Other policy developments

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OTHER POLICY DEVELOPMENTS

On an annual basis, the FMA assesses risks at the individual bank level in the context of the Supervisory Review and Evaluation Process (SREP). Based on the SREP, the FMA may require certain banks to hold additional capital under the Pillar 2 requirement. The SREP combines a wide range of findings from the supervisory process at the institution level, resulting in a comprehensive supervisory overview for each bank in the domestic market. In 2022, the EBA revised the corresponding SREP guidelines52 , which will apply from 1 January 2023, and added relevant changes related to the proportionality, as well as the cooperation among prudential supervisory authorities, AML / CFT supervisors and resolution authorities. Based on the risks of the individual bank – including vulnerabilities stemming from ML / TF and ESG risks –the FMA may require banks to hold additional capital, liquidity and / or set qualitative requirements from a microprudential perspective with the objective to support the solvency and liquidity of individual institutions.

The FMA has further refined the stress test framework to assess how well domestic banks can cope with financial and economic shocks. In the past year, the FMA conducted stress tests covering almost the whole banking sector based on several different scenarios. The baseline scenario is intended to represent a plausible outlook of future economic development. The other scenarios are intended to simulate an

adverse scenario, such as a financial market collapse or a reputational stress scenario of an idiosyncratic crisis for Liechtenstein and its banking centre. The results of the stress test show that the banking sector is stable and that the stress scenarios have to be quite extreme to see a significant impact on banks’ capital ratios which would be a cause of concern.

In June 2022, MONEYVAL published its fifth country report on Liechtenstein, highlighting the FMA’s supervisory system to be well suited and efficient in combating money laundering and terrorist financing. The report gives Liechtenstein’s authorities a very good grade with regard to combating money laundering and terrorist financing. MONEYVAL recognises the progress made by Liechtenstein and encourages the country to further intensify measures in this respect. With regard to the legal regulations on the prevention of money laundering and terrorist financing, Liechtenstein is rated as “compliant” or “largely compliant” for 37 of the 40 recommendations. MONEYVAL also found no significant gaps in the defence mechanism in the other audit areas. Nonetheless, the

report identifies potential for improvement and makes a number of recommendations to further improve the national system for combating money laundering and terrorist financing. Thus, the FMA will keep working on improving its processes given the high reputational risks – even possibly triggered by a single incident – in the financial sector.

The current war in Ukraine also poses new challenges for the domestic financial sector. Following the start of the Russian aggression against Ukraine, the government in Liechtenstein has swiftly announced that it fully adopts the European Union wide sanctions against Russia and Belarus. The financial sector has also pledged its full support to the government and authorities in enforcing the measures imposed on Russia and Belarus, although the implementation of

52 EBA (2022). Final Report. Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing under Directive 013 / 36 / EU. EBA / GL / 2022 / 03. 18 March 2022.

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Financial Stability Report 2022 BEGINNING OF THE CHAPTER TABLE OF CONTENT

sanctions is associated with considerable efforts and

costs for the whole financial sector, in particular, for smaller institutions. The swift implementation increases costs for the financial sector in Liechten-

stein, but is mostly uncontroversial even among affected financial intermediaries. Particular caution is also needed in light of the uncertain global political and economic environment. The effective and full implementation of international sanctions has shown Liechtenstein banks’ ability to quickly adhere to and implement international standards. Against the background of heightened uncertainty, the FMA will continue closely monitoring further developments and propose appropriate measures, if deemed necessary.

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