Warnings and recommendations

In its meeting on 27 June 2022, the Financial Stability Council (FSC) has recommended to the Government pursuant to Article 33b(2)(d) of the Financial Market Supervision Act (FMAG), to retain the countercyclical capital buffer (CCyB) at a rate of 0% of risk-weighted assets, as there are currently no signs of excessive credit growth in Liechtenstein.

The purpose of the buffer is to build up an additional capital reserve in times of excessive credit growth by financial institutions to cushion losses in the event of a crisis. The basis for the buffer decision is the so-called credit gap, i.e. the deviation of the private sector debt ratio relative to GDP from its long-term trend. The estimation of the credit gap, which is calculated on the basis of household debt and mortgage loans, currently yields a negative value and therefore implies keeping the buffer at 0% from a purely technical, rules-based perspective. Against the background of the negative credit gap and under consideration of other indicators linked to the development of cyclical risks in Liechtenstein, the FSC concluded to keep the countercyclical capital buffer at the level of 0% of risk-weighted exposures.

The FSC continuously monitors the development of cyclical risks in the financial sector and will adapt the recommendation regarding the level of the countercyclical capital buffer if deemed necessary.

Recommendation to maintain the countercyclical capital buffer (AFMS/2022/1)

In its meeting on 27 June 2022, the Financial Stability Council (FSC) recommended pursuant to Article 33b(2)(d) of the Financial Market Supervision Act (FMAG) that the FMA retains the buffer for Other Systemically Important Institutions (O-SIIs), based on an annual calibration and buffer review of the FMA, at 2% of the total risk exposure amount on a consolidated as well as individual basis. This recommendation in particular considers the Guidelines of the European Banking Authority[1] (EBA).

The O-SII buffer is applied to financial institutions that pose substantial systemic risks to the banking system. By specifying an additional buffer consisting of Common Equity Tier 1 (CET1) capital, the O-SII buffer primarily aims to reduce the probability of default of systemically important institutions, but at the same time it also compensates for the negative effects of an implicit state guarantee. In addition, the buffer is intended to strengthen market confidence in the identified banks by increasing their loss absorbing capacity. O-SIIs are identified on a yearly basis, following a procedure established under the EBA Guidelines considering ten indicators. In the first step, a score is calculated for each relevant institution at least at the highest consolidation level. The score reflects the systemic importance of the institution and includes the following core criteria:

• size,
• importance for the economy of the Member State, capturing substitutability/financial institution infrastructure,
• complexity, including the additional complexities from cross-border activity, and
• interconnectedness of the institution with the financial system.

All four criteria are weighted equally. The systemic importance of an institution in the financial center follows from the relative weight of the institution to the other institutions in the Liechtenstein banking system. The threshold of 350 basis points as specified in the EBA Guidelines is used to designate an institution as an O-SII, given a total score of 10’000 basis points for the entire banking sector of a Member State. Since systemic risks can manifest themselves on both a consolidated and an individual basis, and capital allocation is not flexible in a crisis, especially within a cross-border banking group, the O-SII buffer is to be prescribed on both the consolidated and individual basis. The following scores and buffer rates have been calculated for the Liechtenstein institutions:

Table 1: O-SIIs in Liechtenstein and the O-SII buffer rates (consolidated basis)

Table 2: O-SIIs in Liechtenstein and the O-SII buffer rates (individual basis)

The three identified O-SIIs are systemically important to the Liechtenstein banking sector in terms of all four core criteria (i.e. size, importance for the Liechtenstein economy, complexity, and interconnectedness with the real economy). Liechtenstein’s banking sector is highly concentrated around the three systemically important banks, as is apparent from their aggregated total score of 9,157 and 9’063 (out of a possible 10’000 basis points). Given that all three identified O-SIIs have a total score of more than 1’000 points, and hence far exceed the defined threshold of 350 basis points for the identification of a systemically important bank, the FSC recommends that the FMA retain the O-SII buffer at 2% of the total risk exposure amount for all three mentioned banks on a consolidated and individual basis.

[1]  Guidelines on criteria for determining the conditions of application of Article 131(3) of Directive 2013/36/EU (CRD) as regards the assessment of other systemically important institutions (O-SII) (EBA/GL/2014/10)

Recommendation to maintain the O-SII buffer (AFMS/2022/2)

The Financial Stability Council (FSC) has recommended to the Government in its meeting on 28 June 2021 pursuant to Article 33b(2)(d) of the Financial Market Supervision Act (FMAG), to retain the countercyclical capital buffer (CCyB) at a rate of 0% of risk-weighted assets, as there are currently no signs of excessive credit growth in Liechtenstein.

The purpose of the buffer is to build up an additional capital reserve in times of excessive credit growth by financial institutions to cushion losses in the event of a crisis. The basis for the buffer decision is the so-called credit gap, i.e. the deviation of the private sector debt ratio relative to GDP from its long-term trend. The estimation of the credit gap, which is calculated on the basis of household debt and mortgage loans, currently yields a negative value and therefore implies keeping the buffer at 0% from a purely technical, rules-based perspective. Against the background of the negative credit gap and under consideration of other indicators linked to the development of cyclical risks in Liechtenstein, the FSC concluded to keep the countercyclical capital buffer at the level of 0%.

The FSC continuously monitors the development of cyclical risks in the financial sector and will adapt the recommendation regarding the level of the countercyclical capital buffer if deemed necessary.

[1]  Guidelines on criteria for determining the conditions of application of Article 131(3) of Directive 2013/36/EU (CRD) as regards the assessment of other systemically important institutions (O-SII) (EBA/GL/2014/10)

Recommendation to maintain the countercyclical capital buffer (AFMS/2021/1)

In its meeting on 13 October 2021, the Financial Stability Council (FSC) recommended pursuant to Article 33b(2)(d) of the Financial Market Supervision Act (FMAG) that the FMA retain the buffer for other systemically important institutions (O-SII), based on an annual calibration and buffer review of the FMA, at 2% of the total risk exposure amount on a consolidated as well as individual basis. This recommendation in particular considers the Guidelines of the European Banking Authority[1] (EBA) and was issued on the basis of the planned revision of the Banking Act (BankG) to implement CRD V, which - subject to the approval of the Liechtenstein Parliament - is expected to come into force in Liechtenstein in spring 2022. The new capital buffer provisions, as set forth in this AFMS recommendation, are to apply as of the entry into force of the revised Bank Act.

The O-SII buffer is applied to financial institutions that pose substantial systemic risks to the banking system. By specifying an additional buffer consisting of Common Equity Tier 1 capital, the O-SII buffer primarily aims to reduce the probability of default of systemically important institutions, but at the same time it also compensates for the negative effects of an implicit state guarantee. In addition, the buffer is intended to strengthen market confidence in the identified banks by increasing their loss absorbing capacity. O-SIIs are identified on a yearly basis, following a two-step procedure established under the EBA Guidelines and taking into account ten indicators. In the first step, a score is calculated for each relevant institution at least at the highest consolidation level. The score reflects the systemic importance of the institution and includes the following core criteria:

• size,
• importance for the economy of the Member State, capturing substitutability/financial institution infrastructure,
• complexity, including the additional complexities from cross-border activity, and
• interconnectedness of the institution with the financial system.

All four criteria are weighted equally. The systemic importance of an institution in the financial center follows from the relative weight of the institution to the other institutions in the Liechtenstein banking system. The threshold of 350 basis points as specified in the EBA Guidelines is used to designate an institution as an O-SII, given a total score of 10’000 basis points for the entire banking sector of a Member State. Since systemic risks can manifest themselves on both a consolidated and an individual basis, and capital allocation is not flexible in a crisis, especially within a cross-border banking group, the O-SII buffer is to be prescribed on both the consolidated and individual basis. The following scores and buffer rates have been calculated for the Liechtenstein institutions:

Table 1: O-SIIs in Liechtenstein and the O-SII buffer rates (consolidated basis)

Table 2: O-SIIs in Liechtenstein and the O-SII buffer rates (individual basis)

The three identified O-SIIs are systemically important to the Liechtenstein banking sector in terms of all four core criteria (i.e. size, importance for the Liechtenstein economy, complexity, and interconnectedness with the real economy). Liechtenstein’s banking sector is highly concentrated around the three systemically important banks, as is apparent from their aggregated total score of 9,157 and 9’063 (out of a possible 10’000 basis points). Given that all three identified O-SIIs have a total score of more than 1’000 points, and hence far exceed the defined threshold of 350 basis points for the identification of a systemically important bank, the FSC recommends that the FMA retain the O-SII buffer at 2% of the total risk exposure amount for all three mentioned banks on a consolidated and individual basis.

[1]  Guidelines on criteria for determining the conditions of application of Article 131(3) of Directive 2013/36/EU (CRD) as regards the assessment of other systemically important institutions (O-SII) (EBA/GL/2014/10)

Recommendation to maintain the O-SII buffer (AFMS/2021/2)

In order to address the structural, long-term systemic risks in the Liechtenstein banking sector, the Financial Stability Council (FSC) has recommended to the Government pursuant to Art. 33b(2)(d) of the Financial Market Supervision Act (FMAG) that a systemic risk buffer (SyRB) be established for all Liechtenstein banks in the amount of 1% of mortgage-backed loans for properties in Liechtenstein, both on a consolidated and on an individual basis. This recommendation was made on the basis of the planned revision of the Banking Act (BankG) to implement the revised EU Capital Requirements Directive (CRD V[1]), which - subject to approval by the Liechtenstein Parliament - is expected to come into force in Liechtenstein in spring 2022. The new capital buffer provisions according to this FSC recommendation are to apply as of the entry into force of the revised Banking Act.

In the revised EU Capital Requirements Directive, the O-SII buffer (Art 131 CRD V) and the SyRB (Art 133 CRD V) will be additive, whereas previously only the higher of the two capital buffers was applied. Against the background of these legal changes, a recalibration of the SyRB - but also of the O-SII buffer (see FSC Recommendation 2021/2) - is now to be carried out. Subject to the planned revision of the Banking Act, the level of the buffers will therefore be adjusted in such a way that the implementation of CRD V does not result in an increase in the effective buffer requirements merely due to the regulatory changes.

The systemic risk buffer serves to avoid or mitigate macroprudential risks or systemic risks with potential serious adverse effects on the financial system and the real economy that have not already been captured by the countercyclical capital buffer or O-SII buffer. The recalibration of the SyRB is methodologically based on the calibration in 2019, but in addition considers the regulatory changes resulting from the planned CRD V introduction.

Based on the FMA's analysis, two significant sources of systemic risk were identified for the Liechtenstein banking sector. These are systemic vulnerability and systemic cluster risk.

Systemic vulnerability results from an increased vulnerability of banks to the financial system, which can arise through the interconnectedness of banks with each other, with the financial system and with the real economy. Examples of systemic vulnerability are

• potential risks arising from contingent liabilities to the deposit insurance scheme,
• reputational risks of the Liechtenstein financial center in general as well as due to the prevailing business model, and
• systemic risks arising from the special institutional features in Liechtenstein.

Systemic cluster risk arises from substantially similar risk sources in the banking sector and can lead to significant negative effects in the financial system and in the real economy due to the similarity of business models across banks. In Liechtenstein, the high mortgage portfolios in the bank balance sheets against the background of the high indebtedness of the private household sector as well as the similar dependencies vis-à-vis correspondent banks were identified as systemic cluster risks.

The level of the systemic risk buffer is calibrated using different methodological approaches, taking into account both historical crisis costs and potential costs due to the materialisation of specific systemic risks, as well as a comparison of macroprudential capital buffer requirements with similar banking systems to Liechtenstein’s.

In particular, the calibration also considers overlaps with the capital buffer for other systemically important institutions (O-SII buffer) as well as risk mitigating factors. These include, for example, the lower complexity of Liechtenstein bank balance sheets due to the application of the standardised approach, the less complex business models, proportionality criteria as well as the addressing of idiosyncratic risks in the Supervisory Review and Evaluation Process (SREP) or in the Pillar 2 capital requirement. After considering the overlaps with the O-SII capital buffer as well as the risk-mitigating factors, the calibration results in a sectoral SyRB for all Liechtenstein banks of 1% of the risk-weighted amount of mortgage-backed loans secured by real estate properties in Liechtenstein. The sectoral SyRB aims to strengthen the resilience of the banking sector in relation to the identified real estate-related systemic risks. The recalibrated systemic risk buffer is expected to apply from spring 2022 - when the revised Banking Act enters into force - on both a consolidated and an individual basis, as systemic risks can manifest themselves on both a consolidated and an individual basis and capital allocation is not sufficiently flexible, especially in a crisis. At the same time, arbitrage opportunities should be excluded to ensure a level playing field for all Liechtenstein banks.

The sectoral SyRB of 1% of the risk-weighted amount of the mortgage-backed loans secured with real estate properties in Liechtenstein is considered effective, proportional and appropriate based on the stress scenarios and past crisis costs. This is based on the identified systemic risks in the Liechtenstein financial system and the potential losses due to structural risks. Should the systemic risks continue to increase - in particular due to rising risks in relation to private household debt - the FSC will consider increasing the buffer ratio in the course of the regular review of the systemic risk buffer, provided that no other (and more accurate) macroprudential instruments are available to address the systemic risks.

[1] Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures, OJ. L 150, 7 June 2019, p. 253.

Recommendation to adjust the systemic risk buffer (AFMS/2021/3)

Pursuant to Article 33b(2)(d) of the Financial Market Supervision Act (FMAG), the Financial Stability Council (FSC) has recommended to the Government in its meeting on 29 June 2020 to retain the countercyclical capital buffer (CCyB) at a rate of 0% of risk-weighted assets, as there are currently no signs of excessive credit growth in Liechtenstein.

The purpose of the buffer is to build up an additional capital reserve in times of excessive credit growth by financial institutions to cushion losses in the event of a crisis. The basis for the buffer decision is the so-called credit gap, i.e. the deviation of the private sector debt ratio relative to GDP from its long-term trend. The estimate of the credit gap, which is calculated on the basis of household debt and mortgage loans, currently yields a positive value and would therefore imply an increase in the buffer from a purely technical, rules-based perspective. A closer analysis shows, however, that the increase in the credit gap is mainly due to the expected decline in GDP and that there is still no evidence of excessive lending. Against the background of the current global recession and under consideration of other indicators linked to the development of cyclical risks in Liechtenstein, the FSC therefore concluded that an increase in the countercyclical capital buffer is currently not recommended.

The FSC continuously monitors the development of cyclical risks in the financial sector and will adapt the recommendation regarding the level of the countercyclical capital buffer if deemed nec-essary.

Recommendation on maintaining the countercyclical capital buffer (AFMS/2020/1)

In its meeting on 29 June 2020, the Financial Stability Council (FSC) recommended pursuant to Article 33b(2)(d) of the Financial Market Supervision Act (FMAG) that the FMA retain the buffer for Other Systemically Important Institutions (O-SII) at 2% of the total risk exposure amount on a consolidated basis. This recommendation takes account in particular of the Guidelines of the European Banking Authority (EBA).[1] 

The O-SII buffer is applied to financial institutions that pose substantial systemic risks to the banking system. By specifying an additional buffer consisting of Common Equity Tier 1 capi-tal, the O-SII buffer primarily aims to reduce the probability of default of systemically im-portant institutions, but at the same time it also compensates for the negative effects of an implicit state guarantee. In addition, the buffer is intended to strengthen market confidence in the identified banks by increasing their loss absorbing capacity.

O-SIIs are identified on a yearly basis, following a two-step procedure established under the EBA Guidelines and taking into account ten indicators. In the first step, a score is calculated for each relevant institution at least at the highest consolidation level. The score reflects the systemic importance of the institution and includes the following core criteria: 

• size,
• importance for the economy of the Member State, capturing substitutability/financial institution infrastructure,
• complexity, including the additional complexities from cross-border activity, and
• interconnectedness of the institution with the financial system.

All four criteria are weighted equally. The systemic importance of an institution in the finan-cial centre follows from the relative weight of the institution to the other institutions in the Liechtenstein banking system. The threshold of 350 basis points as specified in the EBA Guidelines is used to designate an institution as an O-SII, given a total score of 10 000 basis points for the entire banking sector of a Member State. The second step consists in a super-visory assessment by the national authorities, in which further optional indicators may be used to assess systemic importance. This serves to identify all systemically important banks as O-SIIs, even if they were not identified as such in the first step.

The following scores and buffer rates have been calculated for the Liechtenstein institutions:

The three identified O-SIIs are systemically important to the Liechtenstein banking sector in terms of all four core criteria (i.e. size, importance for the Liechtenstein economy, complexity, and interconnectedness with the real economy). The Liechtenstein banking sector is highly concentrated around the three systemically important banks, as is apparent from their aggregated total score of 9'046 (out of a possible 10'000 basis points). Given that all three identified O-SIIs have a total score of more than 1'000 points, and hence far exceed the defined threshold of 350 basis points for the identification of a systemically important bank, the FSC recommends that the FMA retain the O-SII buffer at 2% of the total risk exposure amount.

[1] Guidelines on criteria for determining the conditions of application of Article 131(3) of Directive 2013/36/EU (CRD) as regards the assessment of other systemically important institutions (O-SII) (EBA/GL/2014/10).

Recommendation on the application of the O-SII buffer (AFMS/2020/2)

In its meeting on 29 June 2020, the Financial Stability Council (FSC) recommended pursuant to Article 33b(2)(d) of the Financial Market Supervision Act (FMAG) that the FMA implement the recently published ESRB recommendations in the context of the COVID-19 pandemic.

ESRB Recommendation 2020/6 deals with liquidity risks due to margin calls, which may occur to a greater extent in times of financial market turbulence. While the ESRB Recommendation is only partially relevant for Liechtenstein, as there is no central counterparty (CCP) operating in Liechtenstein, the FSC recommends that the FMA consider the recommendations relevant for Liechtenstein in its regular supervision activities and implement them accordingly.

ESRB Recommendation 2020/7 provides for a restriction of dividend distributions, share buy-backs, and payments of variable remuneration to material risk takers for banks, insurance and reinsurance undertakings, and central counterparties until the end of the year in order to strengthen the quantity and quality of own funds of financial intermediaries in the context of the COVID-19 pandemic. In principle, the FSC supports the ultimate objectives of the recommendation to prevent a spillover of the downturn of the real economy to the financial sector, allowing the financial sector to play an important supportive role in the following economic recovery. Against the background of the current global recession, a prudent and cautious distribution policy in the financial sector therefore remains essential. However, considering the special characteristics of the financial sector in Liechtenstein, especially the well above-average capitalization of the Liechtenstein banking and insurance sectors, as well as the legal framework, a general prohibition of dividend distributions, share buy-backs, and payments of variable remuneration to material risk takers in Liechtenstein is not considered being proportional in light of the objectives of the Recommendation. The FSC therefore recommends the FMA not to implement the respective ESRB Recommendation in Liechtenstein.

ESRB Recommendation 2020/8 requires the national macroprudential authorities to monitor the financial stability implications of the fiscal measures taken to support the real economy in the context of the COVID-19 pandemic. In this context, the FSC recommends that the FMA establish a respective monitoring, as proposed in the Recommendation, and regularly report the results of the analysis to the ESRB. The FSC recommends the Government to make the data for this analysis available to the FMA.

Recommendation on the implementation of ESRB Recommendations 2020/6, 2020/7 and 2020/8 on ensuring financial stability in the context of the COVID-19 pandemic (AFMS/2020/3)

The Financial Stability Council (FSC) has recommended to the Government in its meeting on 14 December 2020 pursuant to Article 33b(2)(d) of the Financial Market Supervision Act (FMAG) to implement ESRB recommendations ESRB/2016/14 and ESRB/2019/3 on closing real estate data gaps in, while considering the specifics of the Liechtenstein real estate and mortgage market in an adequate form.

The real estate sector plays an important role in the economy and its development can have a significant impact on the financial system. Past financial crises have shown that unsustainable developments in real estate markets can have serious consequences for the stability of the financial system and the economy as a whole.

Establishing a more harmonised framework to monitor developments in the residential and commercial real estate markets – the most significant segments of the real estate sector from a financial stability perspective – is therefore crucial to ensure early detection of vulnerabilities that could lead to financial crises in the future. To identify the build-up of systemic risks and assess the need for macroprudential intervention, decision-makers need reliable and relevant information, especially for the implementation of borrower-based instruments. A better understanding of the structural and cyclical features of the residential and commercial real estate market helps macroprudential supervisors and policymakers to better understand the dynamics of the real estate sector, identify the threats it poses to financial stability and take appropriate action.

Against this background, the above-mentioned ESRB recommendations envisage closing existing gaps in the availability and comparability of data on residential and commercial real estate markets relevant for such macroprudential purposes. The purpose of the recommendation is to implement a framework for the monitoring by national macroprudential authorities of developments in the real estate sector that are relevant for financial stability, based on commonly accepted target definitions and indicators.

In implementing this recommendation, particular account should be taken of the principle of proportionality and the special characteristics of the Liechtenstein financial market. The Financial Stability Council (FSC) therefore recommends that the FMA takes adequate account of the following points in its implementation:

• In particular, the size and development of the domestic residential and commercial real estate market should be taken into account in the implementation. In a small economy like Liechtenstein, the market volume and the number of transactions in the real estate market are naturally very low, which can occasionally lead to problems when calculating individual indicators. Against this background, only those data are to be collected that are meaningful and relevant from the perspective of the FMA for the assessment of risks to financial market stability.
• Against the background of high private household indebtedness, which is primarily driven by mortgage loans, monitoring of the residential real estate market appears central from the perspective of financial market stability in Liechtenstein. Better data availability enables macroprudential supervision and policy to monitor risks efficiently and, based on this, to apply the available macroprudential instruments in a targeted manner. When implementing the recommendation in the residential real estate sector, the specifics of the Liechtenstein mortgage market are to be taken into account in an adequate form.
• The lending volume for commercial real estate loans is however relatively small. Therefore, in terms of proportionality, it is recommended to strive for a pragmatic partial implementation of the ESRB recommendation regarding the data on commercial real estate.
• The available information on the collected indicators is intended to be sufficiently representative for the domestic residential and commercial property market. Against the background of the high concentration in the domestic mortgage market – the three other systemically important institutions have a market share of more than 95% in both residential and commercial real estate loans – the reporting obligation should only apply to those credit institutions that have a significant market share in residential or commercial real estate mortgages.

Recommendation on the implementation of ESRB recommendation ESRB/2016/14 and ESRB/2019/3 on closing real estate data gaps (AFMS/2020/4)

In line with article 33b para 2 lit. d FMA Act, the Financial Stability Council has recommended to the government in its first meeting on 5 July 2019 to set the countercyclical capital buffer (CCyB) at a rate of 0% of risk-weighted assets, as there is no sign of excessive credit growth in Liechtenstein.

The main indicator that underlies this decision is the credit gap, i.e. the deviation of the indebtedness of the private sector relative to GDP from its long-run trend. As the credit gap is currently negative, the CCyB is set at 0% in accordance with the guidance of the Basel Committee on Banking Supervision (BCBS). The FSC has also considered alternative indicators regarding the development of cyclical risks following the recommendation of the European Systemic Risk Board (ESRB).

The FSC continuously monitors the development of cyclical risks in the financial sector and will adapt the recommendation regarding the level of the CCyB if deemed necessary.

Recommendation on the application of the countercyclical capital buffer (AFMS/2019/1)

In its meeting on 28 October 2019, the Financial Stability Council (FSC) recommended pursuant to Article 33b(2)(d) of the Financial Market Act (FMAG) that the FMA set the level of the buffer for other systemically important institutions (O-SIIs) to 2% of the total risk exposure amount on a consolidated basis. This recommendation takes account in particular of the Guidelines of the European Banking Authority (EBA).[1]

The O-SII buffer is applied to financial institutions that pose substantial systemic risks to the banking system. By specifying an additional buffer consisting of Common Equity Tier 1 capital, the O-SII buffer primarily aims to reduce the probability of default of systemically important institutions, but at the same time it also compensates for the negative effects of an implicit state guarantee. In addition, the buffer is intended to strengthen market confidence in the identified banks by increasing their loss-absorbing capacity.

O-SIIs are identified on a yearly basis, following a two-step procedure established under the EBA Guidelines and taking into account ten indicators. In the first step, a score is calculated for each relevant institution at least at the highest consolidation level. The score reflects the systemic importance of the institution and includes the following core criteria:

• size,
• importance for the economy of the Member State, capturing substitutability/financial institution infrastructure,
• complexity, including the additional complexities from cross-border activity, and
• interconnectedness of the institution with the financial system.

All four criteria are weighted equally. The systemic importance of an institution in the financial centre follows from the relative weight of the institution to the other institutions in the Liechtenstein banking system. The threshold of 350 basis points as specified in the EBA Guidelines is used to designate an institution as an O-SII, given a total score of 10 000 basis points for the entire banking sector of a Member State. The second step consists in a supervisory assessment by the national authorities, in which further optional indicators may be used to assess systemic importance. This serves to identify all systemically important banks as O-SIIs, even if they were not identified as such in the first step.

The following scores and buffer rates have been calculated for the Liechtenstein institutions:

The three identified O-SIIs are systemically important to the Liechtenstein banking sector in terms of all four core criteria (i.e. size, importance for the Liechtenstein economy, complexity, and interconnectedness with the real economy). The Liechtenstein banking sector is highly concentrated around the three systemically important banks, as is apparent from their aggregated total score of 8991 (out of a possible 10 000 basis points). Given that all three identified O-SIIs have a total score of more than 1000 points, and hence far exceed the defined threshold of 350 basis points for the identification of a systemically important bank, the FSC recommends that the FMA set the O-SII buffer at 2% of the total risk exposure amount.

This results in an increase in the O-SII buffer rate from 0% to 2% of the total risk exposure amount. When implementing CRD IV in 2015, Liechtenstein chose to cover the additional capital requirements for the three systemically important banks via the systemic risk buffer. Following the formal incorporation of CRD IV into the EEA Agreement by Decision of the EEA Joint Committee No 79/2019 of 29 March 2019, the fundamental provisions on capital buffers are being adjusted to the European understanding in autumn 2019. The systemic risk buffer is also being recalibrated in this context.

[1] Guidelines on the criteria to determine the conditions of application of Article 131(3) of Directive 2013/36/EU (CRD) in relation to the assessment of other systemically important institutions (O-SIIs) (EBA/GL/2014/10).

Recommendation on adjustment of the O-SII buffer (AFMS/2019/2)

The FMA has already implemented this recommendation. By decision of 20 November 2019, the size of the O-SII buffer for the three identified institutions has been set accordingly.

In its meeting on 28 October 2019, the Financial Stability Council (FSC) recommended pursuant to Article 33b(2)(d) of the Financial Market Act (FMAG) that the Government establish a systemic risk buffer for identified Liechtenstein banks of up to 2% of the total risk exposure amount at both a consolidated level and at the level of the individual institutions in order to avert long-term structural systemic risks.

Pursuant to Article 4a(1)(c) of the Banking Act (BankG)[1], the systemic risk buffer (SyRB) serves to "mitigate long-term non-cyclical systemic or macroprudential risks, the realisation of which has serious negative consequences for the financial system or the real economy". The systemic risk buffer improves resilience by increasing loss-absorption capacity while limiting the indebtedness and risk appetite of banks. The specification of a systemic risk buffer consisting of additional Common Equity Tier 1 capital increases the risk-bearing capacity of banks that are particularly exposed to the identified structural systemic risks.

With its recommendation based on the FMA's analysis of the existing systemic risks for the Liechtenstein banking sector, the FSC is addressing two major systemic sources of risk to which the Liechtenstein banking sector is exposed, namely systemic vulnerability and systemic cluster risk.

1. Systemic vulnerability arises from an increased vulnerability of banks to disruptions in the financial system due to the interconnectedness of one or more banks with each other, the financial system, or the real economy. In Liechtenstein, important factors for systemic vulnerability include similar cross-border exposures, contingent liabilities related to the deposit guarantee scheme, and systemic risks resulting from institutional specifics and the prevailing business models of banks.

2. Systemic cluster risk arises from substantial similar exposures and dependencies of the banking sector. Such similarities across banks can lead to severe negative effects in the financial system and the real economy. A substantial cluster risk in Liechtenstein results, for example, from the banks' large exposures to mortgage loans in light of the high level of debt in the private household sector.

The level of the systemic risk buffer is calibrated using several methodological approaches, taking into account the historic costs of crises, potential costs arising from the materialisation of specific systemic risks, and a comparison of the macroprudential capital buffer requirements in banking systems similar to Liechtenstein's. Finally, the banks with systemic risk buffers are selected according to quantitative criteria, taking into account several direct and indirect contagion indicators as well as proportionality criteria. Only those banks are selected that are particularly exposed to systemic risks.

This evaluation results in the following systemic risk buffer rates for the following identified institutions:

Given that systemic risks can manifest themselves at both the consolidated level and the level of individual institutions, and given that capital allocation within cross-border banking groups is typically not flexible during a crisis, the systemic risk buffer is also recommended on an individual basis. When both the SyRB and a capital buffer for other systemically important institutions (O-SIIs) apply to the same institution at the same time, only the higher of the two capital buffers is used.

Following the formal incorporation of CRD IV[2] into the EEA Agreement by Decision of the EEA Joint Committee No 79/2019 of 29 March 2019, the fundamental provisions on capital buffers are being adjusted to the European understanding in autumn 2019. The O-SII capital buffer is also being recalibrated in this context.

As part of the revision of the underlying legal bases in the European Union, the provisions on macroprudential instruments have also been amended. Following the incorporation of the changes to the regulatory framework in Liechtenstein, the macroprudential capital buffers – especially the systemic risk buffer and the O-SII capital buffer – will also have to be recalibrated and reassessed, given that overlaps between the two capital buffers have so far not been taken into account.

[1] Law of 21 October 1992 on banks and investment firms (Banking Act; BankG), LGBl. 1992 No. 108, as amended.

[2] In this context, CRD IV covers both Directive 2013/36/EU ("CRD IV") and Regulation (EU) No 575/2013 ("CRR").

Recommendation to adjust the systemic risk buffer (AFMS/2019/3)

With the revision of the Banking Ordinance (BankV) on 26 November 2019, this recommendation has already been implemented.