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FINMA Urged to Enhance Risk Management Processes

Zurich, Switzerland - The International Monetary Fund (IMF) has called on the Swiss Financial Market Supervisory Authority (FINMA) to strengthen risk management processes and ensure that they are supervised correctly by statutory auditors.

Regulatory Framework Improvements

In a comprehensive report, the IMF highlighted several areas where FINMA’s regulatory framework could be improved. Some key recommendations include:

• Conducting assessments of concentration risks beyond single-name exposures using stress testing and scenario analysis
• Clarifying requirements for related party transactions and reporting to the supervisor
• Providing guidance on liquidity risk management for smaller banks
• Conducting thematic reviews of operational risk and assessing common risk factors in this area

Related Party Transactions

The report emphasized the need for clarity on what constitutes a related party transaction, with requirements for dealings at market terms and conditions, as well as board oversight. Reporting of such transactions to the supervisor should be brought in line with international standards.

Liquidity Risk Management

FINMA’s efforts to enhance liquidity risk management were praised, but the report noted that smaller banks may require more guidance on how to apply quantitative requirements.

Internal Controls and Audit

The report highlighted the importance of internal controls and audit, financial reporting and external audit, disclosure and transparency. FINMA was commended for its focus on internal controls and audit, but warned that more needs to be done to prevent serious breakdowns.

Regulatory Framework for Abuse of Financial Services

While Switzerland’s regulatory framework regarding abuse of financial services is well developed, the report noted that there may be a need for more guidance on how to apply requirements in practice.

Conclusion

The IMF’s report concludes that FINMA should prioritize enhancing its risk management processes and supervisory approach to ensure the stability of the Swiss financial system. By implementing these recommendations, FINMA can provide greater confidence to banks, investors, and the general public that risks are being managed effectively.

Key Recommendations

1. Enhance assessments of concentration risks beyond single-name exposures using stress testing and scenario analysis.
2. Clarify requirements for related party transactions and reporting to the supervisor.
3. Provide guidance on liquidity risk management for smaller banks.
4. Conduct thematic reviews of operational risk and assess common risk factors in this area.
5. Strengthen internal controls and audit, financial reporting and external audit, disclosure and transparency.
6. Prioritize enhancing risk management processes and supervisory approach.

By implementing these recommendations, FINMA can ensure the stability of the Swiss financial system and provide greater confidence to all stakeholders.