Financial Crime World

Complexity of Cross-Border Activity Threatens Financial System

A recent report by the Financial Stability Council (FSC) has highlighted the complexities arising from cross-border activity in Liechtenstein’s financial sector. The report emphasizes the interconnectedness of institutions with the financial system, warning that a failure to address these issues could have far-reaching consequences for financial stability.

Systemically Important Institutions

According to the report, three banks - LGT Bank AG, Liechtensteinische Landesbank AG, and VP Bank AG - have been identified as systemically important institutions (O-SIIs) due to their size, importance to the economy, complexity, and interconnectedness with the real economy. These banks account for a significant proportion of the country’s banking sector, with an aggregated total score exceeding 9,000 basis points.

  • The FSC has recommended that the Financial Market Authority (FMA) retain the O-SII buffer at 2% of the total risk exposure amount.
  • The report notes that a failure to address these complexities could have serious consequences for financial stability and the economy as a whole.

ESRB Recommendations Implemented

The FSC has also implemented several recommendations from the European Systemic Risk Board (ESRB) aimed at ensuring financial stability in the context of the COVID-19 pandemic. These recommendations include:

  • Restrictions on dividend distributions
  • Share buy-backs
  • Payments of variable remuneration to material risk takers

However, the FSC has recommended that these restrictions not be implemented in Liechtenstein due to the country’s unique financial sector characteristics, including its well-capitalized banking and insurance sectors. Instead, the FMA is advised to monitor the financial stability implications of fiscal measures taken to support the real economy.

Real Estate Data Gaps Must Be Closed

The report also emphasizes the importance of closing real estate data gaps in Liechtenstein. The ESRB has recommended that national macroprudential authorities establish a framework for monitoring developments in the residential and commercial real estate markets, with reliable and relevant information essential for identifying vulnerabilities and assessing the need for macroprudential intervention.

  • The FSC has recommended that the Government implement these recommendations, while considering the specifics of Liechtenstein’s real estate and mortgage market.
  • A more harmonized framework is crucial for ensuring early detection of vulnerabilities and preventing financial crises in the future.

Conclusion

The complexity of cross-border activity and the interconnectedness of institutions with the financial system pose significant challenges for regulators and policymakers in Liechtenstein. The implementation of ESRB recommendations aimed at ensuring financial stability and closing real estate data gaps is crucial for maintaining a stable financial system. As the country navigates these complexities, it is essential that policymakers prioritize the need for reliable and relevant information to inform macroprudential decision-making.