E XECUTIVE SUMMARY Financial Stability Report 2020
Risks and recommendations On balance, mainly on the back of global factors related to the Covid-19 pandemic, the financial stability outlook has worsened since the 2019 Financial Stability Report. In light of the world economy facing its sharpest contraction since the Great Depression in the 1930s, the financial stability implications of the economic downturn have to be monitored closely. While a weak international environment, associated with subdued global trade activity and weak external demand, is particularly challenging for small and open economies like Liechtenstein, the financial sector and the economy as a whole have shown remarkable resilience to the downturn so far. A spillover of the crisis to the financial sector has to be avoided. To allow the financial sector to play an important supportive role in the following economic recovery, a spillover of the downturn of the real economy to the financial sector must be prevented by all means. Apart from the contraction of the real economy and potential second-round effects in the financial sector, low interest rates and stretched valuations in equity markets pose additional challenges for financial intermediaries’ profitability, which may also lead to increased risk taking. Fiscal policy has reacted quickly to the looming recession. The wide range of fiscal measures for safeguarding jobs and mitigating the consequences of the pandemic-related recession are welcome from a financial stability perspective. While sound public finances and large liquid assets enable the government to extend the existing fiscal measures if deemed necessary, the government should also plan ahead for an adequate exit strategy from the strong fiscal measures, as a continuation of the prudent fiscal policy approach is a crucial anchor of stability both for
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the financial sector and the whole economy in light of volatile GDP growth rates inherent to a small and open economy. Against the background of the current global recession and elevated levels of uncertainty, a prudent and cautious distribution policy remains essential in the whole financial sector. Considering the overall situation and the uncertain economic impact of the global pandemic, sufficient levels of capital and loss absorbing capacity are crucial to mitigate the impact of the current crisis. Financial intermediaries across all financial sectors are therefore recommended to follow a prudent and cautious distribution policy taking into account elevated levels of uncertainty. While it seems likely that the Liechtenstein banking sector is less affected by the global setback in economic activity than banks in other countries, it is still important to keep the high levels of loss-absorption capacity to be prepared for any unexpected adverse developments in the bumpy recovery phase ahead. On top of this, a high level of risk awareness regarding a deterioration in credit quality is absolutely crucial. Asset quality in general and the non- performing loan ( NPL ) ratio more specifically have to be monitored regularly in the next year, as the adverse effects of the recession are likely to become visible with a significant delay. Second-round effects in the financial sector, particularly after the expiration of fiscal support measures across countries, may turn out to be stronger than currently anticipated. In an environment of elevated uncertainty, a high level of risk awareness regarding potential losses or loss provisions is absolutely crucial.
