Further development of the Swiss “too big to fail” legislation

Switzerland again played a leading role in 2015 responding to challenges related to financial institutions that are “too big to fail”. In October, the Federal Council decided to introduce higher capital requirements for global systemically important Swiss banks by the end of 2019 and to accelerate the implementation of emergency plans. Switzerland is thus the first country worldwide to introduce binding requirements for the lossabsorbing and recapitalisation capacity of its largest banks in the event of resolution.

Since the financial crisis, the regulatory and supervisory authorities in leading international financial centres have been attempting to lessen the severity of the “too big to fail” problem. The issue is particularly pressing in Switzerland as its financial sector, and in particular its two large banks, account for a significant percentage of GDP. This explains why it was one of the first countries to take action, with Swiss “too big to fail” standards being introduced into the Banking Act on 1 March 2012. From the outset, the Federal Council was to review the provisions within three years and compare them with international standards. In February 2015, the Federal Council published an evaluation report based on the recommendations33 of the expert group headed by Prof. Aymo Brunetti. While this report approved the basic design of the “too big to fail” legislation, it also advocated amending capital requirements and reviewing the implementation of emergency plans. Following publication of the report, the Federal Council called for the FDF, together with the SNB, the SIF and FINMA, to draft proposals for amending the Swiss “too big to fail” standards by the end of 2015. The working group presented its key findings to the Federal Council at the beginning of October.

On this basis, the Federal Council agreed on 21 October 2015 that in future both big Swiss banks, UBS and Credit Suisse, should have significantly more loss-absorbing capital. The aims of the higher capital requirements for these two global systemically important banks are twofold. While goingconcern capital is intended to cope with potential losses from ongoing business activities and prevent insolvency, gone-concern capital ensures the continuation of systemically important functions in the event of resolution. The gone-concern requirements can also be met fully through debt capital, which can be converted into equity if capital reserves (bail-in) prove inadequate.

The public hearing process on the new regulations is scheduled for the first quarter of 2016.

New quantitative and qualitative capital adequacy requirements

In October, the Federal Council passed more stringent requirements for global systemically important banks with regard to leverage ratio and riskweighted assets. Both these requirements are now significantly higher than in 2012. That means both large banks are now to have a total loss-absorbing capacity (TLAC) equivalent to 10% of their total exposure. The leverage ratio acts as a security net, particularly if risk weightings retrospectively turn out to be inappropriate. It is now 5% for going-concern instruments and a further 5% for bail-in capital for resolution (gone concern). The requirement expressed in terms of risk-weighted assets (RWA) should reflect the differing risk profiles of the various investment classes. The risk-weighted requirements now come to 14.3% each for going-concern and gone-concern instruments, giving a total requirement of 28.6%.

The quality of the capital instruments permitted should improve as should the quantitative minimum capital requirements. The going-concern leverage ratio requirement for Common Equity Tier 1 capital, for example, will increase by almost 50% compared to the former regulations.

Mandatory implementation of emergency plans by 2019

In line with the principles-based approach, Switzerland wants to ensure that the systemically important functions of UBS and Credit Suisse can be preserved, supported by realistic emergency plans (recovery and resolution plans) drawn up by the banks themselves. In October, in addition to defining higher capital requirements, the Federal Council set a deadline for implementing emergency plans. By adapting their corporate structures,36 the large banks have already taken the first major steps to being better prepared for resolution in the event of a crisis. However, there are still extensive intra-group interdependencies precluding the smooth continuation of systemically important functions in a crisis. The Federal Council has remedied this deficiency by making the implementation of emergency plans mandatory by the end of 2019.

Switzerland assumes a leading role

The measures approved by the Federal Council in 2015, which include the loss-absorbing capacity of 10% of total assets, will substantially strengthen the capital reserves of the two large banks from 2019 onwards. The Federal Council’s ruling of October 2015 reflects the considerable risks facing Switzerland owing to the size of its large banks in relation to the domestic economy. FINMA welcomes the decision, as it will enhance the resilience of the large banks and the stability of the financial centre. The new, improved “too big to fail” legislation means Switzerland is an international leader when it comes to binding capital requirements.

Setting up of UBS’s and Credit Suisse’s Swiss legal entities

The transfer of domestic business and systemically important functions to independent Swiss legal entities was a major step forward for the two large Swiss banks in 2015.

UBS Switzerland AG

FINMA licensed UBS Switzerland AG as a bank, securities dealer and custodian bank in the second quarter of 2015. Besides the result of FINMA’s review of standard licensing requirements under banking and stock market law, the licensing procedure also requires the fulfilment of specific demands by the global systemically important Swiss banks regarding their capital, liquidity, risk diversification and emergency planning. UBS Switzerland has since commenced operations. The transfer of banking business with private and corporate clients booked in Switzerland means the systemically important functions are all brought together within the Swiss entity. The high-risk investment banking operations of UBS AG have also been segregated. The move to a modular corporate structure significantly strengthens the resolvability of the entire financial group.

Credit Suisse (Switzerland) Ltd

Credit Suisse also plans to transfer its Swiss business from Credit Suisse AG to a separate Swiss legal entity – Credit Suisse (Switzerland) Ltd. This process is already under way for its systemically important functions, which will improve the bank’s resolvability.   

Capital requirements

The new calibration of the Swiss standards includes historic loss values, comparisons with international standards and the risk profile of the big Swiss banks.

 

Eigenmittelanforderungen 

 

(From the annual report 2015)