FINMA Risk Monitor – Key Risks and Their Impact on Businesses

What is the FINMA Risk Monitor?

The FINMA Risk Monitor is an annual report published by the Swiss Financial Market Supervisory Authority (FINMA). It analyzes the most significant risks for the Swiss financial sector and provides guidance for banks, insurance companies, and financial institutions. The report outlines risks with a time horizon of up to three years and establishes supervisory expectations for regulated entities.

The macroeconomic environment remains uncertain, characterized by inflation, geopolitical tensions, and economic instability. Although inflation has slightly eased, major risks for the financial market persist.

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Key Risks in the FINMA Risk Monitor and Their Impact on Businesses

1. Real Estate and Mortgage Risks

• The Swiss real estate market has cooled somewhat, but overheating risks remain.
• Banks continue to grant mortgages with high loan-to-value ratios or unsustainable lending criteria.
• The commercial real estate sector faces additional risks due to the rise of remote work and structural market changes, leading to potential office vacancies.

Impact on Businesses:

• Banks may face stricter capital requirements and possible regulatory tightening of mortgage lending criteria.
• Real estate funds could suffer from valuation corrections.
• Commercial property owners may experience higher vacancy rates and declining property values.

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2. Credit Risk – Other Loans

• Declining profits and falling market valuations may lead to losses on margin loans and corporate loans.
• Highly leveraged businesses are particularly vulnerable.
• The UBS acquisition of Credit Suisse remains under close scrutiny, especially regarding its leveraged finance positions.

Impact on Businesses:

• Companies may face tighter credit conditions.
• Financing could become more expensive, especially for small and medium-sized enterprises (SMEs).
• Banks will need to adjust their risk management to identify potential credit risks early.

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3. Market Risk – Credit Spread Risk

• Increasing risk premiums for corporate and government bonds could lead to portfolio devaluations for financial institutions.
• The uncertain economic outlook may cause higher risk spreads.

Impact on Businesses:

• Raising capital will become more costly, as bond investors demand higher risk premiums.
• Banks and insurers may face portfolio losses, weakening their capital positions.

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4. Liquidity and Refinancing Risk

• A loss of depositor confidence could lead to liquidity shortfalls for banks.
• Systemic crises could trigger liquidity shortages, destabilizing the financial system.

Impact on Businesses:

• Financial institutions must maintain higher liquidity buffers.
• Stricter liquidity management requirements are expected.
• Companies should explore alternative funding sources to mitigate liquidity risks.

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5. Market Access

• Swiss financial institutions continue to face challenges accessing key foreign markets, particularly within the EU.
• Regulatory fragmentation makes it harder to secure market access.

Impact on Businesses:

• Banks may encounter additional regulatory hurdles, especially in the EU.
• Financial service providers may need to restructure their operations to continue offering cross-border services.

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6. Money Laundering Risks

• Stricter anti-money laundering (AML) regulations and increased compliance requirements for financial institutions.
• Crypto transactions are increasingly linked to money laundering risks.

Impact on Businesses:

• Financial institutions must invest in enhanced compliance measures.
• Companies handling international financial transactions must ensure compliance with AML regulations.

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7. Sanctions

• Increased risks from international trade restrictions, particularly concerning Russia sanctions.
• Enhanced oversight of compliance with sanctions regulations.

Impact on Businesses:

• Financial institutions must ensure full compliance with sanctions to avoid legal consequences.
• Companies trading with sanctioned countries may face more restrictive financial services.

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8. Outsourcing Risks

• Growing dependence on third-party providers, especially in IT and cloud services, increases operational risks.
• Disruptions at critical service providers could severely impact financial institutions.

Impact on Businesses:

• Banks and insurers must strengthen oversight of their supply chains and IT service providers.
• Companies should enhance resilience against IT failures.

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9. Cyber Risks

• Cyberattacks on the financial sector are increasing, particularly through ransomware and phishing attacks.
• Inadequate security measures at financial institutions can lead to data breaches and system failures.

Impact on Businesses:

• Higher investments in cybersecurity are required.
• Financial institutions must ensure that third-party providers adhere to strict security standards.
• Companies should safeguard against financial and operational damage from cyberattacks.

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Conclusion: Key Challenges for Businesses in the Swiss Financial Market

The FINMA Risk Monitor highlights significant challenges for financial sector businesses. Banks, insurers, and financial service providers must navigate a volatile market environment, increasing regulatory requirements, and rising technological risks.

Key Takeaways for Businesses:

1. Strengthen credit risk management, particularly in real estate and corporate lending.
2. Build liquidity reserves to withstand sudden market disruptions.
3. Enhance compliance measures to mitigate money laundering and sanction-related risks.
4. Increase cybersecurity investments to counter growing digital threats.
5. Ensure IT infrastructure resilience to reduce dependencies on external service providers.

FINMA will continue to closely monitor the situation and may introduce new regulatory measures if necessary. Financial institutions should proactively adjust their risk strategies to maintain their competitive edge.