On April 10, 2024, the Swiss Federal Council published its report on banking stability. The report provides for a wide-ranging assessment and evaluation of the Swiss too-big-to-fail regime in relation to the circumstances surrounding the crisis that led to the takeover of Credit Suisse by UBS in March 2023. The Federal Council aims to increase financial stability by implementing 22 regulatory measures under the Swiss banking supervisory regime in the following six fields of action: (i) Corporate Governance and Prudential Supervision, (ii) Capital Requirements, (iii) Early Intervention and Recovery, (iv) Ensuring Liquidity in a Crisis, (v) Resolution Planning and (vi) Crisis Organization and Cooperation between Authorities. This Bulletin provides an initial overview of the most important measures proposed by the Federal Council.

A. Introduction

On April 10, 2024, the Swiss Federal Council published its evaluation report on banking stability (the Report). The Report combines the regular assessment and evaluation of the Swiss too-big-to-fail (TBTF) regime, which the Federal Council is required to provide every two years in accordance with article 52 of the Federal Act on Banks and Savings Institutions (the FBA), with the Federal Council’s more specific obligations to provide an assessment and analysis of the circumstances surrounding the crisis of Credit Suisse (which ultimately led to the takeover of Credit Suisse by UBS in March 2023) and its own activities in response thereto.

The Federal Council has concluded that many of the measures already introduced and currently in force at national and international level adequately increased financial stability. However, the Report also identifies remaining gaps in the existing regime, and thus a need for action to further strengthen the Swiss financial market laws. The Federal Council aims to further increase financial stability by implementing 22 measures under the Swiss banking supervisory regime in the following six fields of action: (i) Corporate Governance and Prudential Supervision, (ii) Capital Requirements, (iii) Early Intervention and Recovery, (iv) Ensuring Liquidity in a Crisis, (v) Resolution Planning and (vi) Crisis Organization and Cooperation between Authorities. The Federal Council has defined an additional seven measures to be further assessed.

The regulatory measures proposed in the Report are of a general nature and provide for a comprehensive outline of the envisaged amendments to the Swiss regulatory regime. Additional legislative efforts will, however, be required to determine and craft implementable provisions to be added to the Swiss regulatory framework.

This Bulletin aims to provide an initial overview of the most important measures suggested by the Federal Council.

Going forward, we intend to publish additional information on the regulatory developments resulting from the Report on the new Homburger Hub – Regulatory Innovations.

B. Field of Action: Corporate Governance and Prudential Supervision

Based on the enforcement practice of the Swiss Financial Market Supervisory Authority FINMA (FINMA) in recent years, the Federal Council has determined that the lack of proper corporate governance at financial institutions can have serious consequences, not the least on the reputation of, and clients’ confidence in, financial institutions. The Federal Council therefore proposes the introduction of various measures to improve the corporate governance of financial institutions. All of these measures are aimed at ensuring that the financial institutions develop and maintain principles and structures that lead to appropriate management and control of their activities by their governing bodies. Of all proposed measures, in our view the following are likely to have the greatest impact:

  • Introduction of a senior managers regime: Inspired by the financial market regulation in the United Kingdom, the Federal Council intends to introduce a so-called senior managers regime as an organizational requirement for systemically important banks (SIBs), including (but not limited to) global systemically important banks (G-SIBs), and, potentially, for banks in general. The senior managers regime is designed to ensure a clear and documented assignment of responsibilities to individuals at senior management levels (i.e., members of the supreme governing body and the management body as well as, in the case of larger institutions, lower-level managers with significant decision-making authority) and the obligation to fulfil them. One important responsibility is that executives have a duty to prevent misconduct in their area of responsibility. This allocation of responsibilities, combined with the possibility of appropriate sanctions (e.g., a reduction in variable remuneration or industry ban) against the senior manager concerned, should make it easier for both FINMA and the financial institutions to hold the individual senior manager accountable.
  • Stricter rules on variable remuneration, including clawbacks: The Federal Council is of the opinion that remuneration systems are instruments of risk control and thus a critical element in supporting the sustainable success of financial institutions. The Federal Council therefore intends to strengthen the legal basis for requirements on remuneration systems (e.g., by extending the retention periods for variable remuneration components or linking the variable remuneration to long-term economic success criteria) at SIBs, and, potentially, banks in general, with the aim of preventing wrong incentives that can lead to short-term profit-seeking and excessive risk-taking. In addition, it proposes to introduce the possibility of so-called clawbacks. In essence, clawbacks are intended to allow financial institutions to reclaim variable remuneration that has already been paid, either on their own initiative or at the request of FINMA. Conversely, the Federal Council determined that capping or prohibiting variable remuneration («bonus caps») is not an appropriate measure that it intends to implement.

In addition to the proposals designed to improve the corporate governance of Swiss banks, the Federal Council also announced that it will examine the introduction of certain other measures relating to FINMA’s supervisory powers. In particular, it will assess whether FINMA should be empowered to impose pecuniary administrative sanctions, such as administrative fines, on financial institutions. In contrast, the Federal Council confirmed that it does not intend to implement administrative fines against individuals, as FINMA already has instruments at its disposal that have drastic effects on individuals (e.g., industry ban, confiscation of unlawfully acquired profits, naming and shaming). According to the Federal Council, such fines entail the risk that individuals would refuse to cooperate with FINMA based on their right to remain silent («nemo tenetur») and thus weaken the effectiveness of FINMA’s supervision.

C. Field of Action: Capital Requirements

The Report situates its review of (going concern and gone concern) capital requirements as one field of action within the focus area concerned with strengthening the prevention regime.

The two guiding principles that the Federal Council applied in assessing a number of potential measures are (i) compatibility with international standards and (ii) proportionality, in particular against the background of the Report’s analysis of difficulties experienced by Credit Suisse.

In line with previous revisions to the TBTF regime and other assessments published in the aftermath of March 19, 2023, the Report places a spotlight on the capitalization of parent banks, i.e., operating entities of banking groups that also hold participations in various subsidiaries in Switzerland and abroad and oftentimes operate a central treasury. Whereas the Capital Adequacy Ordinance (CAO) originally required participations to be deducted from the parent bank’s capital (essentially requiring full capital backing of participations at the level of the parent bank), this was initially counteracted by relief granted to the Swiss G-SIBs and ultimately discarded in favor of risk weighting the participations (resulting in less than full capital backing of participations at the level of the parent bank). The Report recommends that potential measures such as increasing the risk weights on participations in foreign subsidiaries or reverting to the initial approach of fully deducting participations from eligible capital be explored further. Such changes could be implemented by way of amending the CAO. While applicable to all SIBs, the greatest impact would likely be felt by G-SIBs with foreign subsidiaries.

Further recommendations are to include forward-looking elements in institution-specific Pillar 2 capital surcharges/add-ons and stricter rules on prudent valuation adjustments (PVA). These would also be implemented by way of amending the CAO and apply to all SIBs (with the stricter rules on PVAs extending to all banks).

For some perceived deficiencies regarding the risk-bearing capacity of AT1 instruments, the Report recommends that steps for improvement be initiated at the international level.

D. Field of Action: Early Intervention by FINMA and Recovery

Pursuant to the Report, the Federal Council intends to strengthen the powers and responsibilities of FINMA and the applicability of FINMA measures with respect to early intervention, and to introduce additional requirements applicable to the recovery planning of SIBs.

  • Early Intervention by FINMA: Under the current legislative framework FINMA may order protective measures within the meaning of article 26 FBA and/or initiate formal restructuring proceedings in accordance with article 28 et seqq. FBA if a bank is at risk of becoming insolvent. A risk of insolvency exists if there is a reasonable concern that a bank is overindebted or has serious liquidity problems, or if the bank no longer meets the capital requirements after the deadline set by FINMA. The Federal Council has concluded that in the recovery phase, i.e., in a crisis prior to the respective bank being at risk of insolvency, FINMA can only rely on its general supervisory and intervention powers under the Financial Market Supervisory Act.
    In light of this regulatory framework and in consideration of the fact the more progressed a bank crisis is, the more difficult it becomes to successfully stabilize a bank, the Federal Council intends to implement additional measures allowing FINMA to intervene at an earlier stage in a crisis, in particular during the recovery phase. The Federal Council, therefore, suggests establishing a legal basis, potentially modelled on article 51 of the Federal Insurance Supervisory Act, to strengthen FINMA’s early intervention options. Based on these regulatory amendments FINMA should, pursuant to the Federal Council, in future be permitted to implement early intervention measures as part of the recovery process. The Report does not specify at which stage FINMA will be permitted to intervene. The Federal Council does, however, conclude that the triggers and timing for early interventions (potentially based on market indicators and stress tests) will need to be defined as clearly as possible.
  • Recovery Plan: Under the current regulatory regime SIBs are required to maintain a recovery plan pursuant to article 64 of the Federal Ordinance on Banks and Savings Institutions (FBO). The recovery plan sets out the measures that the respective SIB will implement based on its own initiative in a crisis scenario, prior to being at risk of insolvency within the meaning article 25 FBA. The recovery plan should, therefore, ensure that the bank can continue its orderly business activity without state intervention by FINMA.
    The Federal Council intends to introduce specific and additional statutory requirements in relation to the recovery plan and its approval by FINMA (e.g., regarding activation of the recovery plan, the scope of recovery measures and their feasibility) under the FBO. In addition, a legal basis will be introduced allowing FINMA to take measures to remedy any deficiencies in the recovery plan (e.g., by means of capital or liquidity surcharges), as provided for under current law in relation to the emergency plan.

E. Field of Action: Ensuring Liquidity in a Crisis

Strengthening the liquidity regime is a focus area of its own in the Report (with a single field of action: ensuring liquidity in a crisis).

In addition to the introduction of a public liquidity backstop (which is the subject of a draft bill already submitted to parliament and only relates to SIBs), the Report assesses a broad variety of potential measures that would apply to all banks:

  • Liquidity requirements: The Report deems the liquidity requirements for SIBs under the recently revised Liquidity Ordinance to already take account of the essential need for action (also in light of a separate review of the new requirements being due by end-2026). For other banks, however, the Report recommends that the review and further strengthening of the liquidity requirements relating to the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) applicable for all banks be addressed at the international level. The Report further recommends an evaluation of general legislation on covered bonds, to facilitate the diversification of funding sources, and proposes enhanced requirements for data processing and provision capabilities, to enable authorities to recognize a liquidity crisis at an early stage.
  • Lender of Last Resort (LoLR): The Report recommends that the existing legal basis and framework conditions be reviewed, specified in greater detail and refined as necessary, with a view to expanding the potential of liquidity provision in a crisis through the LoLR by utilizing both ordinary and emergency facilities, including by way of a regulatory obligation for banks to prepare collateral. The Report also recommends that options for reducing the stigma issue and for increased transferability of liquidity assistance within a banking group be examined and that banks expand access to facilities of foreign central banks as far as possible.

F. Field of Action: Resolution Planning

In the Report, the Federal Council highlights the importance of minimizing the remaining uncertainties, risks and obstacles to resolution and of expanding the resolution measures available to FINMA in restructuring proceedings. The Federal Council has, therefore, identified various measures in the area of resolution planning designed to ensure that resolution is a credible instrument that can be implemented in a wide variety of crisis scenarios with an acceptable level of risk.

  • Legal Basis for Orderly Wind-down: In addition to a full or partial bail-in in accordance with article 30b FBA, in formal restructuring proceedings FINMA is permitted to order a transfer of the bank’s assets or parts thereof to other legal entities or to a bridge bank, a combination with or takeover by other companies, and a change of the bank’s legal form. To date the primary resolution strategy for G-SIBs preferred by FINMA has been a Single-Point-of-Entry Bail-in at the level of the bank holding company (SPoE strategy), enabling the operating entities within the banking group to continue their business activities during the restructuring proceedings.
    Aiming to increase flexibility in restructuring proceedings, the Federal Council intends to include additional restructuring options for FINMA. As part of the expansion of resolution options, the Federal Council states that the existing SPoE strategy could also be adapted. This would not require any changes at statutory level as the existing legal framework already allows FINMA to incorporate options required for an intervention at the level of the operating entities. In addition, the Federal Council, plans to establish an express legal basis for FINMA to implement an «orderly wind-down» (i.e., a restructuring with the intention, not of keeping a SIB alive, but of winding it down over a period of a few years). Creating a legal basis for an orderly wind-down will, pursuant to the Federal Council, address any legal uncertainties relating to such a measure under the existing restructuring framework.
  • Parent Bank Resolution Plan: Under the current legal framework, FINMA prepares a resolution plan for G-SIBs in accordance with article 64(2) FBO. Whilst the emergency plan pursuant to article 60 FBO aims to ensure the continuance of the systemically relevant functions located within the Swiss bank, the resolution plan outlines how the entire financial group can be restructured under formal restructuring proceedings in an orderly manner. Whilst the parent bank is included in the resolution plan, no specific strategy is defined for the orderly resolution of the parent bank.
    Pursuant to the Report, the Federal Council intends to introduce a requirement for G-SIBs to prepare a resolution plan at the level of the parent bank. Under the parent bank resolution plan, it would have to be evidenced how the parent bank could be resolved over a period of one to two years. As with the emergency plan, the bank would have to show, that the financial and organizational interdependencies within the group do not represent an obstacle to resolution. Pursuant to the Federal Council, criteria for FINMA’s review of the resolution plan will need to be defined with potential measure in case of unremedied deficiencies of the resolution plan. Currently, only UBS would be affected by such a requirement.

More generally, the Federal Council proposes to implement measures designed to decrease legal uncertainties surrounding bail-in. Such measures could include simplifying the compensation mechanism for shareholders after a bail-in and abolishing the obstacles to implementing a bail-in from an operational perspective – in particular in cross-border scenarios.

G. Rejected Measures

In addition to the measures identified for implementation or further assessment, the Federal Council evaluated a number of additional measures that it concluded not to further pursue, including:

  • generally increasing capital adequacy requirements through a higher leverage ratio;
  • abolishing AT1 capital instruments;
  • introducing regulatory restrictions on deposit withdrawals by bank customers and amendments to the existing depositor protection regime; and
  • introducing a legal basis for temporary public ownership as an «ultima ratio» instrument.

H. Outlook

The measures proposed by the Federal Council entail comprehensive and wide-ranging changes to the existing Swiss financial market regulatory framework, both at the level of legislation and ordinances. The Federal Council therefore intends to implement the identified measures in a phased approach: In particular, the Federal Council may implement the measures that only require changes at the ordinance level as a first step (e.g., by amending the CAO), as these can be enacted by the Federal Council itself. In a second step, the Federal Council will prepare a dispatch for the amendments to the legislative acts that need to be amended for all other proposed measures. Likely in parallel, the Federal Council will seek to promote certain changes at the international level (e.g., in the area of liquidity requirements). While the Federal Council has emphasized that the proposed measures should be implemented quickly, it has not (yet) provided a specific timeline by which it intends to complete the above steps. In relation to the timeline it should also be noted that on June 8, 2023, the Swiss Parliament decided to appoint a Parliamentary Investigation Committee (PInC) to investigate the management of the authorities in connection with the emergency merger of Credit Suisse with UBS. For the implementation of certain measures the Federal Council intends to take into account the findings of the PInC, which are expected to be published by the end of 2024.

I. Homburger Hub – Regulatory Innovations

The Report and the measures set out thereunder will lead to wide-ranging amendments to the Swiss banking supervisory framework. Whilst the exact form and timing for the implementation of the measures suggested by the Federal Council remain uncertain, the measures will not only affect SIBs but also (to a varying degree) the wider population of Swiss banks. In addition, the Federal Council has recently announced regulatory initiatives in the areas of the revision of the Financial Market Infrastructure Act, prevention of greenwashing and FinTech-regulation. It can, therefore, be expected that the Swiss financial market laws will be subject to numerous changes in the near future.

These regulatory developments will affect various Swiss financial market participants and are worth following closely. In order to ensure that you remain informed and up-to-date, we have established the Homburger Hub – Regulatory Innovations on which we will be sharing regular updates on these regulatory developments. More details and information on how to get access to the Homburger Hub – Regulatory Innovations will follow shortly.