Switzerland

Details

  • Date: 9/5/2011
Bookmark and Share

"In the end, risks must be minimized by the banks themselves" 

KPMGnews interview with: Anne Héritier Lachat, Chair of FINMA Board of Directors

KPMGnews: Continued low interest rates and increasingly sweeping regulations are currently leaving their mark in Switzerland. How do you see their impact on Switzerland as a financial center?

Anne Héritier Lachat: There’s no doubt about it that Switzerland as a financial center is faced with great challenges as a result of the factors you mentioned. But it’s not alone. Other countries and financial centers are also struggling with the risks presented by the low-interest environment. Other countries, however, are finding themselves confronted with the consequences of the crisis on financial markets to a much greater degree than Switzerland. And finally all relevant financial centers have made changes to their regulatory frameworks or will do so in the future. Generally these changes are much more comprehensive and detailed than in the traditionally liberal country of Switzerland, just think about the Dodd-Frank Act in the USA... The question I therefore have to ask myself from a regulatory perspective is how well equipped to face these challenges are the institutions we supervise and do we have the regulatory instruments to make a positive contribution? Personally, I think that most Swiss institutions are well equipped and professionally managed.

Which changes do you anticipate with regard to Switzerland’s banking landscape and its business models? How competitive are Switzerland’s banks at present compared to those in other countries?

Anne Héritier Lachat: There are significant changes taking place in all key areas of banking. This holds true for investment banking since the crisis, the asset management business whereby the focus there is on the problems surrounding the cross-border business, as well as retail banking in light of the challenging interest rate environment and the mortgage situation. With a population of over 300 banks and securities dealers, it’s also normal for a few problems to arise from time to time. Generally, though, I think that the quality of banking in Switzerland is sufficient to successfully adapt to changing conditions and hold its own against international competition.

Low interest rates entice bank clients to take greater risks. How have banks strengthened their risk management? Which influence does FINMA have and to what extent does it intend to make use of it?

Anne Héritier Lachat: The low-interest environment tends to make stakeholders take higher risks on the financial market for a number of different reasons. One aspect of this is a desire for returns. Whenever classical investments that are considered secure only yield minor returns, bank clients, banks and insurance companies frequently look for higher-return alternatives. However, investments of that sort are usually associated with higher risks. Another aspect concerns the impact of granting loans: An expansive monetary policy frees up cheap money for banks to lend out. In addition, low interest rates have an impact on economic viability calculations. At an early stage in the tense interest rate environment, FINMA already intensified its supervisory activities in this area and made banks aware of both the interest rate risks they assumed and the importance of risk management. FINMA also selectively orders corrective measures. In the end, however, risks must be managed and minimized by the banks themselves.

The insurance industry was spared from more major problems during the financial crisis. With that in mind, do you think additional regulations and greater supervision of insurance companies are justified?

Anne Héritier Lachat: As we see it, there is a certain need for additional regulation in the non-traditional or non-insurance business. The crisis has demonstrated that this could create huge risks. Just think of AIG, for instance. We may adapt our ongoing supervisory activities within the scope of the current regulatory framework. In light of how the insurance business is changing, this is the correct approach to take. FINMA intends to further develop its supervisory activities just as it does in all areas of supervision and gear them toward a risk-based approach in order to ensure that its scarce resources are utilized in those areas where policyholders could face the greatest risks. The Swiss Solvency Test, which saw mandatory implementation in Switzerland this past year, is a central supervisory instrument that effectively reflects risks, specifically interest risks, for example.

It seems that under the EU’s Solvency II directive, insurance companies require less capital than mandated by the Swiss Solvency Test. That could put Swiss insurers on unequal footing. Does FINMA intend to make appropriate adjustments to the Swiss Solvency Test?

Anne Héritier Lachat: The statement that Solvency II generally has lower capital requirements is not entirely accurate. A distinction has to be made and two aspects must be taken into consideration: On the one hand, the definitive requirements for Solvency II have not even been defined yet. On the other, the SST results in lower equity requirements, for instance, in the area of non-life insurance. The SST is currently placing increased requirements on life insurance companies – yet again as a result of the extremely low interest rate situation! Once the definitive parameters of Solvency II have been set in stone, FINMA will analyze them in detail. Wherever appropriate and also wherever our principal mission of protecting policyholders permits, we will not rule out adjustments to establish some conformity with the European regime.

With the partial revision of the Collective Investment Schemes Act (CISA), all institutional asset managers are to fall under the CISA. Do you have an estimate of how many license applications FINMA will be receiving?

Anne Héritier Lachat: The CISA revision is an adjustment to reflect international developments which will enable institutional asset managers to continue managing European funds from Switzerland in the future, as well. Without this change in the law, such activities would be more difficult or even impossible from mid-2013 onward. Only those asset managers of funds who previously did not require any license in Switzerland will be affected by the revision. This does not affect independent asset managers representing private individuals. We can’t say how many asset managers currently manage foreign funds without a license. It’s clear, however, that the extremely tight schedule until 2013 will make it imperative for FINMA to have a very structured procedure in place in order to manage the requests it will receive should the CISA revision enter into force in this form.

With regard to cross-border business, independent asset managers will be regulated less strictly than banks. How will FINMA react to this inequality?

Anne Héritier Lachat: It’s not only with regard to cross-border business that rules for independent asset managers are more lenient than for prudentially-supervised institutions. In our “Distribution Report” we therefore prompted a discussion about whether it might make sense to license or register independent asset managers. At the moment we are working on analyzing the reactions to this report and will make a statement on the issue once we’ve finished. Regardless of that, two things are clear: 1. Foreign authorities will treat independent asset managers the same as those who are employed at banks. 2. For the asset managers’ custodian banks, there will still be legal and reputational risks in cross-border transactions, even if assets are handled by external asset managers. Custodian banks must take these risks into consideration and proceed with caution when selecting these partners and instructing them.

Where do you see Switzerland’s standing as a financial center in 10 years’ time?

Anne Héritier Lachat: I hope that Switzerland as a financial center will have successfully mastered the challenges mentioned earlier. FINMA’s role is to perform its supervisory duties within the legal framework set forth by legislators in order to protect financial market clients and ensure the stability of the system. Of course to do so, we also try to anticipate key developments on financial markets and with regard to international regulation. Others, however, are responsible for structuring financial market policy. Basically, I think that professional quality and stable conditions will continue to count for something in 10 years, as well.

 

Interview: Andreas Hammer and Simone Glarner, Marketing & Communications