PREFACE

Financial Stability Report 2021

In this publication, the Liechtenstein Financial Market Authority (FMA) presents its fourth annual Financial Stability Report on the financial sector in Liechtenstein. Since Liechtenstein does not have a national central bank, the FMA is legally responsible to contribute to the stability of the financial system in accordance with the Financial Market Supervision Act (FMA Act, Art. 4).

Financial stability can be defined in many ways. Most importantly, financial stability is a necessary condition for the efficient allocation of resources in an economy, the management of risks and the absorption of shocks. The stability of the financial system also ensures access to finance and credit for households and businesses both during booms and recessions and even in the case of severe macroeconomic shocks. While this report covers Liechtenstein’s whole financial sector, it particularly focuses on the banking sector, as empirical evidence from previous crises suggests that financial stability goes hand in hand with a stable banking sector.

This year’s Financial Stability Report puts a special focus on the implications of the COVID-19 pandemic. As a small and open economy, Liechtenstein was strongly affected by the global economic downturn, with plummeting export activity at the start of global recession. However the Liechtenstein economy in general and the financial sector more specifically have shown remarkable resilience in this highly challenging environment. Similar to earlier global downturns, the strength of the domestic labor market has not only supported the economic recovery, but also had a stabilizing effect on the financial sector. The financial sector strongly benefited from high capital and liquidity buffers during the crisis, contributing to strong confidence among clients and further supporting Liechtenstein’s reputation as a stable financial center.

Overall, our analysis concludes that Liechtenstein’s financial sector is sound and stable. Nevertheless, macroprudential policy must remain vigilant in face of some recent global and domestic developments. At the global level, the low interest rate environment, increasing inflation rates and stretched valuations both in stock and bond markets may be associated with increasing challenges for financial intermediaries going forward. From a domestic perspective, the high indebtedness of private households in light of increasing mortgage debt deserves closer attention.

The current policy framework – with regular meetings and discussions in the Financial Stability Council – has turned out to be very helpful to tackle remaining policy issues, as it has also facilitated the cooperation and exchange among responsible institutions. In light of the large role of the financial sector and its significance for the economy as a whole, a regular and careful analysis of the various risk factors is indispensable to be able to react in a timely manner if deemed necessary.

Mario Gassner Chief Executive Officer Martin Gächter Head of Financial Stability/Macroprudential Supervision