(7)

As regards Liechtenstein, this recent assessment has revealed that: a. Household indebtedness in Liechtenstein was equivalent to 226 % (4) and 120 % of disposable income and gross domestic product (GDP) respectively in 2020 according to Financial Market Authority (FMA) estimates, ranking Liechtenstein among the countries with the highest household indebtedness in the EEA. Moreover, household debt has recently been trending upward. Apart from the favourable costs of debt financing, perceived tax incentives might have contributed to the accumulation of household debt (5). An analysis conducted by the FMA shows that indebtedness is unevenly distributed across households, with 14 % of households reporting debt between CHF 500 000 and CHF 1 million, and 9 % of households reporting debt exceeding CHF 1 million, according to the tax statistics. Furthermore, the share of households with a debt-to-income (DTI) ratio above five is relatively high, suggesting that elevated household debt is not always accompanied by greater household income. On a more positive note, the high share of fixed interest rate mortgages is an important mitigant to the risks related to household indebtedness. b. The housing market dynamic has remained moderate in recent years. Given the legal restrictions on the purchase of real estate (6), transaction activity is typically low in Liechtenstein. No price indices are published by the public authorities. Nevertheless, according to the FMA, price data from expert assessments indicates only moderate increases in the prices of both land and apartments. Similarly, building activity and transaction activity have also remained relatively stable in recent years. c. According to the FMA, mortgage growth (including RRE and other real estate loans of domestic banks in the Swiss franc currency area) has recently been on a declining trend and nominally stood at 0,7 % in 2019 (down from 8,8 % in 2010), with a slight uptick to 2,5 % in 2020. Annual growth in domestic RRE loans was even weaker, amounting to 1,1 % in 2020. d. According to the FMA, a relatively prudent approach has been taken to the provision of mortgage loans in terms of loan-to-value (LTV) ratios, with only a negligible share of both existing and new mortgages having an LTV ratio higher than 80 % in 2019 and 2020. Banks are also required to report loans as ‘exceptions to policy’ whenever they overrule their internal guidelines with respect to mortgage affordability. In practice, banks verify whether an interest rate increase to 4,5 % or 5 % would imply a debt service burden exceeding a third of household income. In the light of the current low interest rate environment and the history of low interest rates in the Swiss franc currency area the burden of complying with such requirements is quite severe. However, around 23 % of total RRE loans in Liechtenstein belonged to this ‘exceptions to policy’ category as of the end of 2020. e. The total volume of domestic RRE loans amounted to roughly 85 % of GDP in 2020, which is one of the highest ratios in the EEA. However, the size of the Liechtenstein’s banking sector corresponds to roughly 15 times the country’s GDP, which means that while mortgage loans are a source of income for some Liechtenstein banks, domestic loans are not paramount for the profitability and solvency of the banks operating in Liechtenstein as they mainly focus on private banking services. At the same time, Liechtenstein’s banking sector is well capitalised, with the Common Equity Tier 1 (CET1) capital ratio standing at 22,3 % in June 2021. Additionally, Liechtenstein’s banking sector is characterised by very strong liquidity indicators, with the extremely low loan-to-deposit ratio of 65 % implying low funding risk. f. Given the conservative LTV ratios of domestic mortgage loans, their limited share in banks’ portfolios, and the high capitalisation of the banking sector, direct risks to financial stability stemming from the RRE sector are currently limited in Liechtenstein. However, while the labour market in Liechtenstein has proven to be resilient during times of recession over the past decades, and household wealth remains relatively high, the already high and increasing level of household debt nonetheless makes the household sector vulnerable to unexpected macroeconomic shocks. If the level of unemployment increases and/or household income decreases, some households may find it more difficult to service their debts than they do now. The associated negative effects on household income and wealth may reinforce the initial macroeconomic shocks if households are required to reduce consumption in order to service their debt. This could lead to second-round effects and an increase in the risks to credit institutions and the financial system (7). g. The ESRB acknowledges that several measures aimed at the mitigation of the current RRE vulnerabilities are in place in Liechtenstein, including, in particular, the LTV limit of 80 %, the requirement to amortize mortgages to a maximum LTV ratio of 66 % within the first 20 years of loan repayment, and increased risk weights on mortgages for banks applying the Standardised Approach for the calculation of own funds requirements (8). At the same time, the FMA is implementing Recommendation ESRB/2016/14 of the European Systemic Risk Board (9). The new data, which will be available in the second half of 2022, are expected to further improve the analysis of RRE vulnerabilities in Liechtenstein. h. From a forward-looking perspective and taking into account the medium-term risk outlook, the current macroprudential policy mix is considered to be partially appropriate and partially sufficient. Given the already high and increasing level of household debt, and the considerable share of households that are vulnerable to unexpected negative shocks, the existing limit to the LTV ratios should be complemented by income-related borrower-based measures to prevent further accumulation of RRE vulnerabilities. To this end, a legal basis for borrower-based instruments may need to be created, thus providing sufficient flexibility to the national authorities to address the RRE vulnerabilities in Liechtenstein.