Financial Crime World

Liechtenstein’s Banking Sector Praised for Stability, but FMA Sounds Warning on Global Risks

The Liechtenstein Financial Market Authority (FMA) has released its latest Financial Stability Report 2022, which highlights the country’s banking industry as sound and stable despite increased global risks. However, the report also warns of potential vulnerabilities that require prompt action from financial institutions and government authorities.

Systemic Risks Remain Limited

According to the FMA, systemic risks in Liechtenstein’s financial sector are limited. Nevertheless, analysts have identified several areas of concern:

  • Global Economic Outlook: The global economic outlook has deteriorated significantly, with increased risks to financial stability.
  • Debt Servicing Capacity: While debt servicing capacity is not expected to deteriorate in the event of a global recession, there is a risk that private households may struggle to pay their debts if the real estate market continues to pose challenges.

Climate Change and Digitalization: Emerging Risks

The FMA’s report also highlights the potential impact of climate change and digitalization on the financial sector. Analysts warn that these trends could lead to significant risks for the industry unless addressed promptly:

  • Climate Change: Climate-related events, such as extreme weather conditions, can have a devastating impact on the financial sector.
  • Digitalization: The increasing use of technology in finance can create new risks, such as cybersecurity threats and data breaches.

Recommendations for Financial Institutions and Government Authorities

To mitigate these risks, the FMA has issued a series of recommendations:

For Financial Institutions:

  • Strengthen Structural Efficiency: Banks should focus on improving their structural efficiency to reduce costs and increase profitability.
  • Implement Sustainable Lending Standards: Banks should implement sustainable lending standards to reduce the risk of default by borrowers.
  • Maintain Reasonable Levels of Profitability and Solvency: Insurance companies should aim to maintain reasonable levels of profitability and solvency to ensure they can meet their obligations.

For Government Authorities:

  • Accelerate Accession Negotiations with IMF: The government is urged to accelerate its accession negotiations with the International Monetary Fund (IMF), a move that would provide Liechtenstein’s financial sector with access to expert advice and support in times of crisis.
  • Ensure Sufficient Coverage Ratios for Pension Schemes: Pension schemes must ensure they have sufficient coverage ratios to meet future obligations.

By heeding these warnings and taking proactive steps, Liechtenstein’s banking industry can continue to thrive while minimizing its exposure to global risks.