FINMA Risk Monitor Report 2024

Risk Monitor Report 2024

The Swiss Financial Market Supervisory Authority (FINMA) has released its Risk Monitor Report 2024, outlining the major risks facing the Swiss financial system over the coming years. This comprehensive report serves as a guide for financial institutions and regulators, emphasizing evolving market challenges, emerging risks, and supervisory priorities.

Key Risks Identified

1. Real Estate and Mortgage Vulnerabilities

The Swiss real estate sector, with CHF 1.2 trillion in outstanding mortgages as of mid-2024, remains under scrutiny due to risks of market overheating. Structural shifts such as remote work and rising vacancy rates in commercial properties amplify these risks. Stress tests suggest potential losses exceeding CHF 10 billion in a crisis scenario, particularly in the commercial real estate segment.

2. Credit Risk Beyond Mortgages

Lombard loans, a staple of large international banks’ portfolios, face heightened risk amid volatile markets. Lower-than-adequate collateral haircuts could result in significant losses during market downturns. The report also underscores the impact of geopolitical and monetary uncertainties on corporate lending.

3. Market Risk from Credit Spreads

Rising credit spreads on sovereign and corporate bonds pose valuation risks to financial institutions. Widening spreads could lead to significant losses in portfolios, impacting profitability and undermining investor confidence.

4. Liquidity and Funding Challenges

The adoption of instant payments by 60 banks highlights potential intraday liquidity risks. Coupled with lessons from the 2023 banking turmoil, FINMA flags vulnerabilities to rapid deposit outflows and the cascading effects of liquidity shortages on financial stability.

5. Geopolitical Barriers and Market Access

Legal and regulatory uncertainties in cross-border financial services, particularly with the EU, continue to challenge Swiss institutions. Recent strides in mutual recognition agreements with the UK, however, offer some relief.

6. Money Laundering Concerns

With Switzerland’s prominent position in cross-border wealth management, risks of money laundering remain high. Particular challenges include managing high-risk clients and monitoring the rising use of cryptocurrencies in illicit transactions.

7. Sanctions and Compliance Risks

Economic sanctions, especially US secondary sanctions on Russia, have heightened legal and reputational risks for Swiss financial intermediaries. Increasing efforts to evade sanctions underline the need for robust compliance measures.

8. Outsourcing Dependencies

Operational risks from outsourcing critical functions, particularly to cloud service providers, continue to grow. FINMA notes that 90% of banks now outsource part of their critical operations, raising concerns over concentration risks and third-party service disruptions.

9. Cybersecurity Threats

Cyberattacks on the Swiss financial sector have risen by 30%, with ransomware, phishing, and business email compromise among the most prevalent methods. Cyber incidents linked to third-party service providers are particularly alarming, accounting for nearly a third of reported attacks.

FINMA’s Supervisory Response

To address these risks, FINMA has outlined key supervisory measures:

– Enhanced Monitoring: Stress tests, on-site reviews, and detailed data collection will continue across high-risk areas like real estate and liquidity management.

– Regulatory Evolution: FINMA may transition from principles-based to rules-based regulations for high-risk sectors such as mortgage lending.

– Cybersecurity Measures: Scenario-based cyber exercises and stronger cybersecurity frameworks for institutions will remain a focal point.

– Risk Mitigation for Outsourcing: FINMA plans to improve oversight of outsourced functions and encourage institutions to diversify service providers.

A Call to Vigilance

The FINMA Risk Monitor 2024 offers a sobering analysis of the challenges facing Switzerland’s financial institutions. While it highlights critical areas of vulnerability, it also underscores the importance of forward-looking oversight and proactive risk management to safeguard financial stability.

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