Appendix I. The Swiss “Too big to Fail” Regime
1. Since the Global Financial Crisis, the two G-SIBs have strengthened their resilience by implementing a number of measures under the Swiss “Too big to fail” (TBTF) regime. The regime consists of two components: First, stricter going-concern capital and liquidity requirements to strengthen resilience of systemically important banks. Second, a resolution framework providing for orderly resolution by giving FINMA resolution powers and tools to deal with SIBs. In addition, SIBs are required to have sufficient loss-absorbing capacity in a gone concern perspective. These measures are especially designed with the objective that no public funding is needed in the event of a crisis.
2. The SNB, in consultation with FINMA, determines whether a bank is systemically important. This is determined by size, interconnectedness with the financial system and the economy and if the institution cannot be substituted at short notice. SNB takes into account various factors of both qualitative and quantitative nature. Among others, it uses criteria such as (i) the market share of systemically important functions; (ii) the amount of secured deposits that exceeds the deposit protection level of CHF 100,000; (iii) the ratio of the bank’s total assets to Swiss GDP; and (iv) the bank’s risk profile as determined by its business model, balance sheet structure, quality of assets, liquidity and debt-equity ratio. Functions are considered systemically relevant if they are indispensable to the Swiss economy and cannot be substituted at short notice (such as, for example, the domestic deposit and lending businesses).
3. Swiss capital requirements are consistent with Basel III measures and minimum requirements are higher than Basel minima. In 2016, the Swiss Federal Council amended the Capital Adequacy Ordinance (CAO). This amendment set out the new higher capital requirements for SIBs and introduced a new ‘gone concern’ requirement for G-SIBs in line with G20 standards and the FSB. Minimum going concern capital requirements for the two G-SIBs are 10 percent Common Equity Tier 1 (CET) plus an additional 4.3 percent of tier 1 capital. 1 In addition, the gone concern loss-absorbing capacity (GLAC) capital requirement for G-SIBs is 14.3 percent (before any rebate). Currently - including rebates associated with structural improvements to facilitate a SPOE strategy -the total loss-absorbing capacity (TLAC) requirement is roughly 26 percent. As of January 2019, and in taking into account the rebates granted by FINMA, both banks are already fully compliant with the requirement for gone-concern instruments under the TBTF regime.
4. The TBTF legislation provides for an incentive system in the form of rebates for the two G-SIBs when they improve their overall resolvability. FINMA can announce rebates on the additionally required loss-absorbing funds (as long as international standards and minimum requirements under the law are fulfilled); determined individually for the two G-SIBs in consultation with SNB. The decision is based on the effectiveness of banks’ measures to improve the group’s global resolvability and the interdependencies between the different groups. These can be, for example, structural improvements and the dissolution of complex structures, financial separation to limit contagion, and separation of operational structures in order to secure the continuation of important operational services. The creation of a non-operating holding company for one G-SIB, the transfer of Swiss-based systemically important functions to separate service companies by both large banks and their compliance with loss-absorbing debt capacity requirements in the form of bail-inable bonds resulted in rebates. FINMA assesses the eligibility for rebates every year.
5. The Federal Council is required by law to evaluate the TBTF regime every two years. The evaluation’s objective is to examine whether the regime’s provisions are in line with the international standards, as well as to compare how the standards have been implemented abroad. The last evaluation report, adopted by the Federal Council in June 2017, concluded that the regulatory model does not need to be fundamentally adapted as it is suitable to reduce the risk of SIBs. However, the report recommended that reduced gone concern capital requirements should be extended to the three domestically focused SIBs. 2 The new rule came in force on 1 January 2019.
This note was prepared by Jan Philipp Nolte, IMF senior financial sector expert.
FINMA keeps lists of all authorized institutions in its webpage: https://www.finma.ch/en/finma-public/authorised-institutions-individuals-and-products/. An overview of the structure of the banking sector in Switzerland can be found in this publication of the SNB: ‘Banks in Switzerland 2017.’
As the two banks were rather small (with secured deposits of about CHF 20 and 36 million) and their business model not focused on consumers which would have been in immediate need of reimbursement there was no observable negative impact on depositor confidence in the safety net despite long reimbursement processes executed by the two liquidators.
Although the FINMASA attributes resolution powers and tools to FINMA, it does not explicitly designate it as resolution authority (see KA 2 and its essential criteria) while it does designate the FINMA as a supervisory authority (for example Art. 4 FINMASA).
FINMA should be judicious in the use of special agents because of potential contagion and deposit runs if the act has to be publicized.
According to Art. 63 Ordinance on Banks and Saving Banks (BO), this is the case for a systemically important bank if the eligible CET 1 capital falls below 5 percent of the risk weighted positions or if a bank is holding less than the minimum required capital set out in Art. 42 (1) and (2) CAO.
FINMA may initiate resolution measures against a bank if it finds the bank to be (i) under justified concern of over-indebtedness, (ii) non-compliant, upon prior notice by FINMA, with regulatory capital provisions, or (iii) experiencing severe liquidity problems (Art. 25 BA).
A bank can be determined as being systemic at the time it is likely or likely to fail, but this determination would need to be made by the SNB in consultation with FINMA. Such determination could be made on short notice.
As part of the reform package described in Box 1, it is planned to drop the “last resort” requirement.
Both G-SIBs had issued roughly CHF 65 billion in bail-inable bonds by end-2018. The majority (about 90 percent) is issued in USD and to U.S. institutional clients. Only a small part of bonds is sold to Swiss institutional clients thereby likely limiting contagion. Both institutions have an internal policy not to sell these bonds to retail customers.
Art. 126a CAO.
Domestically focused D-SIBs are since 1 January 2019 subject to comparable requirements; but they must only maintain 40 percent of the going concern requirements as additional loss-absorbing capacity.
Category 3 comprises of middle-size cantonal banks and larger regional banks, in total 24 banks. Category 1 and 2 comprise of the two G-SIB and the three domestically focused SIBs.
For the two G-SIBs, the requirement only covers the two Swiss banks of the groups (UBS Switzerland AG and Credit Suisse Schweiz AG), which contain the systemically important functions for Switzerland.
The BA gives the SNB the authority to designate not only banks, but also bank functions as systemically important. The identified functions are mainly the domestic deposits and lending activities as well as domestic payment transactions.
This includes 248 banks and 46 securities dealers; 8 members are in the process of discontinuing their business activities (as per 31 December 2018).
COOP, the second largest retailer, and the Federal Employees Savings, which is part of FDF.
Preferential deposits (including insured deposits) are paid out as first creditor class claims in bankruptcy after secured claims (Art 35 BIO-FINMA).
Other preferential deposits which are not insured deposits are, for example, deposits in employee benefits foundations and deposits booked with foreign branches of Swiss banks (Art. 37a (6) BA).
The current ceiling of CHF 6 billion correspond to 1.33 percent of insured deposits. As of 31 December 2017, the total amount of insured deposits was CHF 450 billion. The Federal Council has the power to raise the ceiling if “special circumstances warrant it” (Art. 37h (4) BA).
FINMA monitors if banks fulfill the conditions through the annual auditing process. In addition, members must grant esisuisse a corresponding direct debit authorization.
IADI CP2, Essential Criteria (EC) 4 states that the DIA’s powers should include, among others: (a) assessing and collecting premiums, levies, or other charges; (b) transferring deposits to another bank; (c) reimbursing insured depositors; and (d) obtaining directly from banks timely, accurate, and comprehensive information necessary to fulfil its mandate. esisuisse does none of this.
For purposes of this note, mid-size banks are the 10-15 banks—out of the over 300 banks in Switzerland—just below the level of banks with a SIB designation.
The Federal Council can issue ordinances “in order to counter existing or imminent threats of serious disruption to public order or internal or external security” (Art. 184 (3) and Art. 185 (3) of the Federal Constitution).
To rescue UBS, the SNB provided also about CHF 60 billion to move toxic assets from the bank into an SPV.
LOLR/ELA for financial institutions are governed by the Federal Act on the Swiss National Bank. According to the Act, one of SNBs tasks is to contribute to the stability of the financial system (Art. 5). Art. 9 of the Act contains the instruments the SNB may use for fulfilling its tasks. One of these instruments is “credit transactions with banks and other financial market participants on condition that sufficient collateral is provided for the loans.” The accompanying Message of the Federal Council on the National Bank (see BBl 2002 6097, 6133) states that the SNB shall act as Lender of Last Resort and for this purpose may provide ELA. See also Section 6, page 6 of SNB’s Guidelines on Monetary Policy Instruments for a description of its emergency lending assistance (ELA).
Based on the information available from ongoing supervision such an opinion could be done on a short notice by FINMMA. FINMA can limit its solvency confirmation to a plausibility check on the bank’s solvency assessment that it has submitted to SNB, Information exchange and coordination for the purpose of facilitating the provision of ELA are covered by the bilateral MOU between FINMA and SNB.
An example for transparency on ELA requirements is the Canadian framework which can be found here: https://www.bankofcanada.ca/markets/market-operations-liquidity-provision/framework-market-operations-liquidity-provision/emergency-lending-assistance/
While there is no international consensus on the appropriate communication strategy for ELA operations, it is best practice to disclose any bilateral ELA on an ex post basis. A delay of, for example, one year or more, or as long as necessary until public disclosure would not undermine policy objectives would be appropriate.
MOU in the area of financial stability and the exchange of information on financial market regulation between the FDF, FINMA and SNB (January 2011),
While the MOU from 15 May 2017 also covers contingency and crisis management as a common area of interest, no activities have been undertaken under this arrangement.
FINMA chairs the committee unless measures under the control of the confederation or the SNB are to be discussed, in which case the FDF or the SNB may chair the committee.
MOU in the area of coordination and information exchange between FINMA and esisuisse (June 2017).
In preparation for a potential Brexit, the two G-SIBs plan to move operations and assets from the U.K. to the EU. At least in one case (UBS), this might make the EU operations systemic and therefore subject to SSM supervision and SRB resolution which may have an impact on the membership in the CMG and cross-border cooperation in general.
For the three domestically focused SIBs the RWA-requirement is between 12.86 and 13.22 percent.
The three domestically focused D-SIBs have only to fulfill 40 percent of the gone concern capital requirements applicable to CS and UBS as the authorities deem them to be less interconnected internationally, less complex and therefore less systemically important.