FINMA highlights outsourcing, liquidity risks in Swiss financial sector

The Swiss Financial Market Supervisory Authority (FINMA) has raised concerns over growing unrest in Switzerland’s financial sector, with a particular focus on the risks associated with liquidity, refinancing, and outsourcing business activities, as detailed in their latest “Risk Monitor 2023” report.

FINMA’s report points to liquidity and refinancing risk as a primary concern, indicating that financial institutions may face challenges in maintaining adequate liquid funds to meet their obligations during a crisis.

Such a scenario could be exacerbated by the need for increased collateral, potential rating downgrades, or the swift withdrawal of client funds. This risk was illustrated by the fall of Credit Suisse, which experienced a significant “bank run” before its acquisition by UBS.

The event highlighted how quickly a bank run can create a severe stress situation, potentially leading to an irreversible downward spiral.

The second significant risk outlined by FINMA is the growing trend of outsourcing critical business functions to third-party service providers, which amplifies operational risks.

The regulatory body warns that any disruption in these outsourced functions could threaten the overall stability of the financial market. It is the responsibility of the institutions themselves to manage and oversee these third-party relationships to ensure seamless operations.

FINMA’s report makes it clear that while business activities can be outsourced, the accountability for proper business conduct cannot. It emphasizes the need for financial institutions to improve their understanding of their full supply chain and the associated risks.

The authority calls for enhanced measures to address these vulnerabilities to safeguard the integrity of the Swiss financial marketplace.