30. Stress tests also show that capital ratios are broadly adequate for domestically
oriented and small banks. Nevertheless, the lack of access to data at the individual bank level
means that bank specific losses may be underestimated. Moreover, these banks face additional
risks, including litigation from the U.S. tax authorities and issues related to their corporate
governance that cannot be addressed within the stress test framework.
Liquidity of the banking system
31. The banking sector benefits from high liquidity, with almost all banks satisfying the
liquidity coverage ratio (LCR) requirement in Swiss francs. Nearly all banks exceed the
100 percent mark for the LCR, in large part due to high deposits at the SNB. Over the medium
term, banks would need to substitute these central bank deposits with other sources of high-
quality liquid assets (HQLA). Meanwhile, average LCRs in euro and U.S. dollars remain fairly low,
with several small banks showing outflows over the next 30 days, while essentially having zero
HQLA in those currencies.
7
Overall, prudential liquidity norms need to take into account the limited
supply of Swiss franc-denominated Level 1 liquid assets (i.e., Swiss government bonds).
B. Insurance Sector Stress Test
32. Stress tests were conducted to assess the resilience of the insurance sector. Solvency
stress testing, using the three scenarios defined in Section A, was conducted by the insurance
companies and evaluated by FINMA and the IMF staff. These solvency stress tests were
complemented with sensitivity analysis of an extreme, natural catastrophic scenario for non-life
insurers and a pandemic scenario for life insurers. In addition, sensitivity stress testing with respect
to interest rate and real estate price, as well as market-wide liquidity stress testing, was carried out
(see technical note on insurance).
6
From a transitional capital viewpoint, a CET1 ratio of 7 percent is considered to be a trigger level for recovery
measures, and thus used as a trigger level for high-trigger CoCos.
7
Nevertheless, average LCRs in euro and U.S. dollars without inflow cap are around 109 and 88 percent,
respectively. Smaller banks tend to cover their outflows with inflows (also from deposits at larger banks) instead of
HQLA.
SWITZERLAND
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