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Financial Stability Takes Center Stage in Liechtenstein: Importance of Compliance Highlighted

Liechtenstein, a small but financially powerful nation located between Switzerland and Austria, has put in place a robust framework for macroprudential supervision to safeguard its financial stability. At the heart of this effort is the Financial Stability Council (FSC), established in May 2019 to foster financial stability and mitigate systemic risks in the country’s financial sector.

The Role of FMA

Liechtenstein’s key regulatory authority, the FMA (Financial Market Authority), has been tasked with ensuring the stability of the financial market, protecting customers, preventing abuse, and implementing international standards. As part of its role as a macroprudential supervisor, the FMA uses various instruments, recommendations, and warnings to safeguard financial stability.

FSC: A Beacon of Cooperation

The FSC brings together representatives from the Ministry for General Government Affairs and Finance (MPF) and the FMA, with a chairperson appointed by the MPF. The council’s primary objective is to discuss matters related to financial stability while fostering cooperation among macroprudential institutions.

Key Objectives of Macroprudential Supervision

The overarching goal of macroprudential supervision in Liechtenstein is to maintain a stable and sound financial system, which is essential for the country’s economic growth. To achieve this, the FMA and FSC have identified five key intermediate objectives:

  • Prevent excessive growth and leverage: This objective aims to prevent the buildup of excessive debt or credit in the financial sector.
  • Prevent excessive maturity mismatch and market illiquidity: This objective seeks to reduce the risk of financial institutions being unable to meet their short-term obligations due to a mismatch between assets and liabilities.
  • Prevent direct and indirect exposure concentration: This objective aims to prevent the accumulation of risks in specific areas or sectors, such as real estate or commodities.
  • Limit the systemic impact of misaligned incentives (reducing moral hazard): This objective seeks to reduce the risk of financial institutions engaging in excessive risk-taking due to the presence of implicit guarantees or bailouts.
  • Strengthen the resilience of financial infrastructures: This objective aims to improve the ability of financial systems to withstand and recover from shocks.

Tasks and Challenges

The FSC’s key task is to continuously monitor and assess systemic risks in the Liechtenstein financial sector, identifying potential threats before they materialize. This requires a proactive approach, as addressing identified risks efficiently is a significant challenge for macroprudential supervision.

Tasks of the FSC

The FSC’s explicit tasks have been defined in Article 33b of the FMA Act:

  • Discussing issues relevant to financial stability: The FSC is responsible for discussing matters related to financial stability, including potential risks and vulnerabilities.
  • Encouraging cooperation and opinion exchange among institutions represented on the Council: The FSC aims to foster cooperation and coordination among macroprudential institutions.
  • Discussing warnings and recommendations from the European Systemic Risk Board: The FSC considers warnings and recommendations from the European Systemic Risk Board (ESRB) to ensure consistency with EU-wide efforts to maintain financial stability.
  • Issuing recommendations to the government or FMA regarding instruments for safeguarding financial market stability: The FSC provides advice on instruments that can be used to mitigate systemic risks.
  • Issuing warnings and recommendations in accordance with Article 33c of the FMA Act: The FSC may issue warnings and recommendations to prevent or mitigate potential risks.
  • Presenting an annual report to Parliament: The FSC submits an annual report to Parliament, outlining its activities and efforts to maintain financial stability.

Maintaining financial stability is crucial for Liechtenstein’s long-term prosperity. The establishment of the FSC and its emphasis on macroprudential supervision demonstrate the country’s commitment to prudence and compliance in the face of potential risks.