## 1cheea2019011 - EXECUTIVE SUMMARY

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### Introduction and banking sector size
- FSAP mission dates: January 23 and February 6, 2019.
- Banking sector statistics:
  - Total banking assets: CHF 3,300 billion (about five times Swiss GDP).
  - Switzerland’s market share in global cross-border private banking: more than a quarter.
  - Two G-SIBs (Credit Suisse and UBS) together represent 52 percent of total Swiss market share in terms of deposits and combined total global assets of 260 percent of GDP.
  - Two-thirds of the G-SIBs’ balance sheet comprises foreign assets.
  - Five designated SIBs: CS, UBS, PostFinance, Raiffeisen Group, Zürcher Kantonalbank.
  - Total assets of the three domestic SIBs in aggregate: CHF 513 billion (about 80 percent of Swiss GDP).
  - Other banks: 24 larger regional and cantonal banks; 259 small regional banks focusing on retail activities.

### Institutional framework and roles
- Principal agencies: SNB, FINMA, FDF; esisuisse as self-regulatory deposit insurer.
- SNB:
  - Monetary authority and lender of last resort with explicit mandate to contribute to financial stability.
  - In consultation with FINMA, determines whether a bank is systemically important and applies countercyclical capital buffer to the Federal Council.
  - Determines and oversees systemic FMIs and assesses emergency plans of systemically important banks from the lender-of-last-resort perspective.
  - Does not exercise supervision or resolution functions.
- Information sharing:
  - SNB, FINMA, and FDF have a Memorandum of Understanding (MOU) detailing information exchange and crisis cooperation.
  - esisuisse is not incorporated into system-wide arrangements; it has a bilateral memorandum with FINMA.

### Early intervention and recovery planning — findings and recommendations
- Findings:
  - An explicit early intervention framework addressing material qualitative supervisory concerns is lacking.
  - No formal policy describing which, when, and how relevant information must be exchanged between pertinent divisions.
  - FINMA dedicates less than one FTE to recovery planning out of 25 FTE in GB-R while prioritizing resolution planning (four FTE).
  - Only the five pre-designated SIBs are required to maintain recovery plans; GB-R has approved all five plans and they are updated annually.
- Key recommendations:
  - Craft a written early intervention framework to institutionalize timely intervention while preserving proportionality and equal treatment.
  - Document operational modalities for information exchange and cooperation between pertinent divisions to enhance timeliness of recovery and resolution interventions.
  - Define FINMA recovery plan guidance and require all banks to prepare recovery plans, prioritizing banks with insured deposits above CHF 6 billion and respecting proportionality (size, complexity, interconnectedness).
  - Allocate greater resources to recovery planning within FINMA.

### Resolution powers, planning, and operational preparedness
- Legal and operational status:
  - FINMA’s early intervention, resolution, and liquidation powers are closely aligned with the FSB Key Attributes.
  - Resolution framework established under the BA; BIO-FINMA applies to all banks and relevant group entities.
  - FINMA exercises resolution powers without any ex-ante court involvement; judicial review is ex post and court challenges do not suspend resolution measures.
- Resolution tools available to FINMA:
  - Remove and replace governing bodies; appoint a restructuring agent; impose continuity of important services; transfer assets/liabilities/contracts; establish a bridge bank; establish an asset management vehicle; temporarily stay early termination rights; write down or convert debt (bail-in).
- Operationalization and gaps:
  - FINMA has created playbooks, drafted legal documentation and templates, and prepared a draft restructuring plan; manuals for each resolution power (especially bridge bank) should be established.
  - FINMA has yet to complete group resolution plans for the two G-SIBs and remove several critical impediments to resolvability.
  - Recommendation: Formalize resolution planning requirement for non-SIBs and require them to provide information for planning; accelerate removal of impediments for all five SIBs; empower FINMA to require structural/legal/operational changes to enhance resolvability.

### Bail-in strategy specifics for G-SIBs
- Preferred strategy: single point of entry (SPOE) bail-in at the group holding level.
- Requirements and limits:
  - G-SIBs required to hold additional funds in bail-inable bonds issued by the group holding company, governed by Swiss law and subordinate to issuer’s other liabilities.
  - A bail-in cannot include secured, privileged (including insured deposits), and off-settable claims.
  - Before any conversion, share capital must be completely written down and CoCos (AT1), T2 debt and TLAC must be converted or written down as well.
- Operational details:
  - 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 is sold to Swiss institutional clients.
  - FINMA and the G-SIBs have drafted playbooks with central security depositories and the Swiss stock exchange SIX to operationalize bail-in.
  - Bail-inable bonds held in the U.S. require further discussions with U.S. authorities.

### Depositor insurance (DIS) — current setup, planned reforms, and recommendations
- Current DIS (esisuisse) characteristics:
  - Privately run, ex-post funded, narrow pay-box scheme; coverage up to CHF 100,000 per depositor and per bank.
  - Cannot be used to fund resolution measures (e.g., transfer of deposits).
  - BA caps the maximum amount all banks together are obligated to contribute to esisuisse at CHF 6 billion.
  - Two non-bank deposit-taking institutions are not members: COOP and the Federal Employees Savings (part of FDF).
  - In practice payouts have taken over a month; no statutory payout period exists.
- Planned reforms under public consultation (March 2019) — proposed elements:
  - Partial ex-ante DIS funding: 50 percent of banks’ maximum contribution collateralized by securities or cash held at SIX; remaining 50 percent ex-post financed.
  - Replace CHF 6 billion cap with a dynamic cap at 1.6 percent of insured deposits but not less than CHF 6 billion.
  - Seven-day payout period starting when the liquidator receives payout instructions from the depositor; esisuisse required to provide funding (if needed) within 7 days.
  - Mandatory single customer view; banks required to have infrastructure to support seven-day payout.
- Assessment and IMF recommendations:
  - Proposed changes would be an improvement but would not fully align with IADI Core Principles.
  - Recommended reforms to include:
    - Establish a DIA as a public-sector entity with statutory mandate and exclude active bankers from its board.
    - Grant the DIA a pay box plus mandate to fund resolution measures subject to safeguards (least-cost test).
    - Remove any DIS cap—neither static (CHF 6 billion) nor dynamic (1.6 percent).
    - Introduce ex-ante funding with a target level sufficient for simultaneous payouts of several midsize banks, supplemented by government back-up.
    - Legally prescribe a seven-day payout deadline triggered by bank failure; require single customer view subject to audits and testing.
    - Make the two currently exempt deposit-taking institutions regular DIS members.
    - Regularly assess public awareness and run communication campaigns.
- Resolution funding gap:
  - Switzerland lacks a separate resolution fund or resolution funding mechanism; funding would otherwise need to come from government in a crisis.
  - Changing esisuisse’s mandate and funding could help but would be limited and slow to build.
  - Recommendation: Establish an ex-post resolution funding mechanism allowing temporary public financing for resolution with recovery from banks later, consistent with FSB Key Attributes.
  - Preconditions: advance procedure to determine systemic institution and need for temporary public funds; mechanism to ensure prompt availability of public funds; legal linkage for recovery from firms’ stakeholders and levies; government (not SNB) as appropriate provider of temporary public funding.

### Official financial support and Emergency Liquidity Assistance (ELA)
- ELA framework and conditions:
  - SNB can provide ELA as lender of last resort under the Federal Act on the Swiss National Bank; SNB can—but is not obliged to—provide ELA.
  - Conditions to qualify include systemic importance, solvency opinion from FINMA, and sufficient collateral as determined by SNB.
  - Eligible collateral currently includes Swiss residential mortgages and securities (subject to eligibility criteria); ELA can be provided in CHF or main foreign currencies with no formal volume limit provided sufficient collateral exists.
  - ELA arrangements are in place with the five designated SIBs; SNB annually tests capability to select and transfer eligible collateral.
  - Since the 2014 FSAP, SNB has not received any ELA requests; ELA could be provided within a day once requested.
  - SNB would be able to provide ELA to a bank in resolution as bail-in aims to restore solvency.
- Recommendations:
  - SNB should simulate internal procedures and cooperation with FINMA for ELA application and execution periodically.
  - SNB should issue policies and procedures to support ELA provision to any bank potentially systemic under certain circumstances.
  - SNB should issue guidance on ELA requirements and procedures to allow non-SIBs to prepare, while retaining full discretion on granting ELA.
  - SNB should broaden eligible ELA collateral to include other non-marketable instruments (for example, corporate loans) and help banks preposition such collateral, conditional on SNB discretion.
- Transparency issue:
  - Little public information on ELA requirements and procedures is available, hampering non-SIB preparation.

### Contingency planning, crisis management, and cross-border cooperation
- Domestic arrangements:
  - Tripartite MOU (FDF, SNB, FINMA) governs crisis management cooperation and establishes:
    - Steering Committee (Head of FDF chair, SNB Chairman, FINMA Chairman) for strategic coordination — platform without decision-making powers.
    - Committee on Financial Crises (chaired by FINMA CEO) for preparatory coordination — meets once or twice a year in peacetime.
  - Gaps and recommendations:
    - A national contingency plan and a national crisis communication plan are missing.
    - Advance crisis preparedness under Steering Committee oversight with a national contingency plan, crisis communication plan to ensure a single voice, and regular multi-agency simulation exercises including cross-border exercises with CMG members.
    - Authorities should conduct simulation exercises including top-level staff and executives and prepare a crisis compendium and communications plan.
- Role of deposit insurer in crisis management:
  - esisuisse is not a full participant in crisis preparedness; FINMA currently provides only general warnings to esisuisse.
  - Recommendation: After establishing a public DIA, integrate it fully into crisis management arrangements and testing exercises.
- Cross-border cooperation:
  - Crisis Management Groups (CMGs) are operational for both Swiss G-SIBs, chaired by FINMA and involving host authorities (U.S., U.K.); COAGs in place.
  - CMG functions include preparing group-wide resolution strategies, assessing impediments to resolvability, preparing playbooks and table-top exercises.
  - FINMA convenes multi-day CMG meetings three times a year and exchanges information with additional host jurisdictions.

### TBTF regime (Appendix I) — structure and requirements
- Regime components:
  - Stricter going-concern capital and liquidity requirements.
  - Resolution framework providing for orderly resolution and sufficient gone-concern loss-absorbing capacity.
- Capital and loss-absorbing capacity requirements:
  - Minimum going concern capital for the two G-SIBs: 10 percent Common Equity Tier 1 (CET) plus an additional 4.3 percent of tier 1 capital.
  - Gone concern loss-absorbing capacity (GLAC) for G-SIBs: 14.3 percent (before any rebate).
  - Total loss-absorbing capacity (TLAC) requirement: currently roughly 26 percent (including rebates).
  - For three domestically focused SIBs: RWA-requirement between 12.86 and 13.22 percent; they must fulfill 40 percent of the gone concern capital requirements applicable to CS and UBS.
- Rebates and incentives:
  - FINMA may grant rebates on additionally required loss-absorbing funds for resolvability improvements.
  - Rebates assessed annually and based on effectiveness of measures (structural, separation of services, compliance with bail-inable debt capacity).
- Governance and evaluation:
  - Federal Council required to evaluate TBTF regime every two years; last evaluation adopted June 2017 concluded no fundamental adaptation needed and recommended extending reduced gone concern capital requirements to the three domestically focused SIBs (rule effective 1 January 2019).

### Selected main recommendations and priorities (high-level)
- Early intervention and recovery planning:
  - Establish explicit early intervention framework (FINMA; ¶15). Timing: MT; Priority: M.
  - Formalize information exchange operational modalities (FINMA; ¶15). Timing: ST; Priority: M.
  - Define recovery planning policies including proportionality criteria and require recovery plans starting with banks with insured deposits above CHF 6 billion (FDF/FINMA; ¶17). Timing: ST; Priority: M.
  - Prioritize more in-depth recovery planning for targeted banks and allocate more FINMA resources (FINMA; ¶18). Timing: ST; Priority: H.
- Resolution powers and planning:
  - Formalize resolution planning requirement for non-SIBs and require information provision (FDF, FINMA; ¶27). Timing: ST; Priority: H.
  - Accelerate removal of resolvability impediments for all five SIBs (FINMA; ¶32). Timing: ST; Priority: H.
  - Empower FINMA to require structural changes to enhance resolvability (FDF; ¶33). Timing: ST; Priority: H.
- Deposit insurance and resolution funding:
  - Establish a public DIA with statutory mandate and exclude active bankers from its board; give DIA pay box plus mandate to fund resolution measures subject to safeguards (FDF; ¶41). Timing: ST; Priority: H.
  - Replace CHF 6 billion cap and introduce ex-ante deposit insurance fund sufficient for simultaneous payouts, supplemented by government back-up (FDF; ¶41). Timing: ST; Priority: H.
  - Prescribe a seven-day payout deadline for protected deposits starting from closure of the bank and require single customer view and regular payout capability testing (FDF/FINMA; ¶41). Timing: ST; Priority: H/M.
  - Establish a resolution funding mechanism in line with FSB Key Attributes relying on pay box plus mandate for the DIA and ex post recovery from banks of temporary public financing costs (FDF; ¶42-43). Timing: ST; Priority: H.
- Official financial support and ELA:
  - Broaden eligible ELA collateral while preserving SNB discretion (SNB; ¶47). Timing: ST; Priority: M.
  - Issue ELA guidance to enable ELA at short notice to other banks beyond the five SIBs and simulate SNB-FINMA coordination (SNB/FINMA; ¶46-47). Timing: ST/MT; Priority: M.
- Contingency planning:
  - Under Steering Committee oversight, advance crisis preparedness with national contingency and crisis communication plans and regular simulation exercises (FINMA/SNB/FDF; ¶50). Timing: ST; Priority: M.
  - After establishing a public DIA, integrate it fully into crisis management arrangements (FINMA/SNB/FDF; ¶51). Timing: MT; Priority: H.

*Source: EXECUTIVE SUMMARY of the FSAP note for Switzerland (content unit 1cheea2019011).*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### 1cheea2019011 - EXECUTIVE SUMMARY

### Introduction
- Review covers Swiss financial safety net and crisis management arrangements, focusing on the authorities’ ability to deal with failing and potentially failing banks and preparations for financial distress and crisis; based on FSAP mission during January 23 and February 6, 2019.
- Switzerland banking sector statistics:
  - Total banking assets: CHF 3,300 billion (about five times Swiss GDP).
  - Switzerland’s market share in global cross-border private banking: more than a quarter.
  - Two G-SIBs (Credit Suisse and UBS) together represent 52 percent of total Swiss market share in terms of deposits and combined total global assets of 260 percent of GDP.
  - Two-thirds of the G-SIBs’ balance sheet comprises foreign assets.
  - Five designated SIBs: CS, UBS, PostFinance, Raiffeisen Group, Zürcher Kantonalbank.
  - Total assets of the three domestic SIBs in aggregate: CHF 513 billion (about 80 percent of Swiss GDP).
  - Other banks: 24 larger regional and cantonal banks; 259 small regional banks focusing on retail activities.

### Institutional framework
- Main institutions: SNB, FINMA, FDF (official agencies) and esisuisse (self-regulatory body).
- SNB roles:
  - Monetary authority and lender of last resort with an explicit mandate to contribute to financial stability.
  - In consultation with FINMA, determines whether a bank is systemically important and applies countercyclical capital buffer to the Federal Council.
  - Determines and oversees systemic FMIs; assesses emergency plans of systemically important banks from the lender-of-last-resort perspective.
  - Does not exercise supervision or resolution functions.
- Information-sharing arrangements:
  - SNB, FINMA, and FDF have a Memorandum of Understanding (MOU) detailing information exchange and crisis cooperation.
  - esisuisse is not incorporated into system-wide arrangements; it has a bilateral memorandum with FINMA.

### Early intervention and recovery planning
- Finding: An explicit early intervention framework addressing material qualitative supervisory concerns is lacking; a written framework would enhance timely interventions while preserving proportionality and equal treatment.
- Information sharing: No formal policy describing which, when, and how relevant information must be exchanged; operational modalities should be documented to enhance timely recovery and resolution interventions.
- FINMA RRP efforts:
  - Significant resources spent operationalizing RRP with focus on the two G-SIBs.
  - Since 2016, a dedicated Recovery and Resolution Division (GB-R) consolidates expertise.
  - Two G-SIBs restructured under non-operating holding companies and issued bail-inable bonds to support SPOE strategy.
  - G-SIBs to finalize Swiss emergency plans this year; preparations to operationalize bail-in are well advanced.
  - FINMA has yet to complete G-SIBs’ (group) resolution plans and remove several critical obstacles to resolvability.
  - CMG roadmaps to remove resolvability impediments by end-2021 are welcomed and should be accelerated.
- RRP scope and intensity recommendations (summarized):
  - Require recovery plans from all banks respecting proportionality, starting with banks with insured deposits above CHF 6 billion.
  - Intensify recovery planning for the five SIBs; allocate more resources to recovery planning.
  - Extend RRP requirements to a wider set of banks; FINMA should prepare resolution plans for certain non-SIBs.
  - Empower FINMA to require banks subject to resolution planning to revise legal and operational structure to enhance resolvability.

### Resolution powers and planning
- Alignment: FINMA’s early intervention, resolution, and liquidation powers are closely aligned with the FSB Key Attributes.
- TBTF regime components:
  - Strict going-concern capital and liquidity requirements.
  - Framework for orderly resolution of systemic banks.
- Notable absence: No resolution funding mechanism in the current framework.
- Legal and operational recommendations:
  - Formalize resolution planning requirement for non-SIBs and require them to provide information for planning.
  - Accelerate removing impediments to resolvability for all five SIBs.
  - Empower FINMA to require structural changes to enhance resolvability.
  - Strengthen operational resolution framework with manuals for each resolution power, including the bridge bank tool.
  - Elevate provisions of BIO-FINMA into statutory law to enhance legal certainty (currently under discussion).

### Depositor insurance and resolution funding
- Current DIS (esisuisse) characteristics and shortcomings:
  - Privately run, ex-post funded, narrow pay-box scheme.
  - Not compliant with international standards; cannot be used to fund resolution measures (e.g., transfer of deposits).
  - Not fully incorporated into the national safety net and crisis management arrangements.
- Recommended DIS reforms:
  - Thorough reform warranted: introduce a public deposit insurer (DIA) with statutory mandate and ex-ante funding.
  - Abolish the cap of CHF 6 billion and set an ex-ante fund target level based on a thorough risk-and-financial-needs analysis; complemented by government backstopping.
  - Allow DIA a pay box plus mandate to fund resolution measures subject to safeguards (least cost test).
  - Make two currently exempt deposit-taking institutions formal DIS members.
  - Prescribe in law a seven-day payout deadline for protected deposits starting from the closure of the bank.
  - Require banks to produce a single customer view, subject to regular mandatory audits, and regularly test payout capabilities.
  - Regularly measure public awareness levels of the DIS to assess effectiveness of public awareness activities.
- Resolution funding gap:
  - Framework lacks resolution funding other than resources from the firm and its shareholders and creditors.
  - Even if esisuisse’s mandate changed, funding would be limited and slow to build; authorities should establish an ex post resolution funding mechanism allowing recovery from banks of temporary public financing costs to facilitate resolution.

### Official financial support (including Emergency Liquidity Assistance)
- ELA preparedness and transparency:
  - SNB should issue policies and procedures to provide ELA to any bank that could be deemed systemic under certain circumstances.
  - Currently, little public information on ELA requirements and procedures, hampering non-SIB preparation.
- Recommendations on ELA:
  - Broaden eligible ELA collateral to include other non-marketable instruments (for example, corporate loans), while SNB retains full discretion on accepted collateral.
  - Issue guidance on ELA requirements to make ELA available at short notice—and at SNB’s discretion—to other banks than the five SIBs, particularly banks targeted by the CHF 6 billion recommendation.
  - Simulate SNB’s internal procedures and coordination with FINMA for application and execution of ELA, including to non-SIBs.

### Contingency planning and crisis management
- Systemwide preparedness gaps:
  - A national contingency plan, including crisis communication, is missing.
  - esisuisse is not a full member of crisis management and preparedness arrangements.
- Recommended actions:
  - Under the Steering Committee for Crisis Management oversight, advance crisis preparedness with:
    - A national contingency plan.
    - A national crisis communication plan to ensure agencies speak with “one voice” using the same facts and assumptions.
    - Regular multi-agency financial crisis simulation exercises, complemented with cross-border exercises, particularly with CMG members.
  - After establishing a public DIA, make it a full member of arrangements and activities for crisis management and preparedness.
  - Test readiness with financial crisis simulation exercises.

### Main recommendations (selected highlights from Table 1)
- Early intervention and recovery planning:
  - Establish an explicit early intervention framework (FINMA; ¶15). Timing: MT; Priority: M.
  - Formalize operational modalities for information exchange and cooperation between pertinent divisions (FINMA; ¶15). Timing: ST; Priority: M.
  - Define formal policies for recovery planning, including proportionality criteria (FINMA; ¶17). Timing: ST; Priority: M.
  - Require recovery plans from all banks starting with banks with insured deposits above CHF 6 billion (FDF/FINMA; ¶17). Timing: ST; Priority: M.
  - Prioritize more in-depth work and resources for recovery planning for targeted banks (FINMA; ¶18). Timing: ST; Priority: H.
- Resolution powers and planning:
  - Formalize resolution planning requirement for non-SIBs (FDF, FINMA; ¶27). Timing: ST; Priority: H.
  - Accelerate resolvability of all five SIBs and remove impediments (FINMA; ¶32). Timing: ST; Priority: H.
  - Empower FINMA to require banks to change legal/operational structure to enhance resolvability (FDF; ¶33). Timing: ST; Priority: H.
- Deposit insurance and resolution funding:
  - Establish a DIA as a public entity with statutory mandate and exclude active bankers from its board (FDF; ¶41). Timing: ST; Priority: H.
  - Give the DIA a pay box plus mandate to fund resolution measures subject to safeguards (FDF; ¶41). Timing: ST; Priority: H.
  - Replace cap of CHF 6 billion and introduce an ex-ante deposit insurance fund sufficient for simultaneous payouts, supplemented by government back-up (FDF; ¶41). Timing: ST; Priority: H.
  - Prescribe a seven-day payout deadline for protected deposits starting from closure of the bank (FDF; ¶41). Timing: ST; Priority: M.
  - Require single customer view and regular payout capability testing (FDF/FINMA; ¶41). Timing: ST; Priority: H.
  - Establish a resolution funding mechanism in line with FSB Key Attributes relying on a pay box plus mandate for the DIA and ex post recovery from banks of temporary public financing costs (FDF; ¶42-43). Timing: ST; Priority: H.
- Official financial support and ELA:
  - Broaden eligible ELA collateral while preserving SNB discretion (SNB; ¶47). Timing: ST; Priority: M.
  - Issue ELA guidance to enable ELA at short notice to other banks beyond the five SIBs (SNB; ¶47). Timing: ST; Priority: M.
  - Simulate SNB-FINMA coordination for ELA application and execution (SNB/FINMA; ¶46). Timing: MT; Priority: M.
- Contingency planning:
  - Under Steering Committee oversight, advance crisis preparedness with national contingency and crisis communication plans and regular simulation exercises (FINMA/SNB/FDF; ¶50). Timing: ST; Priority: M.
  - After establishing a public DIA, integrate it fully into crisis management arrangements (FINMA/SNB/FDF; ¶51). Timing: MT; Priority: H.

*Source: EXECUTIVE SUMMARY of the FSAP note for Switzerland (content unit 1cheea2019011).*

### 6.      FINMA is both supervisory and resolution authority. It is responsible to protect the

### 6. FINMA is both supervisory and resolution authority. It is responsible to protect the

### FINMA’s role and organization
- FINMA is responsible to protect the functioning of financial markets; to supervise the banking, insurance, and securities sectors, using a principles-based approach; and FINMA is also—if not formally designated as such—the resolution authority for licensed entities and systemic FMIs.
- In 2016, FINMA established a recovery and resolution division, GB-R, pooling pertinent expertise that had been scattered throughout FINMA.
- GB-R responsibilities:
  - Recovery and resolution planning and international cooperation thereof.
  - Approval of emergency plans drawn up by the SIBs.
  - Intervene and accompany restructuring efforts of a problem bank, manage resolutions and conduct (or monitor if delegated to a third person) the liquidation of banks under the insolvency law.
  - Responsible for all tasks concerning the Swiss DIS.
- Staffing and reporting:
  - GB-R has a staff of about 25 full time equivalents (FTE) but can draw on support from other divisions (especially banking supervision).
  - The head of the division is a member of the FINMA Executive Board and reports directly to FINMA’s CEO.

### Government roles and deposit insurance
- The Federal Department of Finance (FDF) is responsible for financial stability policies and relevant laws and ordinances.
- The State Secretariat for International Finance represents Switzerland's interests in financial, monetary and tax matters and is responsible for implementing the Federal Council’s financial market policy.
- esisuisse (self-regulatory body) provides protection for deposits booked in Switzerland up to CHF 100,000 per depositor and per bank.
  - The deposit insurer operates under a narrow pay box mandate and is ex-post financed.
  - It would only become active if the insured depositors cannot be compensated fully out of the remaining liquidity in the failed bank.
  - The payout of insured deposits is executed by the liquidator under supervision of FINMA.

### TBTF regime and systemic bank resilience
- Since the Global Financial Crisis, the two G-SIBs have strengthened resilience by implementing measures under the Swiss “Too big to fail” (TBTF) regime.
- The regime consists of two components:
  - Stricter going-concern capital and liquidity requirements.
  - A resolution framework providing for orderly resolution by giving FINMA resolution powers and tools, and requiring sufficient loss-absorbing capacity in a gone concern perspective.
- Objective: these measures are designed so that no public funding is needed in the event of a crisis.

### Early intervention powers and practice
- FINMA has a broad range of enforcement and early intervention powers to deal with problem banks; tools include ordering action to restore compliance and precautionary measures up to withdrawal of license, liquidation and bankruptcy.
- FINMA publishes an annual enforcement report with anonymized case studies documenting enforcement practice.
- Legal bases and authorities:
  - FINMA can act to restore a bank’s compliance when aware of a violation (Art. 31 Financial Markets Supervision Act [FINMASA]).
  - FINMA can appoint an investigating agent within the institution that breaches the law (Art. 36 FINMASA).
    - The agent can implement FINMA’s supervisory measures, explore restructuring options, or replace management bodies; costs borne by the supervised entity.
  - FINMA can order protective measures under the BA (Art. 26 BA) when reasonable grounds exist to expect that (i) the institution is over-indebted; (ii) has serious liquidity problems; or (iii) does not fulfill the capital adequacy requirements after a deadline set by FINMA.
    - Possible measures include issuing instructions to governing bodies; appointing an investigator; stripping governing bodies of representation and removing them; changing the auditor; limiting business activities; forbidding payments or securities transactions; ordering a determent of payments or payment extension; or closing down the bank.
    - Precautionary measures are enforceable immediately and a court appeal does not suspend their effect.
- Internal escalation and timing:
  - FINMA has an internal escalation mechanism to move responsibility for a problem bank from the supervision division to GB-R.
  - Transfer to GB-R usually takes place six months before resolution measures need to be taken.
  - After transfer, GB-R evaluates financial status, monitors financial and operating figures (e.g., by imposing advance and more frequent reporting duties), takes protective measures, supports bank-led restructuring while preparing resolution options including liquidation.

### Gaps and recommendations on early intervention
- Observed gaps:
  - An explicit early intervention framework addressing material qualitative supervisory concerns is lacking.
  - Lack of legal clarity on triggers and types of measures increases probability of legal challenges and could generate supervisory forbearance.
  - No formal policy describing which, when, and how relevant information must be exchanged between pertinent divisions.
- Recommendations:
  - Craft a written framework to enhance and institutionalize timely intervention while adhering to proportionality and equal treatment.
  - Ensure law gives guidance on triggers and types of measures, balancing discretion with legal certainty.
  - Document operational modalities for information exchange and cooperation to enhance timeliness of recovery and resolution interventions.

### Recovery planning: scope, practice, and recommendations
- Current scope:
  - Only the five pre-designated SIBs are required to maintain recovery plans.
  - GB-R has approved all five plans; plans are subject to regular annual updates.
  - Initial assessments engaged external audit firms; FINMA now reviews them without external support.
  - FINMA has issued individual guidance to each SIB but has yet to formalize general expectations in a policy document.
- Resource allocation:
  - FINMA prioritizes resolution planning (with four FTE) while dedicating less than one FTE to recovery planning—out of a total 25 FTE in GB-R.
- Recommendations:
  - FINMA should define its own recovery plan guidance and ask all banks to prepare plans.
    - Guidance should ensure consistency of impact assessment across banks while scenarios remain firm specific.
    - Supervisory guidance should focus on types of scenarios (market-wide and idiosyncratic; slow-moving and fast-burn etc.) and severity, rather than prescribing uniform scenarios.
    - Requirement should be rolled out to all banks, prioritizing banks with insured deposits over and above the CHF 6 billion DIS cap.
    - Recovery planning should respect proportionality criteria based on size, complexity, and interconnectedness.
  - FINMA should allocate greater resources to recovery planning given its role in preventing banks from entering resolution.

### Resolution powers and planning
- Legal framework:
  - Resolution framework established under the BA; Banking Insolvency Ordinance (BIO-FINMA) applies to all banks and relevant group entities.
  - Several recommendations from the 2014 FSAP were implemented; further statutory revisions are under discussion to elevate provisions from FINMA ordinance to federal law.
- Box 1: Reforms since 2014 FSAP (key elements implemented and proposed)
  - Implemented:
    - Scope now includes (non-bank) group holding companies and non-regulated operational entities.
    - Bail-inable bonds required to be issued in Switzerland and governed by Swiss law.
    - FINMA has explicit statutory powers to (i) write down or convert debt in resolution; (ii) stay early termination rights; and (iii) exchange information for resolution-related purposes with foreign authorities.
  - Proposed revisions (FDF public consultation March 2019) aim to incorporate BIO-FINMA provisions into the BA, including:
    - Establishing the sequence of the bail-in measure (“bail-in waterfall”) in primary law and regulating the tool in more detail.
    - Limiting the rights of new shareholders after a bail-in for a specified amount of time.
    - Detailing the content of the restructuring plan.
    - Limiting legal action of affected shareholders and creditors against resolution decision.
    - Addressing compensation for written-down shareholders in certain cases.
    - Giving explicit statutory authority to FINMA to depart from pari passu treatment of creditors when exercising resolution powers.
    - Allowing FINMA not to publish protective measures if publication would defeat the purpose of the resolution.
  - Amendments to the DIS are part of the same legal package and are expected to enter into force in 2020.

### Resolution triggers, principles, and tools
- Triggers and assessment:
  - GB-R assesses whether the bank is failing, likely to fail, or non-viable (Article 26 BA).
  - 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).
  - FINMA should specify resolution triggers further in internal policy documents to ensure early triggering of resolution measures.
- Resolution principles:
  - Resolution decree includes a restructuring plan based on prudent valuation, loss-absorbency by shareholders first, respect for creditor hierarchy, and the no-creditor-worse-off principle.
  - After approval, the restructuring plan becomes enforceable; no shareholder approval is necessary.
  - For systemic banks, creditors cannot reject the restructuring plan.
  - For non-systemic banks, creditors can reject the plan within a FINMA-set deadline; if a majority object, the bank is placed in liquidation.
- Resolution powers and tools available to FINMA:
  - Remove and replace governing bodies or issue instructions to them.
  - Appoint an administrator (“restructuring agent”).
  - Impose continuity of important services on relevant entities.
  - Transfer assets, liabilities and contracts to other legal entities or to a bridge bank.
  - Establish a bridge bank.
  - Establish a separate asset management vehicle.
  - Temporarily stay the exercise of early termination rights.
  - As a last resort to prevent insolvency, order a compulsory conversion or a write-down of debt (bail-in).
    - Note: as part of the reform package it is planned to drop the “last resort” requirement.

### Bail-in strategy for G-SIBs and operational preparedness
- Preferred strategy:
  - FINMA’s preferred resolution strategy for the two G-SIBs is the single point of entry (SPOE) bail-in at the group holding level.
  - The two G-SIBs are required to hold additional funds in the form of bail-inable bonds.
    - To count as additional funds, bonds must be issued by the group holding company, be subject to Swiss law and jurisdiction, and be subordinate to the issuer’s other liabilities.
- Limitations and order of write-down/conversion:
  - A bail-in cannot include secured, privileged (including insured deposits), and off-settable claims.
  - Before any conversion, share capital must be completely written down and CoCos (AT1), T2 debt and total loss-absorbing capacity (TLAC) must be converted or written down as well.
- Operational steps taken:
  - FINMA and the two G-SIBs have drafted legal documentation, entered contracts, and drafted playbooks with central security depositories and the Swiss stock exchange SIX to operationalize bail-in (identifying bond holders, canceling old shares, delivering new shares).
  - Bail-inable bonds held in the U.S. require further discussions with U.S. authorities to understand U.S. processes and requirements in the context of a bail-in ordered by FINMA.

### Liquidation and FINMA’s role in insolvency
- FINMA is the sole authority that may initiate liquidation proceedings against a Swiss bank.
- When initiating insolvency proceedings, FINMA appoints a liquidator under its supervision; in rare cases FINMA may carry out the liquidator’s duties itself.
- Once the liquidator is appointed, FINMA’s role is coordination and supervision, including on-site visits and audits, and FINMA can give binding orders to the liquidator.
- FINMA was able in a recent case to sell assets including insured deposits from the liquidation estate to an acquiring bank quickly after the bank was closed.

*Source: 1cheea2019011 - 6. FINMA is both supervisory and resolution authority. It is responsible to protect the*

### 24.      FINMA exercises resolution powers without any ex-ante court involvement. While the

### 24.      FINMA exercises resolution powers without any ex-ante court involvement. While the

### Resolution powers and judicial review
- FINMA exercises resolution powers without any ex-ante court involvement.
- The approval of the restructuring plan can be challenged in court, but such challenges would not suspend resolution measures; courts may only award compensation.
- Courts cannot suspend, or delay resolution actions taken by FINMA.
- FINMA's actions are subject to ex post judicial review.
- The Federal Administrative Court as the competent court of first instance can review both the legal prerequisites and the appropriateness of the decisions taken by FINMA.

### Operationalizing the resolution framework
- Since the 2014 FSAP, FINMA has invested considerable resources to operationalize the resolution framework and to execute the preferred resolution strategy for the two G-SIBs through a bail-in.
- FINMA has created playbooks and other documentation, such as a draft restructuring plan as well as templates and timelines for resolution.
- To strengthen operational readiness FINMA should establish manuals for all resolution powers, particularly for the bridge bank tool, which raises questions of governance (ownership) and licensing requirements that should be discussed and decided in advance.
- Footnote detail: 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 is sold to Swiss institutional clients; both institutions have an internal policy not to sell these bonds to retail customers.

### Emergency plans and resolution planning (B)
- FINMA has yet to establish resolution plans for all SIBs (the only banks subject to this requirement).
- FINMA has issued individual guidance specifying information banks must submit for resolution planning; banks provide data and concrete resolution options and scenarios while FINMA retains full authority over plan content and incorporation of submitted information.
- FINMA has no internal general policies and guidelines on resolution planning.
- FINMA is in charge of the global resolution plans of the two G-SIBs and has established a first iteration that needs to be completed and operationalized in the next three years.
- Annually, banks are required to submit information and data for resolution planning, or when requested by FINMA.

Findings and recommendations:
- All banks that could become systemic under particular circumstances should be required to provide pertinent resolution planning information to FINMA.
- FINMA drafted simplified resolution plans for nine category-3-banks without being legally required to do so; these were desk-top exercises based on public or supervisory information without bank interaction.
- FINMA should expand resolution planning to banks with insured deposits over the CHF 6 billion DIS cap and other banks that could be systemic in a system-wide crisis; the requirement should be formalized and legally mandated.

Emergency plans for SIBs:
- The SIBs are required to submit emergency plans for their Swiss operations and businesses that lay out how uninterrupted operation of systemically important functions or entities for Switzerland can be maintained in the event of insolvency.
- Emergency plans act as a fallback if resolution plans fail; they helped increase groups’ resolvability and serve as an important source for FINMA’s resolution planning.
- FINMA is responsible for the definitive assessment and approval of emergency plans and examines whether:
  - (i) continuation of systemically important functions is technically and organizationally ensured;
  - (ii) legal and financial relations within the group do not obstruct continuation of these functions;
  - (iii) capital and liquidity planning foresees sufficient capital and liquidity to carry on the functions and implement the plan;
  - (iv) suitable processes, infrastructure and human resources exist to operate the functions;
  - (v) intra-group agreements related to continuation of the functions are recorded;
  - (vi) the emergency plan is compliant with relevant foreign laws and regulatory requirements.
- Emergency plans must be updated annually.
- 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 authority to designate bank functions as systemically important; identified functions include domestic deposits and lending activities and domestic payment transactions.

Status and barriers:
- None of the five SIBs has an approved emergency plan.
- A first round of emergency plans from the three domestically focused D-SIBs was reviewed and FINMA asked all three to improve plans and address deficiencies; main obstacle: lack of gone concern capital for the resolution strategy set out in the emergency plan.
- For the two G-SIBs, strong operational interdependencies and financial ties between Swiss subsidiaries and other group companies complicated implementation of emergency plans.
- Emergency plans of the two G-SIBs are required by the BO to be finalized in 2019.

Powers to require structural changes:
- FINMA can require banks to make changes in legal and operational structure based on deficiencies identified in emergency plans.
- FINMA undertakes a “resolvability assessment” when assessing SIB emergency plans and can set deadlines for removal of impediments before using its powers.
- Possible powers include creation of an independent legal entity in Switzerland to host systemically important functions or adjustment of legal and operational structure.
- Banks have a right to appeal FINMA’s decision.
- So far FINMA has not exercised this power; SIBs have implemented changes through supervisory dialogue and TBTF regime incentives (for example, establishment of a holding structure).

### Resolvability assessment (C)
- FINMA implicitly has the power to assess SIBs’ resolvability.
- FINMA conducts resolvability assessments in line with the FSB Resolvability Assessment Process (RAP) for its G-SIBs, applying the FSB template and requiring G-SIB self-assessments which FINMA scrutinizes to inform RAP letters to the FSB chair.
- Both G-SIBs’ resolvability has been improved through organizational measures, including a non-operational holding company and separate service companies to ensure continuation of critical services in resolution and to support the SPOE resolution strategy.

Outstanding resolvability impediments and recommendations:
- Further progress is needed to improve overall resolvability of all five SIBs; FINMA and CMG members agreed to address open issues within the next three years based on a roadmap to remove resolvability impediments by end-2021, though the work should be accelerated.
- Outstanding impediments include:
  - Resolution funding plans for needs not covered by shareholders and creditors (bail-in), especially maintaining adequate group liquidity, timely and sufficient liquidity during resolution and cross-border transferability of surplus liquidity;
  - Sufficiency of loss-absorbing including surplus capacity on a stand-alone basis at the level of material group and the parent bank entities (internal TLAC) which perform systemically important functions for the whole group (such as key business operations or central liquidity management);
  - Further reduction of financial and operational dependencies within the group;
  - Access to FMIs while in resolution;
  - Speedy valuation processes and reporting capabilities to determine the no-creditor-worse-off test and capital needs to restructure a bank after a bail-in;
  - Resolution challenges from specific legal forms of some D-SIBs (state-owned Zürcher Kantonalbank with an explicit guarantee from the Zurich Canton and the cooperative structure for Raiffeisen including intra-group guarantees);
  - The current lack of gone-concern capital for the three domestically focused D-SIBs which they only must start to build up from this year.
- Contrary to emergency plans, there is no explicit power to authorize FINMA to require changes in legal and business structure or operations of a bank to enhance resolvability; existing legislation provides FINMA with the ability to grant rebates as an incentive for G-SIBs to improve resolvability.
- Recommendation: In line with the KA, FINMA’s powers should be strengthened to authorize FINMA to adopt appropriate measures to reduce complexity and costliness of resolution to explicitly enhance resolvability; this power should apply to all banks subject to resolution planning (including the nine-plus category 3 banks).

### Depositor insurance and resolution funding — Deposit Insurance (A)
- The Swiss DIS has a unique set-up with a deposit insurance agency (DIA) that lacks critical elements of the IADI Core Principles.
- The framework is designed to limit the need for a DIA (esisuisse) and rely on its resources for some form of back-up funding only if the remaining liquidity in a failed bank is insufficient to reimburse all insured depositors.
- The reimbursement process is carried out by the liquidator using the closed bank’s employees and infrastructure; esisuisse’s role is limited to raising public awareness, collecting ex-post contributions from members, and handling information requests from depositors in case of bank failure.
- esisuisse is a privately-run system operating under a narrow pay box scheme and cannot be used to finance resolution measures (e.g., transfer of deposits to another bank).
- esisuisse is set up as a Swiss association, mainly self-regulated with the Banking Act setting some key parameters including level and scope of coverage and a cap of CHF 6 billion; esisuisse’s self-regulations are subject to FINMA approval.
- All licensed banks and securities dealers (in total 302 members) in Switzerland are esisuisse members; all deposits of natural persons and legal entities booked in Switzerland up to CHF 100,000 are preferred and insured.
- There are two non-bank deposit-taking institutions which are not members: COOP and the Federal Employees Savings (part of FDF).
- esisuisse’s Board of Directors comprises 13 non-executive members, at least four of whom must be independent individuals; the Board members have contracts of mandate containing rules to prevent conflicts of interest.
- To reduce conflicts of interest, FINMA shares the name of a bank going to be liquidated only with the Executive Board (CEO and COO); the Board of Directors is not given the name but is notified about a possible pay-out case and the size of contributions expected from esisuisse.
- Since the 2014 FSAP, esisuisse has been separated from the Swiss Bankers Association, now has its own offices and IT infrastructure, and has increased headcount.

Funding mechanics and concerns:
- esisuisse does not raise ex-ante contributions; banks’ overall contributions are subject to a cap of CHF 6 billion and ex-post collection would occur only if the failed bank’s estate is insufficient.
- The BA grants priority payment of available funds to insured depositors in liquidation which might avoid the need for extra funding through esisuisse in an ideal scenario.
- To ensure sufficient liquidity, the BA requires banks to hold assets in Switzerland in the amount of 125 percent of the so-called preferred deposits, which include insured deposits.
- FINMA (or the liquidator appointed by FINMA) is responsible for determining and making payouts “immediately,” but there is no statutory payout period; in practice payouts have taken over a month.
- The BA caps the maximum amount all banks together are obligated to contribute to esisuisse at CHF 6 billion; the system does not have a public backstop.
- To enable quick ex-post funding, the BA requires esisuisse members to hold ready 50 percent of their maximum contribution obligation as special liquidity to provide funds within 20 working days.
- Recovery rates have usually been high.

Systemic concerns and coverage:
- The ex-post funding mechanism combined with the CHF 6 billion cap and lack of a formal back-up arrangement could create doubts that the DIS would always fulfill its mandate.
- It is uncommon for DIS members’ contributions to be capped; deposit insurance funds typically have target levels and government backup funding if ex-post levies are insufficient.
- In Switzerland, taxpayers would carry the burden of an insufficiently funded DIS, contrary to the principle that the cost should be borne by members.
- A DIS cannot deal with systemic banks and system-wide crises, underscoring the importance of an effective resolution framework and resolution planning.
- Twelve Swiss banks have insured deposits of more than CHF 6 billion; these banks which are “too big to fail” for the DIS should also be subject to regular resolution planning.

### Planned DIS reform (Box 2)
- In March 2019, the Swiss authorities started public consultation of amendments to the BA for DIS reform.
- Historical note: In 2010 a reform proposal for a nationalized deposit insurance with an ex-ante fund, government back-up funding and a target level of CHF 10 billion was withdrawn after public consultation.
- Proposed changes under discussion include:
  - Partial ex-ante DIS funding: 50 percent of the banks’ maximum contribution would be collateralized by securities or cash held at SIX for esisuisse; the remaining 50 percent would be ex-post financed.
  - The CHF 6 billion cap would be replaced by a dynamic cap at 1.6 percent of insured deposits but not less than CHF 6 billion. Because of growth in insured deposits, the cap’s coverage has fallen from 2.4 percent of insured deposits in 2006 to 1.4 percent today.
  - A seven-day payout period starting when the liquidator receives payout instructions from the depositor; the liquidator would be required to send notice to all insured depositors “immediately.”
  - A mandatory single customer view identifying insured deposits; banks would be required to have necessary infrastructure and procedures to support the seven-day payout period.
  - esisuisse would be required to provide funding (if needed) within 7 days.
  - The proposals do not foresee changes in the mandate and institutional set-up or division of labor between esisuisse, FINMA and the liquidator.
- Assessment of the proposals relative to IADI Core Principles and best practice:
  - Under the new model the deposit insurance fund would not be fully ex-ante funded and would remain without any cash component (Core Principle (CP) 9); it is debatable if pledged assets that remain in banks’ ownership and control would be perceived as ex-ante funding.
  - The Core Principles do not foresee a DIS cap; a cap breaches the principle that banks should bear funding responsibility for the DIS (CP 9, Essential Criteria 2).
  - The proposed payout period and modalities—typically triggered when the bank is closed and depositors lose access to deposits (CP 15)—would not be consistent with the Core Principles. Under the proposals the payout period could take considerably longer than seven days because it would depend on how quickly the liquidator can inform depositors, how quickly depositors respond, and how quickly notifications are delivered (postal service).
  - Depositors would still not have a legal claim against the DIS to be reimbursed when their bank fails.
  - Preparation will be key to meet a short payout deadline. Under the Swiss DIS, esisuisse is the public face without any role in preparing or executing payouts; the liquidator executes payouts but does not regularly monitor banks’ payout capabilities in peacetime; FINMA is the only authority to enforce and test banks’ payout capabilities. This arrangement will make meeting new requirements challenging.
- Note: A draft of the consultation document was shared during the mission; a cursory review with the published version did not reveal differences in the proposed legal amendments.

*Source: 1cheea2019011 - 24.      FINMA exercises resolution powers without any ex-ante court involvement. While the*

### 40.      While the reforms under consideration would be an improvement, they would not

### 1cheea2019011 - 40.      While the reforms under consideration would be an improvement, they would not

### Deposit Insurance Reform: assessment and required changes
- Current proposals would be an improvement but would not fully align the Swiss DIS with the IADI Core Principles and international best practice (Box 2).  
- esisuisse’s mandate and governance are not reformed in the authorities’ proposals; esisuisse’s private-sector nature and board composition with active bankers prevents inclusion in Swiss crisis management arrangements.  
- IADI Core Principle 6 (CP6) implies:
  - The DIA should be a public entity without active bankers on the board to be full members of crisis management arrangements and access highly confidential information.
  - The DIA should be allowed to finance resolution measures (for example, a transfer of insured deposits) which can be more cost effective than a payout and allow uninterrupted depositor access.
- Recommended reforms to be included by the authorities:
  - The DIA should be established as a public-sector entity, performing a statutory mandate without any active bankers participating in its board.
  - The DIA should have a pay box plus mandate, allowing it to fund resolution measures, subject to safeguards (the least-cost test).
  - There should be no DIS cap—neither a static (CHF 6 billion), nor a dynamic (1.6 percent) cap.
  - Ex-ante funding should be introduced with a target level that would be sufficient to payout insured depositors in the case of a simultaneous failure of several midsize banks, supplemented by back-up funding from the government.
  - The law should set the payout deadline at seven working days, triggered by the failure of the bank (inability to repay depositors or license revocation).
  - Banks should be required to produce a single customer view (as foreseen under the current proposal), subject to regular audits to ensure compliance and tests to ensure timely payout.
  - The two-exempted deposit-taking firms should become regular DIS members.
  - Public awareness levels of the DIS should be regularly assessed by esisuisse and communication campaigns should be undertaken to raise these levels.
- Footnotes and definitions preserved from source:
  - IADI CP2, Essential Criteria (EC) 4 lists powers the DIA’s powers should include: (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.

### Resolution Funding
- Switzerland lacks a separate resolution fund or resolution funding mechanism to cover the cost of resolution or compensation; funding would need to come from the government as during the last crisis.
- Authorities view excluding ex-ante government guarantees as deliberate policy to reduce moral hazard and rule out bail-outs.
- FSB Key Attributes (KA 6.3) call for a resolution funding mechanism which could be:
  - a bank-financed deposit insurance or resolution fund, or
  - a funding mechanism for ex post recovery from the banks of the costs of providing temporary financing to facilitate resolution.
- Limitations noted:
  - Changing esisuisse’s mandate and funding models could provide a new funding source, but it would be limited and take time to build up a new ex-ante fund; DISs are not expected to deal with SIBs or a systemic crisis.
- Recommendation:
  - An ex-post funding mechanism is deemed the best way to ensure taxpayers do not pay for bank resolution costs and to address moral hazard, consistent with the Key Attributes and Swiss government policy preferences.
  - An ex post resolution fund would enable allocation of public funds to resolution and trigger a mechanism to recover those funds from banks later.
- Preconditions for ex-post mechanism to work:
  - A procedure to determine that failing financial institutions are systemic and that temporary public funds are needed to preserve financial stability must be established in advance.
  - A mechanism to ensure public funding becomes available at short notice must be established.
  - A legal mechanism linking temporary support from authorities to recoveries from firms’ stakeholders and creditors and, if necessary, from the wider banking industry via levies (KA 6.2), phased in as appropriate to mitigate procyclicality.
  - In all cases, the appropriate authority to provide temporary public funding would be the government, not SNB.

### Official Financial Support and Emergency Liquidity Assistance (ELA)
- Official financial support:
  - The framework does not explicitly establish arrangements for exceptional support, but the Federal Council could use broad emergency powers during a financial crisis (Federal Constitution, Art. 184 (3) and Art. 185 (3)).
  - During the last financial crisis, the Federal Council used these powers to recapitalize UBS AG with CHF 6 billion.
- Emergency Liquidity Assistance (ELA) by SNB:
  - SNB acts as lender of last resort (LOLR/ELA governed by the Federal Act on the Swiss National Bank); SNB can—but is not obliged to—provide ELA.
  - Conditions to qualify for ELA:
    - The domestic bank or group of banks seeking credit must be important for financial stability.
    - The bank seeking credit must be solvent, for which the SNB obtains an opinion from FINMA.
    - Liquidity assistance must be fully covered by sufficient collateral at all times; SNB determines what collateral is sufficient. Eligible collateral are Swiss residential mortgages and securities (both subject to specific eligibility criteria).
    - The ELA has no formal limit regarding its volume, provided that there is sufficient collateral.
    - Liquidity can be provided in CHF or main foreign currencies.
  - ELA arrangements are in place with the five banks that the SNB has designated as SIBs.
  - SNB has prepared with the five SIBs to enable taking mortgages as collateral; SNB annually tests capability to select and transfer eligible collateral; banks test systems more frequently.
  - Since the 2014 FSAP, SNB has not received any requests for ELA, but once requested ELA could be provided within a day.
  - As bail-in—FINMA’s preferred resolution strategy—aims to restore a bank’s solvency, SNB would be able to provide ELA also to a bank in resolution.
- Recommended SNB actions:
  - SNB should simulate periodically the internal procedures and cooperation with FINMA for the application and execution of ELA.
  - SNB should issue policies and procedures supporting its authority to provide ELA to any bank that could be deemed systemic under certain circumstances.
  - SNB should issue guidance on ELA requirements and procedures to allow non-SIBs to prepare and secure ELA if needed; the granting of ELA should remain at SNB’s full discretion.
  - SNB should broaden the set of eligible ELA collateral to include other non-marketable instruments (for example, corporate loans) and undertake steps to help banks preposition this kind of collateral, conditional upon SNB retaining full discretion to decide case by case which collateral to accept.
- Transparency note:
  - Hardly any information on ELA requirements and procedures is publicly available (for example, types of eligible collateral cannot be found on the SNB webpage), which hampers non-SIBs’ preparation for ELA.

### Contingency Planning and Crisis Management: domestic arrangements
- Tripartite MOU (FDF, SNB, FINMA) governs joint activities concerning crisis management, exchange of information, and cooperation in a financial crisis; objectives include improving stability and coordinating crisis-related activities and communications.
- The tripartite MOU establishes two committees:
  - Steering Committee:
    - Responsible for strategic coordination during a crisis.
    - Comprises the Head of FDF (chair), the SNB Chairman, and the FINMA Chairman.
    - Does not have decision-making powers; platform for inter-agency cooperation; meetings held whenever necessary; largely dormant in peacetime.
  - Committee on Financial Crises:
    - Responsible for coordinating preparatory efforts to allow informed discussion during a crisis.
    - Chaired by the CEO of FINMA; other members: the State Secretary of the FDF, the Vice Chairman of the SNB, and the Director of the Federal Finance Administration (if, for example, state guarantees are needed).
    - In peacetime meets once or twice a year to exchange information on financial stability, financial market regulation, and resolution-related matters.
    - Recently discussed emergency plans, resolvability of the two G-SIBs, planned changes to the TBTF-framework, and the general state of the banking sector.
    - Decides if the Steering Committee needs to convene because of an imminent threat to financial stability.
- Gaps and recommendations:
  - Systemwide contingency planning and crisis preparedness must be advanced; responses are typically limited to a defined catalogue of actions (early intervention, recovery measures in a SIB, stemming a bank run, providing ELA, resolution and liquidation).
  - Effective contingency planning should be supported nationally with tools to monitor developments, awareness of policy and operational choices, and inter-agency cooperation between domestic and foreign agencies.
  - Contingency planning and business continuity efforts of different agencies need coordination in an overarching national crisis management plan, prepared and updated by the Committee on Financial Crisis and discussed and approved by the Steering Committee.
  - Authorities should use simulation exercises including top-level staff and executives of SNB, FINMA, and FDF, covering institution-specific and systemic crisis scenarios.
  - As part of the plan, authorities should prepare a crisis communication plan so agencies speak with “one voice.”
  - Contingency planning and a crisis communication plan are foreseen as activities of the Committee on Financial Crisis in its “Organisationsreglement” but have not been put into practice yet; a crisis compendium from 2012 might be a useful basis.

### Role of the deposit insurer in crisis management
- Currently, esisuisse is not involved in crisis preparedness and management activities of other safety net participants and bodies set up under the tripartite MOU; the deposit insurer has signed a bilateral MOU with FINMA.
- Under current arrangements, FINMA warns esisuisse in a “general nature” about a potential deposit insurance case (informing about the number of protected depositors and its estimation of potential funding needs) but does not share information about problem banks or financial stability concerns; the MOU does not foresee crisis-related activities.
- Recommendation:
  - When the DIA has become a public entity, it should fully participate in arrangements and activities for crisis management and preparedness.
  - The DIS needs reform: funding model change, mandate expansion to allow providing resolution funding.

### Cross-Border Arrangements and Cooperation
- Crisis Management Groups (CMGs) are in place for both Swiss G-SIBs and are operational; chaired by FINMA and involve relevant host authorities from U.S. and U.K.; parties have entered into cross-border cooperation agreements (COAG).
- SNB participates in CMG meetings in its role as lender of last resort.
- CMG functions:
  - Prepare group-wide resolution strategies and implementation plans.
  - Assess impediments to resolvability (FSB Resolvability Assessment Process).
  - Work towards coordinated resolution.
  - Prepare playbooks and organize table top exercises; planned enhancements include dry-runs going forward.
- FINMA organizes three multi-day meetings a year, convenes colleges and workshops, exchanges information with CMG members or in bilateral formats; G-SIB representatives are invited to relevant meetings (e.g., execution of a bail-in).
- FINMA exchanges information with authorities from additional host jurisdictions in the Asia-Pacific region where Swiss G-SIBs are core markets though not locally systemic.
- FINMA does not participate as a host authority in other CMGs or non-G-SIB coordination forums because Swiss authorities do not consider such banks systemically important for Switzerland; for the three domestically focused SIBs no cross-border coordination forums are maintained as their operations are mainly domestic.
- Legal framework facilitates FINMA cooperation broadly with foreign resolution authorities, courts and other bodies involved in restructuring and resolution and erects no material barriers to that cooperation; framework gives FINMA administrative powers to recognize foreign resolution and insolvency measures making those foreign measures effective in relation to a foreign bank’s assets and liabilities in Switzerland without court procedures.

*International Monetary Fund — SWITZERLAND (excerpts).*

### Appendix I. The Swiss “Too big to Fail” Regime

### Appendix I. The Swiss “Too big to Fail” Regime

### Overview
- Since the Global Financial Crisis, the two G-SIBs have strengthened resilience through the Swiss TBTF regime.
- The regime consists of two components:
  - Stricter going-concern capital and liquidity requirements to strengthen resilience of systemically important banks.
  - A resolution framework providing for orderly resolution by giving FINMA resolution powers and tools to deal with SIBs.
- SIBs are required to have sufficient loss-absorbing capacity in a gone concern perspective.
- Objective: measures are especially designed so that no public funding is needed in the event of a crisis.

### Identification of Systemically Important Banks
- The SNB, in consultation with FINMA, determines whether a bank is systemically important.
- Determination factors include size, interconnectedness with the financial system and the economy, and whether the institution can be substituted at short notice.
- Criteria used (qualitative and quantitative) include:
  - The market share of systemically important functions.
  - The amount of secured deposits that exceeds the deposit protection level of CHF 100,000.
  - The ratio of the bank’s total assets to Swiss GDP.
  - The bank’s risk profile as determined by its business model, balance sheet structure, quality of assets, liquidity and debt-equity ratio.
- Systemically relevant functions are those indispensable to the Swiss economy and not substitutable at short notice (example: domestic deposit and lending businesses).

### Capital Requirements and Loss-Absorbing Capacity
- Swiss capital requirements are consistent with Basel III measures and minimum requirements are higher than Basel minima.
- 2016 amendment to the Capital Adequacy Ordinance (CAO):
  - Set higher capital requirements for SIBs.
  - 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:
  - 10 percent Common Equity Tier 1 (CET) plus an additional 4.3 percent of tier 1 capital.
- Gone concern loss-absorbing capacity (GLAC) capital requirement for G-SIBs:
  - 14.3 percent (before any rebate).
- Total loss-absorbing capacity (TLAC) requirement:
  - Currently roughly 26 percent (including rebates associated with structural improvements to facilitate a SPOE strategy).
- Compliance status:
  - As of January 2019, taking into account rebates granted by FINMA, both banks are already fully compliant with the requirement for gone-concern instruments under the TBTF regime.
- For three domestically focused SIBs:
  - RWA-requirement is between 12.86 and 13.22 percent.
  - They have to fulfill 40 percent of the gone concern capital requirements applicable to CS and UBS (authorities deem them less interconnected internationally, less complex and therefore less systemically important).

### Rebates and Incentive System
- TBTF legislation provides for an incentive system in the form of rebates for the two G-SIBs when they improve 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); rebates are determined individually for the two G-SIBs in consultation with SNB.
- Rebate decision basis:
  - Effectiveness of banks’ measures to improve the group’s global resolvability and the interdependencies between different groups.
  - Examples of eligible measures: structural improvements and dissolution of complex structures, financial separation to limit contagion, separation of operational structures to secure continuation of important operational services.
- Examples of measures that resulted in rebates:
  - Creation of a non-operating holding company for one G-SIB.
  - Transfer of Swiss-based systemically important functions to separate service companies by both large banks.
  - Compliance with loss-absorbing debt capacity requirements in the form of bail-inable bonds.
- FINMA assesses eligibility for rebates every year.

### Evaluation and Governance
- The Federal Council is required by law to evaluate the TBTF regime every two years.
- Evaluation objective: examine whether the regime’s provisions are in line with international standards and compare implementation abroad.
- Last evaluation report:
  - Adopted by the Federal Council in June 2017.
  - Conclusion: the regulatory model does not need to be fundamentally adapted as it is suitable to reduce the risk of SIBs.
  - Recommendation: reduced gone concern capital requirements should be extended to the three domestically focused SIBs.
- Implementation of recommendation:
  - The new rule came into force on 1 January 2019.

_Appendix I. The Swiss “Too big to Fail” Regime_

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1cheea2019011.pdf_