with the rule in the central scenario; suspending the rule for the mild slowdown would set an undesirable precedent. - Fiscal policy should allow automatic stabilizers to operate fully. - Avoid budgeting overperformance against the rule in 2016 to prevent unnecessary contractionary impulse. - If a deep or prolonged recession materializes, discretionary fiscal easing should be employed by temporarily suspending the rule under established procedures. *Source: IMF staff report excerpt (SWITZERLAND — INTERNATIONAL MONETARY FUND).* ### 24. Pension reforms will help address longer-term fiscal challenges. Population aging is ### _cr15132 - 24. Pension reforms will help address longer-term fiscal challenges. Population aging is ### Pension reforms and fiscal sustainability - Population aging is projected to substantially increase fiscal costs related to pensions over the longer run. - Government reform proposal submitted to parliament includes: - Equalize retirement ages for men and women (currently 65 years for men and 64 years for women). - Reduce the rate at which pension savings are converted into pension annuities by reducing this conversion rate from 6.8 to 6.0 percent per annum. - Increase VAT rates by 2 percentage points by 2029 to ensure more stable funding for the pension system. - Expected outcome: help ensure sustainability of the social safety net and its continued availability for future generations. - Staff recommendation (second pillar): reduce the minimum guaranteed return on invested assets, given the low interest-rate environment. ### Box 1 — Guaranteed Rate of Return in Swiss Pension Funds: findings and advice - Structure: - First pillar: universal old age, survivors, and disability insurance; pay-as-you-go; contributions: employees and employers both pay 4.2 percent of the employee’s income. - Second pillar: fully funded, occupation-based pension plans; compulsory for employees; employer contribution must be at least as large as employee contribution. - Third pillar: private voluntary pension schemes. - Guaranteed nominal rate of return: - The required rate is set administratively each year. - During 2003–09, the average nominal required rate broadly matched the average yield on 10-year Swiss government bonds. - After 2010, the required rate did not decline in line with declines in headline inflation, producing a large increase in required real returns. - In 2015, the real guaranteed return stands around 3 percent—by far the highest in the last decade. - Consequences of a high required rate of return: - Risks insolvency of pension funds. - May encourage excessive risk-taking. - Could lead to refunding, requiring additional payments from employers and employees and/or reductions in pension benefits. - Policy advice: - Short run: consider lowering the nominal guaranteed rate of return at the next review to bring it more into line with market yields. - Medium/long run: consider linking the nominal guaranteed rate of return more closely and automatically to market-based measures of achievable returns. - Administrative note: the guaranteed rate is reviewed annually; next review was scheduled for autumn of 2015. ### Corporate tax reform (Corporate Tax Reform III) - Rationale: Switzerland faced international pressure to reduce favorable tax treatment for multinational corporations in many cantons. - Reform features: - Reform special tax regimes that provide more favorable treatment to income from foreign operations than income from domestic operations. - Implementation expected by 2019; submission to parliament expected this summer (as described). - Fiscal impact and federal support: - Some reforms may result in net revenue loss. - Federal government proposed fiscal support to cantons; current estimate of the needed transfer is approximately ¼ percent of GDP. - Staff view: welcomed reduction of distortions and encouraged finalization consistent with international initiatives to counter base erosion and profit shifting. ### Financial sector reform — key priorities and findings - Overall message: complete the financial sector reform agenda laid out in last year’s FSAP; continue strengthening TBTF policies and contain housing/mortgage risks. - The Big Banks: - Both Swiss G-SIBs have met the 10 percent minimum CET1 capital ratio required under Swiss Too-Big-To-Fail legislation well in advance of the 2019 deadline. - Both banks are in line with or above the average ratio for other G-SIBs. - Both banks are above the Liquidity Coverage Ratio minimum of 100 percent (effective in 2015 in Switzerland). - Estimated Net Stable Funding Ratios above 100 percent as of spring 2014 (NSFR not yet part of Swiss regulation but planned to be introduced in 2016). - Profitability: both banks remained profitable in 2014, but substantial provisions for litigation and regulatory issues weighed on results. - Areas for further improvement (FSAP identified): - Leverage ratios: - Banks’ leverage ratios are above current regulatory minima but remain low by international standards. - Recommendation: tighten minimum leverage ratio requirements for G-SIBs to be more ambitious than international minima; encourage multi-year plans to increase leverage ratios and promote conservative dividend policies. - Risk-weight transparency: - Vigilantly challenge risk weights from internal ratings-based models. - Increase banks’ disclosure requirements regarding capital-weights to enhance transparency and credibility. - Resolvability: - Continue improving resolvability through strengthened cross-border coordination and further restructuring. - Reach agreements with partner supervisors; update global recovery and resolution plans. - Operational risks: - Proactive supervision of risk management and provisioning to mitigate effects from trading activities, tax evasion investigations, or money laundering probes. - Authorities’ and staff actions: - Follow-up to the Brunetti Report (December 2014) with recalibration of capital requirements and adjustments to capital quality; FDF instructed to formulate concrete legislative proposals. - Authorities adopting international standards for increased disclosure regarding risk weights and cooperating with foreign supervisors on crisis management agreements for Swiss G-SIBs. - FINMA measures: monitoring risk weights; introducing multipliers and a moratorium on capital-reducing model changes; intensified on-site inspections. ### Broader FSAP recommendations and supervisory reforms - Continue to refine FINMA’s use of external auditors: - FINMA has strengthened guidance to external auditors and intensified direct supervisory activities. - Additional considerations: fund auditors from a FINMA-managed, bank-financed fund to avoid conflicts of interest; periodic rotation of auditing firms. - Authorities noted limited need for a substantial increase in FINMA’s resource envelope unless new statutory tasks are assigned. - Overhaul deposit insurance: - Reform governance to make deposit insurance more independent and limit banking industry influence in its board. - Build 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. - The Federal Council has taken note of the Brunetti Report and will decide how to proceed on recommendations later. ### Housing and mortgage market measures and outcomes - Context: - Swiss household debt (mainly mortgages) is high by international standards; mortgage debt has risen steadily since 2008. - Prudential measures taken (selected): - Revised minimum requirements for mortgages (Swiss Bankers Association; FINMA) effective mid-2012: - Down payment of at least 10 percent of the lending value from the borrower's own funds (not from pledging or early withdrawal of Pillar 2 pension assets). - Mortgages must be paid down to two-thirds of the lending value within a maximum of 20 years. - FINMA tightened rules for risk-weighting new and renewed mortgages for banks using internal ratings-based approaches (effective 2013). - Federal Council measures (effective 2013): - Non-compliant mortgages allowed but subject to a risk weight of 100 percent. - Mortgages exceeding 80 percent of property value will have a risk weight of 100 percent applied to the part exceeding the 80 percent threshold. - Countercyclical capital buffer (CCB) on SNB’s proposal: - Activated to a level of 1 percent (to be met in the form of CET1) capital by end–September 2013. - Raised to 2 percent in January 2014, to be fulfilled by end–June 2014. - Amended minimum standards effective September 1, 2014: - Amortization period for repayment down to two-thirds of lending value shortened from 20 years to 15 years; loan must be repaid in regular equal tranches from the start. - Stricter use of second incomes when assessing financial sustainability. - Future lending: real estate values must be based on market value or the purchase price, whichever is lower. - Effects observed: - Housing and mortgage markets show signs of cooling: growth rate of residential real estate prices has eased for owner-occupied apartments and single-family houses. - Mortgage growth has decelerated, though less pronounced. - Price-to-rent and price-to-income ratios have started to stabilize. - Percent of new mortgages with loan-to-value ratios exceeding 80 percent has been on a declining trend. - Authorities and banks view required down payment from borrower’s own funds (not funded by pension savings) as an important measure. *Source: International Monetary Fund* ### 36. However, the cooling of mortgage-related risks is still tentative and partial. Mortgage ### _cr15132 - 36. However, the cooling of mortgage-related risks is still tentative and partial. Mortgage ### Mortgage and housing-sector risks - Mortgage debt is high and still rising as a percent of GDP. - Loan-to-income ratios on new mortgages have not yet declined. - Recent interest rate cuts for SNB sight deposits could re-ignite mortgage demand. - If risks are not reduced or re-accelerate, tighter and more binding prudential measures should be adopted, for example: - explicit limits on the percent of new mortgages that can exceed a given debt-service-to-income and/or debt-to-income ratio. - Concentration and interest-rate risks identified by the SNB in its most recent Financial Stability Report may need to be stepped up via Pillar 2 measures, including, if necessary, additional capital charges. ### Authorities’ views (mortgages and macroprudential stance) - Authorities believe their measures have had some effect but remain concerned because imbalances are still large and have not fallen substantially. - They agree further policy action may be warranted, particularly to target affordability and the income-producing real estate sector. - They emphasize measures announced in mid-2014 have lagged effects and it is appropriate to let these measures work through the system first. - The SNB indicated that, if imbalances appear set to increase further, an upward adjustment of the CCB could be proposed. - FINMA emphasized careful analysis of interest rate and concentration risks and noted it has taken action in several instances to reduce risks in individual institutions. ### Structural issues and reforms - A February 2014 referendum obliges the government to set unspecified limits on immigration from the EU by 2017. - Tight limits could hurt growth potential by restricting availability of highly-skilled foreign labor. - Limits on immigration are incompatible with agreements with the EU, which could respond by terminating Swiss-EU bilateral agreements. - EU markets account for over half of Switzerland’s exports and three-quarters of its imports. - Progress on AML/CFT and tax transparency: - December 2014: parliament approved a bill to implement the 2012 FATF Recommendations; FATF is assessing these measures. - January 2015: Federal Council began consultations on ratification of the Multilateral Convention and on legal framework for automatic exchange of information reporting standard. - Parliamentary process expected to begin in mid-2015, possibly followed by a referendum, with relevant laws expected to be in place by 2017. - Staff encourages forceful implementation of FATF and Global Forum standards. - Structural reform priorities to support long-run growth: - Facilitate full-time labor participation of women (e.g., reducing child care costs and marginal tax rates on second earners). - Improve access and equity in education. ### Staff appraisal: outlook and risks - Near term: - GDP growth is expected to ease to around ¾ percent in 2015, mainly due to weaker net exports. - Inflation is likely to be driven down to well past -1 percent by late 2015 (the strong franc together with lower oil prices). - Medium term central scenario: - Growth projected to rise gradually back to around 2 percent over the medium term. - Inflation projected to increase to around 1 percent. - Scenario subject to important risks: very low inflation, uncertainty about EU relations and immigration, global and regional developments, changes in international financial regulatory landscape, potential for price reversals in the housing market. - Monetary policy recommendations: - Further monetary easing would support adjustment and reduce risks by limiting near-term growth slowdown and lessening exchange rate overvaluation. - Easing could perhaps be achieved via a program of pre-announced asset purchases (foreign-currency assets—and perhaps some domestic assets). - Maintain policy rate at its current negative level for now. - Central bank communication should build understanding of policy objectives and prevent inflation expectations from becoming entrenched at low levels; may indicate a preference for moving inflation back near the upper end of the target range (i.e., closer to 2 percent) over the medium term. - The SNB should prioritize provisioning over transfers to its distribution reserve to ensure capital remains in line with risks. - Fiscal policy recommendations: - Automatic stabilizers should be allowed to operate fully under Switzerland’s debt-brake rule. - Overperformance against the rule should be avoided to prevent unnecessary contractionary impulse. - If slowdown is significantly more severe or protracted, discretionary fiscal stimulus could be employed by triggering the rule’s temporary escape clause. - Longer-term reforms: - Pension reforms will help address fiscal costs related to aging and ensure sustainability of social safety net. - Continued structural reforms, including resolving EU relations and immigration uncertainty, corporate tax reform, AML/CFT reforms, and automatic exchange of tax information, should be pursued in ways fully consistent with international standards. - Reforms to boost full-time female labor force participation (e.g., lowering marginal tax rates on second incomes). ### Financial sector reform and specific supervisory recommendations - Recent measures to tighten lending standards for mortgages appear to have supported some reduction in mortgage-related risks, but further reforms can strengthen regulation and supervision. - Authorities’ plans to adopt measures along lines recommended in the Brunetti Report are encouraging. - In line with FSAP update recommendations, staff encourages the authorities to: - Continue to monitor closely financial stability risks related to Switzerland’s housing market and its high levels of mortgage debt. If risks do not decline, consider tighter and more binding prudential measures, such as explicit limits on the percent of new mortgages that can exceed a given debt-service-to-income or debt-to-income ratio. - Press the largest banks to continue rapidly bringing their leverage ratios into line with other large international banks and raise minimum leverage ratio requirements to more ambitious levels. - Continue to refine FINMA’s use of external auditors, including by periodically rotating auditing firms; providing more guidance on their supervisory focus; paying auditors from a FINMA-managed, bank-financed fund rather than by the bank that is being audited to avoid conflicts of interest; and intensifying FINMA’s own onsite inspections, including by increasing the number of deep dives. - Increase banks’ disclosure requirements regarding capital-weights to enhance transparency and bolster understanding of, and credibility in, banks’ soundness and business strategies. - Continue to monitor closely the possible effects on the financial sector of the recent exchange rate appreciation and low interest-rate environment, the latter being particularly important for life insurers and defined-benefit pension plans. - To ensure sustainability of defined-benefit plans, the minimum guaranteed rate of return that applies to some plans and that is established by the government should be reduced to bring it into line with market rates. - Overhaul the deposit insurance scheme to align with emerging international best practices by: - building up dedicated ex-ante funding with a back-up credit line from the authorities; - reforming the scheme’s governance so that a majority of board members are independent of the banking industry; - allowing the scheme to finance resolution measures. - Continue discussions with international counterparts to reach agreement on measures to make the largest banks resolvable without public-sector support. *SWITZERLAND — INTERNATIONAL MONETARY FUND* ### 50. It is recommended that the next Article IV consultation take place on the standard 12-month ### _cr15132 - 50. It is recommended that the next Article IV consultation take place on the standard 12-month ### Recommendation - It is recommended that the next Article IV consultation take place on the standard 12-month cycle. ### Key macroeconomic indicators (selected highlights from Tables) - Real GDP (percent change): 2010: 2.9; 2011: 1.9; 2012: 1.1; 2013: 1.9; 2014: 2.0; 2015: 0.8; 2016: 1.2; 2017: 1.5; 2018 (Staff estimate): 1.9. - Nominal GDP (billions of Swiss francs): 2010: 605.6; 2011: 618.5; 2012: 624.4; 2013: 635.7; 2014: 651.8; 2015: 648.2; 2016: 651.1; 2017: 662.1; 2018 (Staff estimate): 678.3. - Consumer price index (period average): 2010: 0.7; 2011: 0.2; 2012: -0.7; 2013: -0.2; 2014: 0.0; 2015: -1.1; 2016: -0.4; 2017: 0.4; 2018 (Staff estimate): 0.8. - Unemployment rate (in percent): 2010: 3.5; 2011: 2.8; 2012: 2.9; 2013: 3.2; 2014: 3.2; 2015: 3.4; 2016: 3.6; 2017: 3.4; 2018 (Staff estimate): 3.3. - Current account balance (percent of GDP): 2010: 14.0; 2011: 6.8; 2012: 9.9; 2013: 10.7; 2014: 7.0; 2015: 5.8; 2016: 5.6; 2017: 5.5; 2018 (Staff estimate): 5.7. - Net international investment position (Net IIP, in percent of GDP): 2010: 134.0; 2011: 138.9; 2012: 132.9; 2013: 117.7; 2014: 121.6; 2015: 128.1; 2016: 133.1; 2017: 136.3; 2018 (Staff estimate): 138.7. ### SNB balance sheet and reserves (high-level) - SNB total assets (millions of Swiss francs): 2009: 207,264; 2010: 269,955; 2011: 346,079; 2012: 499,434; 2013: 490,382; 2014: 561,202. - Foreign currency reserves (millions of Swiss francs): 2009: 94,680; 2010: 203,810; 2011: 257,504; 2012: 432,209; 2013: 443,275; 2014: 510,062. - Memorandum: Balance sheet, percent of GDP: 2009: 35.3; 2010: 44.6; 2011: 56.0; 2012: 80.0; 2013: 77.1; 2014: 86.1. ### General government finances (selected) - General government revenue (billions of Swiss francs): 2010: 189; 2011: 196; 2012: 196; 2013: 199; 2014: 204; 2015: 203; 2016: 204; 2017: 207; 2018 (Staff estimate): 212. - General government expenditure (billions of Swiss francs): 2010: 188; 2011: 194; 2012: 196; 2013: 200; 2014: 203; 2015: 205; 2016: 206; 2017: 209; 2018 (Staff estimate): 213. - General government net lending/net borrowing (billions of Swiss francs): 2010: 1; 2011: 0; 2012: -1; 2013: -2; 2014: -1; 2015: 0; 2016: -3; 2017: -2; 2018 (Staff estimate): -1. - General government gross debt (percent of GDP): 2010: 47.1; 2011: 47.1; 2012: 48.2; 2013: 47.0; 2014: 46.1; 2015: 46.1; 2016: 45.6; 2017: 44.6; 2018 (Staff estimate): 43.5. ### Balance of payments and external sector (highlights) - Current account composition (2012–14 averages / selected figures): - At 9.2 percent of GDP in 2012–14, Switzerland’s current account surplus appears high by international standards. - Statistical bias from retained earnings of MNCs with substantial foreign ownership is estimated at approximately 3 percent of GDP in 2014. - Goods balance (2012–14): +7.2 percent of GDP, mostly reflecting net exports of goods under merchanting. - Services balance (2012–14): +3.2 percent of GDP, more than fully accounted for by financial and insurance services. - Income balance (2012–14): -1.3 percent of GDP, masking large positive net investment earnings of 4¾ percent of GDP which are offset by larger negative labor and secondary income balances. - Volatility and recent dynamics: - The Swiss current account exhibits large volatility: the standard deviation of the Swiss surplus over the last decade is 4 percentage points of GDP. - Official revisions between first estimates and final accounts averaged 3 percentage points of GDP in the last four years. - The current account surplus declined from 10.7 percent of GDP in 2013 to 7.0 percent of GDP in 2014, driven by nontraditional factors despite a stable REER and relatively stable domestic and foreign demand. - Relationship with the real effective exchange rate: - The association between the Swiss REER and the current account surplus is described as mild. Nontraditional items dominating the current account are unlikely to be highly exchange-rate sensitive; many traditional items may also be less exchange-rate sensitive because of intra-MNC trade and tax optimization strategies. ### Financial soundness (selected) - Bank regulatory capital as percent of risk-weighted assets (parent company consolidation basis): 2007: 12.2; 2008: *15; 2009: *17.5; 2010: 17.1; 2011: 16.6; 2012: 16.9; 2013: 17.5; Jun-14: 16.6. - Non-performing loans as percent of gross loans: 2007: 0.8; 2008: 0.9; 2009: 1.1; 2010: 0.9; 2011: 0.8; 2012: 0.8; 2013: 0.8; Jun-14: 0.7. - Net long position in foreign exchange as a percentage of tier I capital: 2007: 12.9; 2008: -13.0; 2009: -20.6; 2010: -36.7; 2011: -56.9; 2012: -44.5; 2013: -41.0; Jun-14: -37.2. ### Analytical findings and implications (Annex I: External Sector Assessment — Stylized Facts) - Much of Switzerland’s current account surplus is accounted for by nontraditional factors: merchanting profits, net exports of financial/insurance services, and a statistical bias from the treatment of retained earnings of multinationals with large foreign ownership. - These nontraditional factors reflect Switzerland’s role as a global hub for commodity trading, wealth management, and multinational corporations, which boosts reported Swiss income and savings though some of this saving may not be fundamentally Swiss. - Stripping away nontraditional factors reveals a much more modest “underlying” current account balance that is consistent with evidence on the overvaluation of the Swiss franc. - The sharp decline in the current account in 2014 (linked to a decline in net income from abroad) highlights the importance of adjusting for nontraditional factors for Swiss external assessments. - Nontraditional components (merchanting, financial and insurance services, net FDI earnings, and income on FX reserves) play a larger role in Switzerland’s current account than in many other major surplus economies, contributing to both the level and volatility of the surplus. - Policy-relevant implication: because nontraditional items dominate the current account and are volatile and often not highly exchange-rate sensitive, policymakers and external assessments should adjust for these factors when interpreting the current account and assessing exchange rate misalignment. *Prepared by IMF staff; content drawn from the Switzerland staff report tables and Annex I in the provided source.* ### Annex 1. Figures ### Annex 1. Figures ### Assessment of the Swiss Current Account and Real Exchange Rate - Staff view: Switzerland’s external position broadly in line with fundamentals in 2014, assessment subject to high uncertainty. - Post–SNB floor appreciation: As of April 2015, the REER has appreciated by about 10 percent relative to its average 2014 value; this appreciation is likely to reduce net exports and has likely left the franc overvalued. - Monetary policy gap: Overvaluation partly reflects a policy gap of insufficiently easy monetary policy—simple Taylor rules suggest an optimal policy rate well below current levels. - Staff conclusion for 2014: Staff assesses the franc to have been broadly in line with fundamentals in 2014, with this assessment subject to significant uncertainty. - Staff conclusion for 2015: Overvaluation likely increased in 2015 due to the appreciation so far that year. ### Core Current Account Definitions and Key Statistics (Switzerland, 2000–14) - Rationale: Strip nontraditional components (merchanting, finance/insurance services, patents/license fees, net investment income excluding reserves) to obtain three “core” measures that are consistent over time. - Narrow definition: - Components: (i) goods balance less merchanting and nonmonetary gold net exports; (ii) services balance less finance and insurance services and patents/license fees; (iii) income balance less all net investment income. - Average (2000–14): -1.4 percent of GDP. - Volatility (Std. dev., 2000–14): 1.2 percentage points of GDP. - Note: The narrow measure shows an average deficit of 1.4 percent of GDP over 2000–14 and a consistent widening since 2008 (cumulatively 4.2 percentage points of GDP). - Medium definition: - Adds: excluded services net exports (finance, insurance, and patent/license fees). - Average (2000–14): 3.9 percent of GDP. - Volatility: 1.8 percentage points of GDP. - Broad definition: - Adds: one-half of X, where X is net investment income excluding income earned on the SNB’s foreign exchange reserves (i.e., 0.5*(Inv. income ex-reserves)). - Average (2000–14): 6.5 percent of GDP. - Volatility: 2.6 percentage points of GDP. - Comparison to EBA: Medium and broad definitions of the core surplus also undershoot the estimated EBA norm. ### Structure of Swiss Current Account Balance (Selected figures from Annex Table 1) - Headline current account balance, 2014: 9.2 (percent of GDP). - Headline current account balance, Avg. (2000–14): 3.5 (percent of GDP). - Goods and services balance, 2014: 4.0 (percent of GDP). - Goods_ex-gold & merchanting, 2014: 3.1 (percent of GDP). - Services_finance & insurance (FI), 2014: 3.5 (percent of GDP). - Investment income: - Inv income_reserves (FX), Avg. (2000–14): 0.5 (percent of GDP). - Inv income_ex-FX, 2014: 3.4 (percent of GDP). - Underlying current account balance (selected averages): - Narrow (blue cells only), Avg. (2000–14): -1.4 (percent of GDP). - Medium (blue + FIL services), Avg. (2000–14): 3.9 (percent of GDP). - Broad (blue + 0.5*(FIL services + Inv. income ex-reserves)), Avg. (2000–14): 6.5 (percent of GDP). ### Draft Page for the 2015 External Sustainability Report — Key Findings and Policy Responses - Foreign asset and liability position and trajectory: - Background: Switzerland is a financial center with a positive NIIP of about 120 percent of GDP and large gross foreign asset and liability positions of 624 and 504 percent of GDP, respectively. - NIIP: No significant trend over the last 10 years despite large current account surpluses; ratio projected to rise moderately in the medium term as recent exchange rate appreciation contributes to a wider output gap and significant inflation undershooting, temporarily depressing nominal GDP growth; longer-run expectation is stabilization and then modest decline. - Assessment: Large gross liabilities and volatile capital flows present risks, mitigated by large net asset position and foreign reserves. - Overall Assessment (2014): The underlying external position was broadly consistent with medium-term fundamentals and desirable policy settings, accounting for measurement anomalies; after significant REER appreciation in early 2015, the external position will likely weaken. - Potential policy responses: - Monetary easing, perhaps via a schedule of FX purchases (given limited options for other methods of monetary easing), to: - help limit the near-term growth slowdown, - reduce risks of inflation expectations becoming anchored at low levels, - lessen franc overvaluation. - Current account: - Background: Moderate to large CA surplus dominated by net investment income and goods balance; preliminary authorities’ estimate: surplus of 7 percent of GDP in 2014, down from 11 percent in 2013 (mainly reflecting decline in primary income). - Assessment: EBA CA regression approach estimates a CA gap of around 0.7 percent of GDP (cyclically-adjusted CA surplus of 7.5 percent of GDP vs EBA norm of 6.8 percent of GDP). However, surplus driven by non-traditional flows; staff assesses a CA gap for 2014 ranging from -3.5 to 2.5 percent of GDP. CA gap expected to become more negative in near term due to REER appreciation in 2015, adversely affecting competitiveness. - Real exchange rate (REER): - Background: REER (CPI basis) appreciated by 26 percent from 2007 to 2011. SNB floor of 1.20 CHF/EUR established September 2011; REER depreciated by 4 percent during 2011–14. SNB exited floor on January 15, 2015. As of April 2015, REER appreciated by about 10 percent from its average 2014 level. - Assessment: EBA REER index and level regression-based estimates suggest average REER in 2014 was overvalued by 11 and 13 percent, respectively. Taking these and staff’s CA assessment into account, staff assesses the franc was broadly in line with fundamentals in 2014 (overvalued by 0–10 percent). Overvaluation likely increased in 2015. - Capital and financial accounts: - Background: Significant net outward FDI (mostly reinvested earnings) consistently featured; bank lending flows became critical since the crisis. SNB accumulated large safe-haven inflows during 2009–12 through reserve accumulation. - Assessment: Safe-haven capital inflows may return if euro area stress re-emerges, emerging market turmoil intensifies, or political risks rise. - FX intervention and reserves: - Background: SNB accumulated foreign exchange reserves of about 70 percent of GDP during 2009–14; at end-2014 SNB’s balance sheet approaching 90 percent of GDP. After exit from floor, franc floated between 1.00–1.10 CHF/EUR with occasional SNB intervention. - Assessment: Reserves are large relative to GDP but more moderate relative to external liabilities; substantial reserves partly explained by capital flow volatility. Interventions have been monetary policy operations aimed at avoiding persistent inflation undershooting and have helped limit exchange rate overvaluation. ### Risk Assessment Matrix — Selected Risks, Likelihood, Expected Impact, and Policy Responses - 1. A surge in financial volatility, as investors move to safe-haven assets - Relative Likelihood: High - Expected impact: High - Policy response: Further ease monetary policy via additional FX purchases; consider temporarily suspending the fiscal rule to allow deeper fiscal easing if downturn is sustained and/or deep. - 2. Protracted period of slower growth in advanced and EM economies - Relative Likelihood: High - Expected impact: High - Policy response: Same as 1 above. - 3. Heightened risk of geopolitical fragmentation in Russia/Ukraine and the Middle East - Relative Likelihood: Medium - Expected impact: High - Policy response: Same as 1 above. - 4. Upside surprises to demand (external or domestic), inflation, and/or franc depreciation - Relative Likelihood: Medium - Expected impact: Medium - Policy response: Scale back monetary easing relative to baseline recommendations. - 5. Growing changes in the international regulatory landscape and increased enforcement actions against banks - Relative Likelihood: Medium - Expected impact: Medium - Policy response: Compliance and effective implementation of relevant international standards, including those issued by the FATF. - 6. A surge in house prices and mortgage borrowings, which eventually collapses - Relative Likelihood: Medium - Expected impact: High - Policy response: Keep tightening supervision and macroprudential policies during the upswing; loosen macro policies following the bust. - 7. Weaker economic relationships with EU (e.g., re-introducing immigration quotas) - Relative Likelihood: Medium - Expected impact: Medium - Policy response: Secure a constructive resolution to uncertainties related to EU relations and immigration. ### Debt Sustainability Analysis — Summary, Baseline, and Stress Tests - Summary: Public debt sustainability risks remain subdued due to strict implementation of fiscal rules and the low stock of public debt. - Baseline scenario: - Main assumptions: gradual but steady recovery of economic growth and continued adherence to federal and sub-federal fiscal rules. - Projection: Public debt projected to decline from 46 percent of GDP in 2015 to 41 percent of GDP in 2020. - Gross financing needs: Expected to remain around 10 percent of GDP during the medium term. - Stress tests: - Main risk: negative growth shock is the primary risk to debt dynamics; adverse interest rate shock or shock to financing needs affect debt trajectory only to a minor extent in the staff analysis. - Real GDP growth shock: - Assumption: Real GDP growth rates are assumed to be one standard deviation (1.8 percent) below the baseline during 2015–16. - Outcome: Under this scenario, the debt-to-GDP ratio approaches 48 percent in 2017 (3 percentage points higher than the baseline). - Primary balance shock: (Description truncated in source) *Annex 1. Figures — IMF staff compilation (Switzerland).* ### 0.4 percent of GDP. This shock results in a debt-to-GDP ratio that is only slightly above the ### _cr15132 - 0.4 percent of GDP. This shock results in a debt-to-GDP ratio that is only slightly above the ### Stress test scenarios and headline results - Primary balance shock: - Noted as a scenario in the stress testing framework (specific numeric shock not restated in supplied excerpt). - Real interest rate shock: - The nominal interest rate increases by 200 basis points during 2015–20. - The debt-to-GDP ratio increases only marginally in 2016 and continues declining afterwards. - Real exchange rate shock: - Assumes the nominal CHF/USD exchange rate increases by 14 percent in 2016 relative to its 2015 level. - Impact on public debt trajectory is minor. - Combined shock (simultaneous combination of the three shocks above): - Results in an increasing debt-to-GDP ratio that approached 48 percent in 2017 (approximately 3 percentage points higher than the baseline). - After 2017, debt starts declining on a trajectory parallel to the baseline. ### Baseline projections and key fiscal and macro indicators (selected series) - Nominal gross public debt (in percent of GDP): 2013: 54.0; 2014: 47.0; 2015: 46.1; 2016: 46.1; 2017: 45.6; 2018: 44.6; 2019: 43.5; 2020: 42.4; (last column) 41.3. - Public gross financing needs (in percent of GDP): 2013: 1.4; 2014: 1.7; 2015: 1.3; 2016: 1.0; 2017: 1.2; 2018: 1.5; 2019: 1.1; 2020: 0.9; 5Y CDS (bp): 15. - Public debt (in percent of potential GDP): 2013: 54.1; 2014: 46.7; 2015: 46.0; 2016: 45.7; 2017: 45.2; 2018: 44.3; 2019: 43.4; 2020: 42.4; (last) 41.3. - Real GDP growth (in percent): 2013: 2.2; 2014: 1.9; 2015: 2.0; 2016: 0.8; 2017: 1.2; 2018: 1.5; 2019: 1.9; 2020: 1.9; 2020 last: 1.9. - Inflation (GDP deflator, in percent): 2013: 0.9; 2014: -0.1; 2015: 0.5; 2016: -1.4; 2017: -0.8; 2018: 0.2; 2019: 0.5; 2020: 0.8; 2020 last: 0.8. - Nominal GDP growth (in percent): 2013: 3.1; 2014: 1.8; 2015: 2.5; 2016: -0.6; 2017: 0.4; 2018: 1.7; 2019: 2.5; 2020: 2.7; 2020 last: 2.8. - Effective interest rate (in percent): 2013: 2.0; 2014: 1.6; 2015: 1.6; 2016: 1.6; 2017: 1.6; 2018: 1.6; 2019: 1.6; 2020: 1.6; (projection) 1.6. - Change in gross public sector debt (cumulative, projection to 2020): 2013: -1.6; 2014: -1.1; 2015: -0.9; 2016: 0.0; 2017: -0.5; 2018: -1.0; 2019: -1.1; 2020: -1.1; cumulative to 2020: -4.8. - Identified debt-creating flows (selected components, in percent of GDP): - Primary deficit (annual): 2013: -1.0; 2014: -0.2; 2015: -0.6; 2016: -0.1; 2017: -0.1; 2018: -0.1; 2019: -0.3; 2020: -0.3; cumulative to 2020: -1.1. - Primary (noninterest) revenue and grants (percent of GDP): 31.9; 31.0; 31.0; 31.0; 31.0; 31.0; 31.0; 31.0; cumulative 185.8. - Primary (noninterest) expenditure (percent of GDP): 30.9; 30.7; 30.4; 30.9; 30.9; 30.8; 30.7; 30.7; cumulative 184.6. - Automatic debt dynamics (contribution, in percent of GDP): 2013: -0.7; 2014: -0.1; 2015: -0.4; 2016: 1.0; 2017: 0.5; 2018: -0.1; 2019: -0.4; 2020: -0.5; cumulative to 2020: 0.1. - Of which: real interest rate contribution: 2013: 0.6; 2014: 0.8; 2015: 0.5; 2016: 1.4; 2017: 1.1; 2018: 0.6; 2019: 0.4; 2020: 0.3; cumulative: 4.1. - Of which: real GDP growth contribution: 2013: -1.3; 2014: -0.9; 2015: -0.9; 2016: -0.4; 2017: -0.6; 2018: -0.7; 2019: -0.8; 2020: -0.8; cumulative: -4.0. - Residual, including asset changes (in percent of GDP): 2013: 0.1; 2014: -0.8; 2015: 0.1; 2016: -0.9; 2017: -0.9; 2018: -0.8; 2019: -0.5; 2020: -0.4; cumulative to 2020: -3.7. ### Alternative scenarios and underlying assumptions (selected) - Baseline underlying assumptions (2015–20, in percent unless indicated otherwise): - Real GDP growth: 0.8; 1.2; 1.5; 1.9; 1.9; 1.9 (2015–20). - Inflation: -1.4; -0.8; 0.2; 0.5; 0.8; 0.8 (2015–20). - Primary Balance: 0.1; 0.1; 0.1; 0.3; 0.3; 0.3 (2015–20). - Effective interest rate: 1.6; 1.6; 1.6; 1.6; 1.6; 1.6 (2015–20). - Historical scenario (2015–20): - Real GDP growth: 0.8; 2.1; 2.1; 2.1; 2.1; 2.1. - Inflation: same as baseline for 2015–20. - Primary Balance: 0.1; 1.0; 1.0; 1.0; 1.0; 1.0. - Effective interest rate: 1.6; 1.6; 1.5; 1.5; 1.5; 1.5. - Constant Primary Balance scenario: - Primary Balance: 0.1 each year for 2015–20 (other variables as baseline). ### Stress test details and visualization outcomes - Stress tests include: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Macro-Fiscal Shock. - Example parameter changes used in stress tests (2015–20, as listed under “Stress Test” table): - Real GDP growth under Real GDP Growth Shock: 0.8; -0.6; -0.3; 1.9; 1.9; 1.9. - Inflation under Real GDP Growth Shock: -1.4; -1.2; -0.3; 0.5; 0.8; 0.8. - Primary balance under Real GDP Growth Shock: 0.1; -0.6; -1.3; 0.3; 0.3; 0.3. - Effective interest rate under Real Interest Rate Shock: 1.6; 1.6; 1.9; 2.1; 2.2; 2.4. - Real exchange rate shock specified in text: nominal CHF/USD increases by 14 percent in 2016 relative to 2015. - Stress test outcomes (selected): - Combined shock raises gross nominal public debt to about 48 percent of GDP in 2017 before declining parallel to baseline thereafter. - Charts (described in the source) show gross nominal public debt in percent of GDP and in percent of revenue, and public gross financing needs in percent of GDP, under baseline and various shocks across 2015–20. ### Risk assessment (heat map and indicators) - Risk assessment framework: - Benchmarks and color-coding: green if debt burden benchmark of 85% not exceeded under specific shock or baseline; yellow if exceeded under specific shock but not baseline; red if benchmark exceeded under baseline; white if not relevant. - Gross financing needs benchmark: 20% (green if not exceeded under specific shock or baseline). - Long-term bond spread over German bonds (bp) referenced (average over 15-Jan-15 through 15-Apr-15): -35 bp noted as example. - External financing requirement benchmarks: 17 and 25 percent of GDP. - Change in share of short-term debt benchmarks: 1 and 1.5 percent. - Public debt held by non-residents benchmarks: 30 and 45 percent. - Market perception indicators provided in the exhibit: - Bond spread: -35 bp (three-month average period stated). - Public debt held by non-residents (in percent of total): charted historically (no single summary number in excerpt beyond the presence of the series). ### FSAP recommendations and authorities’ actions (Annex IV: Status of Key Recommendations) - Short-term recommendations and actions taken: - Impose a leverage ratio on banks tougher than international minima: - Brunetti Report released December, 2014; Federal Council supported recommendations in February 2015 and instructed FDF to submit proposals by end-2015. - Remain alert to build-up of risks in domestic real estate and mortgage markets; enforce self-regulation; consider raising countercyclical capital buffer and introducing DTI/LTV limits: - FINMA and SNB monitor markets; authorities enforcing self-regulations; since September 2014 implemented stricter: (i) amortization requirements; (ii) use of second incomes for financial sustainability evaluation; (iii) valuation of properties for mortgages. No plans for new macroprudential tools currently. - Bring Financial Market Infrastructures (FMIs) into compliance with CPMI-IOSCO Principles and establish crisis management arrangements: - PFMIs transferred into national law for central counterparties, payment systems and central securities depositories via revisions to National Bank Ordinance (NBO). - Financial Market Infrastructures Act in Parliament expected earliest start of 2016 for trade repositories; crisis management arrangements to be strengthened via the new Act and Ordinance. - Establish transparency in financial sector via heightened disclosure requirements: - FINMA circular (2008/22) being revised for pillar 3 disclosure; updates previously made for composition of capital disclosure, leverage ratio framework and disclosure, liquidity coverage ratio disclosure standards. - Swiss big banks increased transparency related to model-based RWA; Swiss accounting rules for banks revised in 2014 enabling more information in notes. - Overhaul deposit insurance scheme (transparency, governance, ex ante funding, payout period): - Federal Council took note of Brunetti Report (December 5, 2014) with recommendations aligning with FSAP (transparency, governance, payout period reduction from 20 to 7 working days, ex ante funding). Federal Council to decide later. No proposal to make deposit insurance funds available to finance resolution measures on a least-cost basis. - Issue guidance on cantonal banks’ governance and guarantees: - Revision of FINMA Circular 2008/24 planned for 2015 with focus on governance; most cantonal banks now have a majority of independent board members except one. No explicit guidance on guarantees planned. - Ensure consolidation among private banks proceeds smoothly: - In 2014 consolidation continued: five private banks ceased business and released from FINMA supervision; one merged; one liquidated; another in liquidation. Transactions proceeded smoothly except one unrelated case. - Issue guidance to auditors; increase onsite supervision intensity: - FINMA Circular 2013/3 established for prudential audits; templates and guidance being implemented; FINMA intensified supervisory activities and considers redirecting resources for further strengthening. Federal Council report (December 20, 2014) identified areas for improvement and will decide on expert group's recommendations later. - Short- to medium-term and medium-term recommendations and actions: - Increase FINMA’s resources: - Authorities report no plans to increase FINMA’s resources. - Reach agreement with partner supervisors on resolution of G-SIFIs: - FINMA reports consensus on resolution strategy with CMGs and is concluding cooperation agreements; detailed implementation to be defined. - Grant FINMA full-range resolution powers and statutory bail-in basis: - Authorities plan to amend the banking act to provide statutory basis for FINMA bail-in powers and grant resolution powers for holding companies and non-operational entities. - Monitor life insurers ahead of removal of palliative measures and enhance understanding of Swiss Solvency Test: - Life insurers monitored closely; FINMA exchanges information with other regulators and provides presentations on Swiss Solvency Test. - Prioritize securities market regulatory reform and conduct-of-business supervision: - Federal Council took note of consultation results on FinSA and FinIA and instructed FDF to adjust; FinSA and FinIA aim to upgrade client protection and align regulations with international standards. - Pursue legislation to improve policyholder protection, enhance brokers’ supervision, increase public disclosure: - In March 2015, revision of Insurance Supervisory Ordinance entered into force with improvements to policyholder protection, public disclosure, and supervision of insurance brokers; application of Swiss Solvency Test to reinsurance captives; increased qualitative requirements; ORSA assembled in dedicated section; increased public reporting obligations synchronized with EU requirements. *Source: IMF staff (as presented in the supplied content).* ### Annex V. Switzerland: Authorities’ Response to Past IMF Policy ### Annex V. Switzerland: Authorities’ Response to Past IMF Policy Recommendations ### Monetary and Exchange Rate Policies - IMF 2014 recommendation: Monetary conditions should remain expansionary and the exchange rate floor should remain in place. - Authorities’ response and actions: - The SNB maintained an expansionary monetary policy stance with the policy rate reduced to -0.75 percent. - In early 2015, the SNB intervened heavily to maintain the exchange rate floor against the euro. - Depreciation against the dollar reduced the likelihood of franc overvaluation. - The SNB judged the franc needed more flexibility and, given the change in conditions, concluded the costs of maintaining the floor were no longer worth the benefits, resulting in an exit from the floor on January 15, 2015. - IMF 2014 recommendation: Negative interest rates on banks’ excess reserves may need to be introduced in case of renewed strong pressures on the franc. - Authorities’ response: Implemented. - IMF 2014 recommendation: Provisions need to be strengthened to bring SNB capital in line with risks. - Authorities’ response: The SNB built up provisions for currency reserves in 2014. - Exchange rate arrangement and classification details: - The de jure exchange rate arrangement is free floating. - On January 15, 2015, the SNB ended the exchange rate floor of CHF 1.20 per euro, and the franc has since been floating. - The SNB may intervene in the foreign exchange market and publishes information regarding its foreign exchange transactions in its annual accountability report. - The 2014 IMF Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) classifies the de facto exchange rate regime as a crawl-like arrangement; this classification does not take into account the exit from the exchange rate floor in January 2015 and implications will be assessed in the 2015 AREAER. ### Housing Market Policies - IMF 2014 recommendations: - Discourage vulnerable households from taking on too much mortgage debt. - Tighten existing self-regulation measures, for example to speed up loan amortization. - Curb mortgage growth in the buy-to let segment. - Consider stricter direct regulation, including mandatory affordability caps and maximum loan-to-value ratios. - Phase out tax incentives that encourage borrowing to finance home buying. - Authorities’ response and actions: - Enforcing self-regulations and implemented new measures since September 2014: - Stricter amortization requirements. - Stricter use of second income for financial sustainability evaluation. - Stricter valuation requirements for residential real estate. - Authorities currently have no immediate plans to introduce new macroprudential tools, though they are continuously assessing whether further action is needed. ### Structural and Fiscal Policies - IMF 2014 recommendation: Address the challenges of an aging population. - Authorities’ response: The government submitted the Pension 2020 reform package to the parliament. - IMF 2014 recommendation: A rapid resolution of uncertainty related to future immigration policy. - Authorities’ response: In progress. ### Financial Sector Policies - IMF 2014 recommendations and authorities’ responses: - Press the large banks to bring leverage ratios into line with other major international banks, ensure an ambitious minimum leverage ratio requirement, and improve transparency regarding risk weights. - The Federal Council supported the Brunetti Report recommendations, including that Switzerland should be among leading countries on going-concern capital requirements based on both risk-weighted requirements and the leverage ratio, and instructed the FDF to submit proposals for necessary legal adjustments by end-2015. - Authorities are adopting international standards related to increased disclosure of risk weights and participating in international initiatives to strengthen standards further. - Continue discussions with international counterparts to reach agreement on measures to make large banks resolvable without public sector support. - FINMA reports consensus on resolution strategy of its G-SIBs with the Crisis Management Group (CMG) of both G-SIBs and is concluding cooperation agreements on crisis management of the Swiss G-SIBs between CMG members. - Increase resources available to FINMA for banking supervision, to extend intensive supervision beyond the largest banks. - FINMA reports it has intensified direct supervisory activities, including on-site inspections, and resources will be redirected to strengthen supervisory activities; they do not see a need for substantially increased resources. - Refine FINMA’s use of external auditors for onsite supervision, including periodic rotation of auditing firms, ensuring auditors are paid from a FINMA-managed bank-financed fund, and providing more guidance on supervisory focus. - In 2013, FINMA established Circular 2013/3 focusing on prudential audits performed by external auditors. - Implementation is supplemented by templates and instructions concerning risk analysis, audit strategy, and form and content of long-form audit reports. - FINMA decided to issue detailed guidance describing how to audit each regulatory audit field. - Overhaul the deposit insurance scheme to align with emerging international best practices (greater transparency, commitment to faster payouts, ex ante financing in a dedicated fund, and powers to take action other than bank closure when cheaper). - The Federal Council took note of the Brunetti Report recommendations, which include transparency, governance reform in line with international standards, shorter payout period, and ex ante funding. - The Federal Council will decide on how to proceed at a later date. - There is no proposal to make deposit insurance funds available to finance resolution measures on a least-cost basis. ### Fund Relations — Key Figures and Arrangements - Membership status: - Joined May 29, 1992; Article VIII. - General Resources Account: - Quota: 3,458.50 SDR Million, 100.00 percent. - Fund holdings of currency: 3,345.34 SDR Million, 96.73 percent. - Reserve position in Fund: 113.22 SDR Million, 3.27 percent. - New arrangement to borrow: 1,110.93 SDR Million. - SDR Department: - Net cumulative allocations: 3,288.04 SDR Millions, 100.00 percent allocation. - Holdings: 3,006.39 SDR Millions, 91.43 percent. - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Charges/Interest: 2015: 0.12; 2016: 0.16; 2017: 0.16; 2018: 0.16; 2019: 0.16. - Total: 2015: 0.12; 2016: 0.16; 2017: 0.16; 2018: 0.16; 2019: 0.16. - Exchange restrictions and notifications: - Switzerland has accepted the obligations of Article VIII, Sections 2, 3, and 4. - On April 30, 2014, Switzerland notified the IMF of exchange restrictions imposed against certain countries, individuals, and entities in accordance with relevant UN Security Council resolutions and EU regulations. - Latest Article IV consultation: - The last Article IV consultation was concluded on April 30, 2014, with the staff report published on May 28, 2014. - Switzerland is on the standard 12-month consultation cycle. - Technical assistance and resident representatives: None. - Financial System Stability Assessment Update and ROSCs: - A Financial System Stability Assessment Update was conducted in 2013–14; report issued on May 28, 2014. - Reports on the Observance of Standards and Codes (Basel core principles, IAIS core principles, and IOSCO objectives and principles) were conducted in 2013–14; report issued on May 28, 2014. ### Statistical Issues and Data Improvements - Overall assessment: Switzerland’s economic and financial statistics are adequate for surveillance purposes. - SDDS participation and plans: - Switzerland subscribed to the Fund’s Special Data Dissemination Standard (SDDS) in June 1996; metadata posted on the Dissemination Standards Bulletin Board. - Switzerland is in full observance of SDDS requirements and is availing itself of SDDS flexibility options on dissemination of production index data (for periodicity and timeliness) and of wages and earnings data (for periodicity). - The Swiss Federal Council supports participation in the IMF’s SDDS Plus; implementing SDDS Plus will take several years with an interagency working group (SIF, SNB, FSO, FFA, FSIO, SECO, and FINMA) active. - Remaining statistical gaps and causes: - General government finance statistics are finalized with considerable lags, mainly due to delays in compiling fiscal accounts at the level of cantons and communes. - Pension statistics are published with a long lag. - GDP by industry are published with a considerable lag. - Steps taken to address deficiencies: - Balance of payments (BOP) statistics: In 2013, content-related revision of surveys for financial flows (investment BOP) was completed; reporting institutions reported data according to the new concept for the first time for 2014 Q3. Since 2014, BOP and international investment position data published based on BPM6; SNB reclassified old data series in line with BPM6. - Switzerland continued to provide Financial Soundness Indicators (FSIs) and participated in the 2009 Coordinated Direct Investment Survey; data and metadata posted on the IMF website. - SNB and FINMA continued to transmit FSB Data Gaps related data to the central data hub hosted by the BIS and prepared for phase 3 of the project. - Cashless payment transactions surveys were thoroughly revised; reporting institutions reported data according to revised surveys for the first time as of December 31, 2014 (reference date). - FSO actions in 2014: - In September 2014, national accounts results published for the first time according to SNA 2008. - For 2015, the FSO planned to publish new data on jobs in line with business census concepts introduced in Q4 2012. - Initiated a project to produce prices on real estate transactions with first results expected in 2017 to assist monitoring of the housing market. ### Surveillance Data — Table of Common Indicators (As of April 31, 2015) - Exchange Rates: Date of Latest Observation: Same day; Date Received: Same day; Frequency of Data: D and M; Frequency of Reporting: M and M; Frequency of Publication: D and M. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation: Feb 15; Date Received: Mar 15; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M. - Reserve/Base Money: Date of Latest Observation: Mar 15; Date Received: Apr 15; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M. - Broad Money: Date of Latest Observation: Mar 15; Date Received: Apr 15; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M. - Central Bank Balance Sheet: Date of Latest Observation: Mar 15; Date Received: Apr 15; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M. - Consolidated Balance Sheet of the Banking System: Date of Latest Observation: Feb 15; Date Received: Apr 15; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M. - Interest Rates: Date of Latest Observation: Same day; Date Received: Same day; Frequency of Data: D and M; Frequency of Reporting: M and M; Frequency of Publication: D and M. - Consumer Price Index: Date of Latest Observation: Mar 15; Date Received: Apr 15; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of Latest Observation: 2012; Date Received: Feb 15; Frequency of Data: A; Frequency of Reporting: A; Frequency of Publication: A. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of Latest Observation: Feb 15; Date Received: Mar 15; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M. - Stocks of Central Government and Central Government-Guaranteed Debt: Date of Latest Observation: Q4/14; Date Received: Feb 15; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q. - External Current Account Balance: Date of Latest Observation: Q4/14; Date Received: Mar 15; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q. - Net International Investment Position: Date of Latest Observation: Q4/14; Date Received: Mar 15; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q. - Exports and Imports of Goods and Services: Date of Latest Observation: Feb 15; Date Received: Mar 15; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M. - GDP/GNP: Date of Latest Observation: Q4/14; Date Received: Mar 15; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q. - Gross External Debt: Date of Latest Observation: Q4/14; Date Received: Mar 15; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q. ### Press Release Highlights — IMF Executive Board Conclusion (May 18, 2015) - Switzerland’s economy performance: - Growth reached 2 percent in 2014. - Late 2014 developments and SNB actions: - Increased capital inflows forced the SNB to start intervening heavily to defend its exchange rate floor of 1.20 francs per euro. - The SNB exited the floor on January 15, 2015, while cutting its policy rate (the interest rate on deposits at the SNB exceeding 20 times required reserves) to -0.75 percent. - Following these moves, the exchange rate appreciated substantially before stabilizing at around (text ends in source). *Annex V. Switzerland: Authorities’ Response to Past IMF Policy Recommendations — sourced from the IMF staff report materials provided in the content unit.* ### 1.05 francs per euro. ### 1.05 francs per euro. ### Near-term outlook and projections - Economic growth in Switzerland is likely to slow in the near term as the strong franc, which is now likely overvalued, reduces net exports. - Leading economic indicators have declined so far in 2015. - For the full year, GDP growth is projected to slow to about 0.75 percent and to about 1.25 percent in 2016. - The growth slowdown is expected to increase unemployment, but only modestly, in part due to the cushioning effects of short-time work arrangements. - Inflation is already very low at -1.1 percent as of April 2015 and is expected to fall further in 2015, as the effects from exchange rate appreciation and the recent decline in oil prices continue to pass through into final prices. ### Medium-term outlook - Over the medium term, the economy is expected to recover gradually. - As the economy adjusts to the exchange rate appreciation, growth is projected to rise gradually back to around 2 percent over the medium term while inflation increases to around 1 percent. - Switzerland’s fiscal rules are expected to keep the structural fiscal deficit near zero and government debt low. ### Risks and vulnerabilities - Very low levels of inflation may complicate the operation of monetary policy by making it more difficult to reduce real interest rates as necessary in response to shocks. - Yields on 10-year government bonds are negative and the lowest in the world, indicating significant risks of a protracted period of very low inflation and sluggish growth. - Other important risks include: - uncertainty about future immigration policy and its effects on EU relations, - global and regional economic developments, - the effects of ongoing changes in the international financial regulatory landscape, - potential for price reversals in the housing market, which has been buoyant in recent years. ### Policy responses and reforms under way - Financial sector reforms, including adoption of tighter lending standards for mortgages. - Proposed reforms to bolster the sustainability of the pension system. - Proposed reforms of corporate taxation and financial controls to help comply with international initiatives aimed at limiting money laundering and cross-border tax evasion and avoidance. - Authorities have recently undertaken or proposed a numbers of reforms in response to risks and medium-term challenges. ### Executive Board Assessment and guidance - Directors commended Switzerland's continued strong economic fundamentals underpinned by sound policy management. - Following exit from the exchange rate floor and subsequent appreciation of the franc, the economy faces currency overvaluation, weakened near-term growth, and low inflation prospects. - Directors agreed that further monetary easing would support growth and reduce exchange rate overvaluation. - Moving inflation closer to the upper end of the target range over the medium term could mitigate risks associated with low inflation, though some Directors considered that controlling inflation to this extent may not be feasible for the small and open Swiss economy. - Given limited room for conventional monetary easing, Directors saw need to explore various options; a pre-announced program for asset purchases could be an option, although many Directors were not convinced about its effectiveness at this juncture. - Looking ahead, Directors agreed that the policy rate should be maintained at its current level for now, as this has been helpful in reducing deflationary pressures. - Directors encouraged the central bank to further enhance communication of its monetary policy framework and to continue to prioritize provisioning over transfers to its distribution reserve to ensure that its capital remains in line with risks. - Fiscal policy: Directors commended Switzerland’s fiscal rule, noting it helped maintain low deficits and debt. For fiscal policy to support growth: - automatic stabilizers should be allowed to operate fully, as permitted under Switzerland’s debt-brake rule, while avoiding budgeting over-performance against the rule; - in the event of a severe or protracted recession, discretionary fiscal stimulus could be employed by triggering the rule’s temporary escape clause. - Financial sector recommendations from Directors included: - closely monitor financial stability risks in the housing market and adopt further prudential measures as needed (examples: raising minimum leverage ratio requirements of the two large international banks and improving their resolvability); - increasing banks’ disclosure of information of risk weights; - further refining FINMA’s use of external auditors; - overhauling deposit insurance; - continued monitoring of the effects of the low-interest rate environment, especially for life insurers and defined-benefit pension plans. - Structural reforms urged to support medium-term growth: - reduce uncertainty related to future immigration policy and its effect on relations with the European Union; - timely completion of corporate tax reforms and financial controls consistent with international initiatives aimed at limiting money laundering and cross-border tax evasion and avoidance; - reforms to boost full-time female labor force participation, such as lowering marginal tax rates on second incomes; - proposed pension reforms to help ensure sustainability of the social safety net. ### Selected economic indicators (highlights from the table, 2012–16) - Real GDP (percent change): 2012: 1.1; 2013: 1.9; 2014: 2.0; 2015: 0.8; 2016: 1.2 - Total domestic demand (percent change): 2012: -1.2; 2013: -0.8; 2014: 1.7; 2015: 2.5; 2016: 1.8 - Foreign balance (contribution to growth): 2012: 2.2; 2013: 2.7; 2014: 0.5; 2015: -1.4; 2016: -0.4 - Nominal GDP (billions of Swiss francs): 2012: 624.4; 2013: 635.7; 2014: 651.8; 2015: 648.2; 2016: 651.1 - Gross national saving (percent of GDP): 2012: 34.1; 2013: 33.2; 2014: 30.5; 2015: 28.6; 2016: 28.5 - Gross domestic investment (percent of GDP): 2012: 24.2; 2013: 22.5; 2014: 23.6; 2015: 22.8; 2016: 22.9 - Current account balance (percent of GDP): 2012: 9.9; 2013: 10.7; 2014: 7.0; 2015: 5.8; 2016: 5.6 - GDP deflator (percent change): 2012: -0.2; 2013: -0.1; 2014: 0.5; 2015: -1.4; 2016: -0.8 - Consumer price index (period average, percent change): 2012: -0.7; 2013: -0.2; 2014: 0.0; 2015: -1.1; 2016: -0.4 - Consumer price index (end of period, percent change): 2012: -0.4; 2013: 0.1; 2014: -0.3; 2015: -1.4; 2016: 0.3 - Unemployment rate (percent): 2012: 2.9; 2013: 3.2; 2014: 3.2; 2015: 3.4; 2016: 3.6 - Output gap (percent of potential GDP): 2012: -1.0; 2013: -0.7; 2014: -0.2; 2015: -0.9; 2016: -0.9 - Potential output growth (percent): 2012: 1.7; 2013: 1.7; 2014: 1.5; 2015: 1.5; 2016: 1.3 - Swiss francs per USD (annual average): 2012: 0.9; 2013: 0.9; 2014: 0.9 - Swiss francs per euro (annual average): 2012: 1.2; 2013: 1.2; 2014: 1.2 - Real effective rate (avg., 2000=100): 2012: 114.0; 2013: 114.0; 2014: 116.0 ### Authorities' (statement by Swiss Executive Director and Senior Advisor) positions - Outlook: Authorities' forecast done in March 2015 is well in line with staff; authorities are slightly more optimistic for 2016 relying on a firming recovery in export sectors and fully share staff’s risk assessment. - Monetary and exchange rate policy: SNB shares staff’s view that monetary conditions are too tight given overvaluation of the Swiss franc and will remain active in the foreign exchange market as necessary to influence monetary conditions. - A preannounced program of foreign purchases might be one of the policy options, though its effectiveness should not be overestimated; quantity of foreign assets to be purchased would presumably need to be fairly high to have a meaningful effect and would expand the balance sheet at a pace that might limit future flexibility. - On moving inflation closer to the upper end of the target range (i.e., closer to 2 percent) over the medium term, SNB’s view is that it is not possible, in a small open economy like Switzerland, to fine-tune inflation to such an extent. - Fiscal policy: Authorities agree debt brake rule and cantonal rules contributed to success of fiscal policy; general government should record a small deficit amounting to 0.1 percent of GDP in 2014 according to latest estimates. - Committed to fiscal strategy: (i) complying with requirements of the debt brake rule in the short and medium-term and (ii) maintaining expenditure growth at a sustainable level. - Given worsening economic indicators, allowing automatic stabilizers to operate freely is the best way forward; discretionary stabilization measures should remain an option only in case of a severe recession. - External assessment: Authorities welcome analysis of factors underlying large current account surplus and note pharmaceutical and chemical export industry accounts for more than 40 percent of total exports in goods. - Pension reform: Authorities welcome staff’s recommendation to go forward with comprehensive pension reform package; review of minimum guaranteed interest rate on second pillar pension funds is done annually with next review in autumn 2015. - Financial sector policies: - Large banks: Support for raising leverage ratio requirements to internationally leading levels; working group led by the Federal Department of Finance will make concrete proposals by end-2015. - Housing and mortgage sector: Authorities share assessment that risks remain high; will closely monitor developments and reassess countercyclical capital buffer; further policy action may be warranted to target affordability and the income-producing real estate sector. - FINMA's supervisory approach: Authorities note effective measures already in place to ensure FINMA’s control over audit work and consider periodic rotation of audit firms would not be effective owing to the oligopolistic structure of the audit market; FINMA considers its current resource to be adequate after recent expansion in staffing. *International Monetary Fund* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15132.pdf_