FINMA’s Risk Management Processes Under Scrutiny

The Swiss Financial Market Supervisory Authority (FINMA) has come under fire for its risk management processes, with experts calling for stricter supervision and clearer guidelines.

Assessment of FINMA’s Practices

A recent report assessed FINMA’s practices in several key areas, including concentration risk, country and transfer risk, market risk, interest rate risk, liquidity risk, operational risk, internal controls, and audit. The results show that while some banks have implemented sophisticated approaches to manage these risks, others may be lacking.

Key Findings

Concentration Risk

FINMA needs to conduct assessments of concentration risk beyond single-name credit concentrations.
Major banks appear to run relatively sophisticated approaches, but beyond single-name exposure verification, they have not been comprehensively assessed by the supervisory process.

The report stresses the importance of updating the definition of what constitutes a related party and the requirements for dealings with such parties.
The current rules and guidance have a potential to miss transactions that should be caught, undermining the reputation of the system.

Risk Assessment

Experts are calling for FINMA to enhance its stress testing program to assess concentrations beyond single-name credit concentrations.
This could involve using active stress and scenario testing to identify potential risks.

Liquidity Risk

FINMA has enhanced liquidity quantitative information gathering (LCR reporting) since 2013, but the report suggests that application of these elements to smaller banks could be broadened.
The authorities’ plan to implement LCR according to the agreed international schedule will provide a substantial improvement.

Operational Risk

The current regulatory framework on operational risk has limited application of basic qualitative requirements and lacks requirements on operational risk regarding information systems.
FINMA’s supervisory rating system should explicitly incorporate operational risk to aid in this risk getting more strategic focus.

Internal Controls and Audit

FINMA has a well-developed focus on internal controls and audit, but experts are calling for the supervisor to ramp up its qualitative risk management and controls approach proactively to reduce the risk of serious breakdowns.

Conclusion

The report concludes that FINMA’s risk management processes need to be improved to ensure a robust and effective supervisory framework. The authority must prioritize strengthening its supervision and guidelines to protect the stability of the Swiss financial system.

Sources:

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