Marco Zwick (CSSF): How Risks and Solutions Evolved in the Covid Crisis
Speaking to the ALRIM Winter E-Conference 2021, Marco Zwick, Director of the Commission de Surveillance du Secteur Financier (CSSF) said that while Luxembourg’s risk model protected the financial sector during the pandemic, particularly from cyber and liquidity risks, the industry must embrace new ways of working and recognize new risks.
What are the key risks the financial sector faced during the pandemic?
With the turbulent markets at the start of the pandemic, some companies faced increased financial risks through lost activities, losses incurred or reduced profits. But covid showed the most important risk is human capital risk. Healthy human beings are needed, especially when people outside our organizations are trying to take advantage of weaknesses arising from the crisis. However, the asset management industry has not seen a significant increase in successful cyber-attacks. Funds also confronted another risk as discussions around sustainable finance are giving rise to the risk of greenwashing – misrepresentation and mis-selling of, ostensibly, sustainable products. Fortunately, the pandemic’s impact was mitigated by fund teams implementing good risk management and diversification strategies.
"The risk posed by liquidity issues has kept funds busy over the past 12 months."
How did the financial sector address the risk of liquidity constraints?
The risk posed by liquidity issues has kept funds busy over the past 12 months. But Luxembourg deployed several liquidity management tools which, with the industry showing a high level of maturity, has ensured resilience. Liquidity mismatches by open-ended and money market funds posed a risk of contamination spreading to the real economy. But we realized that funds were conservatively managed and at no time were funds’ liquidity buffers exceeded. We had the opportunity to test our liquidity management tools, and there was no call for new tools. However, we would like more cooperation on a European level to see whether our liquidity management tools can be deployed collaboratively with other jurisdictions.
How has CSSF’s supervisory role been altered as a result of the pandemic?
As the supervisory authority, CSSF had to find new ways of working. Our agents started working remotely to ensure continuity of financial supervision. We could not perform on-site inspections in a classical sense, so we developed Q&As to address issues including liquidity management and active breaches of net asset value (NAV) calculations. Out of caution we probably overestimated the risks from not being able to supervise in person. But we used screen sharing tools to put us in a position where we operated in the same way we would if we were performing our inspections in your office. Despite these constraints, we covered more than 90% of assets under management daily throughout the pandemic.