E XECUTIVE SUMMARY Financial Stability Report 2021
Recommendations Even though the global economy has shown a strong recovery since the start of the year, the COVID-19 pandemic is associated with increased vulnerabilities in the longer term. Debt levels have increased sharply across sectors and countries since the start of the economic downturn in March 2020, and uncertainty remains high in an environment of slowing growth and increasing inflationary pressures. Against this background, the FMA recommends to financial intermediaries in the whole financial sector to mitigate the associated risks, particularly by focusing on the following measures: – The whole financial sector should focus on maintaining a well-developed risk management framework amidst high financial market and policy uncertainty with regard to increasing interest rate and inflation risks; – Financial intermediaries should closely monitor financial innovations that could possibly become relevant to their business models, such as crypto assets, and adapt their business strategy accordingly if deemed necessary; – M arket participants should carefully analyze threats from potential cyber incidents and develop mitigation strategies to address the associated cyber risks to guarantee business continuity; – Financial intermediaries are advised to further develop and implement strategies to deal with the structural challenges of digitalization and climate change;
– A ll financial intermediaries are advised to further improve and enhance the quality of reporting data in line with European regulation. Despite high capital and liquidity ratios, the COVID-19 pandemic has reinforced challenges of domestic banks’ business models. Liechtenstein banks, particularly the smaller institutions, are facing increasing profitability and efficiency pressures resulting from the “lower for longer” interest rate environment and mounting regulatory pressure. In addition, growing imbalances in the residential real estate sector cannot be ruled out in Liechtenstein in light of high and still rising household indebtedness. Therefore, given the identified risks in an environment characterized by high and persistent uncertainty, both regarding the further course of the COVID-19 pandemic as well as its effects on the banking sector, the FMA recommends to banks to take the following actions: – Focus on maintaining a solid capital base by ensuring cautious dividend distributions and limiting share buybacks and other pay-outs which are associated with lower capital ratios; – Apply sustainable lending standards, in particular for real estate lending; – Focus on borrowers’ solvency, specifically after the termination of COVID-19-related fiscal support measures, such as loan guarantees; – Address the issue of cost inefficiencies in light of the currently difficult circumstances, increasing competition and the low interest rate environment, to safeguard banks’ profitability in the longer term;
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