Financial service providers Finma sees great uncertainty for banks due to geopolitics

The environment for the Swiss financial sector is characterized by uncertainty due to the many geopolitical conflicts around the world. The supervisory authority Finma sees increased risks from sanctions and cyber attacks, for example.

The main risks identified by FINMA in its latest annual risk monitor are both financial and non-financial in nature. However, an increase in non-financial risks in particular has been observed in recent years, the authority announced on Monday.

For example, outsourcing risks were newly listed last year, and this year sanction risks for financial institutions were added as a new main category in their own right.

The situation for banks in connection with sanctions on certain financial services or the granting of financial resources has worsened, writes Finma. The legal and reputational risks for financial institutions, for example, have increased considerably and are very difficult to limit. If sanctions are breached, the consequences could be serious.

For this reason, the database has been further expanded, particularly in connection with the Russia sanctions. Finma also carries out on-site inspections and investigations at various exposed supervised institutions.

Checks on service providers

The authority has also identified increased risks due to the rising number of cyber attacks. According to Finma, more than half of the reported attacks had an indirect impact on financial institutions via affected third parties.

However, the way in which banking service providers deal with cyber risks is sometimes not as mature as that of financial institutions. The authority is therefore focusing on ensuring that outsourcing at banks is successful. In addition, more on-site inspections are being carried out at important service providers on the subject of cyber risks.

Meanwhile, the other risks listed remained high: risks in connection with real estate and mortgages, credit risk, liquidity and refinancing risk, market access and money laundering. Overall, many of the identified risks stem from the macroeconomic environment, according to the report.

Interest rate shocks less likely

However, interest rate risks are no longer classified as the main risk: The probability of interest rate shocks has decreased compared to the previous year due to the current interest rate level and decreasing inflation, according to Finma. However, this should be assessed with caution due to the higher geopolitical risks and possible effects on credit spreads (credit rating premium) of companies and states. "In the current situation, we should not rule out a possible renewed increase in credit spreads", says Finma Director Stefan Walter according to the press release.

The assessment of the risk situation is a central element of Finma's supervision, with the risk monitor providing an overview of the most significant risks with a time horizon of up to three years.

SDA