Under the Swiss “too big to fail” (TBTF) regime, the domestic systemically important banks are required to produce emergency plans that are ready to implement within three years of being designated as systemically important. This original deadline expired for PostFinance in 2018, Raiffeisen in 2017 and Zürcher Kantonalbank (ZKB) in 2016. FINMA has granted the banks extensions of these deadlines.
All three banks’ emergency strategy is to recapitalise and continue operations.
Raiffeisen meets the capital requirements for implementing this strategy for the first time. For this purpose, it has issued bail-in bonds over the last few years, which can be converted from debt to equity via a bail-in in an emergency. It meets the remaining requirements for a potential crisis by reserving CET1 (Common Equity Tier 1) and AT1 (Additional Tier 1) capital.
ZKB has not yet built up the required capital in full. However, its plan to build up the funds is still regarded as plausible. The new Banking Act, which came into force on 1 January 2023, now also provides for the possibility to issue additional loss-absorbing bonds for cantonal banks. Thus, ZKB can also issue bail-in bonds. At the beginning of 2023, it began to build up the corresponding funds by issuing bail-in instruments and is planning further issuances in the near future.
In contrast, PostFinance must realign its emergency planning. Last year, Parliament did not act on the proposal to revise the Post Organisation Act and the Federal Decree on the recapitalisation guarantee by the federal government to Swiss Post. In addition, PostFinance must improve its alternative strategy and the area of “operational dependencies”.
Below we discuss the implementation status of the emergency plans and resolution strategies of PostFinance, Raiffeisen and ZKB.
Last year, PostFinance demonstrated a plausible strategy for recapitalisation in the event of an emergency, which was based on the recapitalisation guarantee planned by the Federal Council. This strategy has been rendered obsolete by Parliament’s decision not to approve the Federal Council’s proposals concerning the amendment of the Post Organisation Act and the Federal Decree on the recapitalisation guarantee to Swiss Post. PostFinance must therefore revise its emergency plan.
The emergency plan also needs to be improved in the categories of operational interdependencies and the alternative resolution strategy.
Raiffeisen Group’s resolution strategy to recapitalise and continue operating is influenced by its unique cooperative structure. In the absence of additional measures, FINMA would have to restructure over 200 independent Raiffeisen banks separately if the group was at risk of insolvency. To avoid this, FINMA has statutory powers to merge the Raiffeisen banks into a resolution entity in the event of a crisis and resolve the whole group in a single procedure. If losses are to be imposed on bondholders via a bail-in, the merged resolution entity could additionally be converted into another legal structure.
As at the end of 2022, Raiffeisen has built up the gone concern capital in full, which means that the emergency plan can be deemed ready to implement. It made various bail-in bond issues for this purpose between 2020 and 2022. It meets the remaining requirements by reclassifying CET1 and AT1 from going concern to gone concern capital. The reclassification reserves the capital for recapitalisation in the event of an emergency.
At Zürcher Kantonalbank (ZKB), the canton of Zurich is sole proprietor and liable for all of the bank’s non-subordinated liabilities if the bank’s own resources are insufficient. The canton would therefore be the primary source of funds to recapitalise the bank in a crisis. The emergency plan determines the level of funds required to adequately recapitalise ZKB if the bank was facing a crisis. In order for the emergency plan to be ready to implement, ZKB must set aside at least half of these funds in advance using the capital instruments stipulated in the Capital Adequacy Ordinance. The endowment capital reserves, a Tier 2 bond and the bail-in bonds already issued are currently eligible as additional loss-absorbing funds.
The aggregated value of these instruments currently still falls short of the gone concern capital requirements for a recapitalisation and therefore the emergency plan has not been approved as ready to implement yet. Effective January 2023, the revision of the Banking Act created the legal basis for cantonal banks to issue bail-in debt instruments. Thus, at the beginning of 2023, ZKB began to build up the corresponding funds by issuing bail-in instruments on this basis and is planning further issuances in the near future.