## 1cheea2025006-source-pdf ## Source details **Canonical URL:** [1cheea2025006-source-pdf](https://www.imf.org/-/media/files/publications/cr/2025/english/1cheea2025006-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1cheea2025006-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1cheea2025006-source-pdf.pdf.json) --- ### Executive summary — overall assessment and key findings - Strong legal framework and well-coordinated financial safety net are critical for Swiss financial stability; SNB, FINMA, and FDF play vital roles. - Credit Suisse (CS) crisis in 2023 revealed vulnerabilities and gaps in early intervention powers and framework; authorities preserved stability but did not implement a resolution of CS based on the TBTF framework. - Crisis highlighted need for: - enhanced resolution and crisis management preparedness; - clearer roles and effective interaction among authorities to restore public and market confidence and ensure financial stability. ### Banking sector overview and systemic footprint - The banking sector contributed 5 percent of Swiss GDP and employed over 100,000 people in 2022. - Total banking assets reached CHF 3,400 billion in 2023, about 4.3 times Swiss GDP. - The five largest banks account for 60 percent of total banking assets. - By end-2023, UBS (post CS acquisition) had assets exceeding CHF 1,400 billion (180 percent of Swiss GDP). - Three designated domestic systemically important banks (D‑SIBs) — PostFinance, Raiffeisen Group, Zürcher Kantonalbank — have total assets of CHF 626 billion, roughly 79 percent of Swiss GDP. - There are 24 category 3 banks deemed significant and high on traditional retail activities; assessment covers entire banking sector because medium-sized and clusters of small banks can pose systemic risks. ### Credit Suisse failure — chronology and key figures - On March 19, 2023, UBS agreed to buy Credit Suisse for approximately $3.3 billion in an all-stock deal. - SNB provided CHF 168billion in liquidity support to Credit Suisse for a smooth transition. - Swiss government offered a guarantee to cover potential losses up to CHF 9 billion; first CHF 5 billion of losses supported by UBS. - AT1 instruments were fully written down, with a write-down amounting to approximately CHF 16 billion. - Key actions (selected): - March 16, 2023: SNB provided CHF 38 billion under ELA, CHF 10 billion through LSFF; Federal Council enacted emergency legislation (PLB-EO). - March 17–20, 2023: SNB provided further tranches including CHF 20 billion, CHF 30 billion under ELA+, and CHF 70 billion through PLB. ### Early intervention and recovery planning — findings - Existing legal early intervention powers of FINMA are severely constrained and hinder timely supervisory actions. - Article 31 FINMASA and Article 36 FINMASA are broad but not detailed; Art. 26 BA protective measures are triggered only on narrow grounds (over-indebtedness, serious liquidity problems, or failure to meet capital adequacy after a deadline). - Not all banks are required to prepare recovery plans; current legal requirement (Art. 64 BO) applies only to the four SIBs. - Some recovery plans have early ‘orange’ triggers at CET1 levels less than half current levels, reducing usefulness. - Recommendation (high-level): establish an explicit early intervention framework in law with early, forward-looking triggers and a comprehensive toolkit. Recommendations (preserve exact timing and priority from source): - Develop an early intervention framework based on sufficiently early and forward-looking triggers (FDF, FINMA ¶17). Timing: ST. Priority: H. - Remove any potential automatic suspensive effect of an appeal by the bank or other stakeholders to FINMA’s early intervention, recovery, resolvability, and resolution’s measures or decisions (FDF, ¶17). Timing: ST. Priority: H. - Adopt a statutory requirement in an Act that all banks must submit annual recovery plans to FINMA, on a proportionate basis (FDF, ¶19, 21). Timing: ST. Priority: H. - Publish guidance to banks for their recovery plans and adopt internal assessment guidance for FINMA staff (FINMA, ¶23). Timing: ST. Priority: M. - FINMA should provide clear guidance on expected liquidity preparations and promote collateral prepositioning and contractual practices to facilitate collateral mobilization. ### Resolution planning and resolvability assessment — findings - Resolution plans currently required only for category 1 and 2 banks; many category 3 banks are large and could generate systemic distress. - Emergency plans need integration into the resolution planning process to clarify responsibilities. - FINMA conducts resolvability assessment for G‑SIBs per FSB RAP, but no D‑SIB has undergone a resolvability assessment so far. - Recommendation: broaden scope and statutory powers for resolution planning and resolvability assessment. Key recommendations (preserve timings/priorities): - Accelerate resolution planning and resolvability assessment to adopt resolution plans for all Category 2 banks by end-2025 and rollout resolution planning for the three most significant banks in Cat. 3 during 2025 (FINMA, ¶35). Timing: ST. Priority: H. - Adopt a statutory obligation for FINMA to prepare annual resolution plans and assess resolvability for all category 3 banks and above, on a proportionate basis, and grant FINMA statutory authority to remove impediments to resolution (FDF, ¶28, 37, 44). Timing: ST. Priority: H. - Amend the law to formally integrate what is currently the emergency plan into the resolution plan to be prepared by FINMA (FDF, ¶34). Timing: ST. Priority: M. - Grant FINMA statutory authority to determine, on a case-by-case basis, the gone concern capital requirements for all D-SIB not subject to any legal limit set a priori; expand such power to all category 2 and 3 banks (FDF, ¶43). Timing: ST. Priority: H. - Strive to ensure high likelihood of effective write down and conversion of liabilities issued in other jurisdictions, or not accept gone concern capital securities issued in jurisdictions that don’t guarantee recognition of Swiss authorities’ decisions (FINMA, ¶41). Timing: MT. Priority: H. - Publicly articulate bank capabilities required to support orderly resolution and adopt internal FINMA staff guidance (FINMA, ¶45). Timing: MT. Priority: M. ### Resolution powers and crisis preparedness — findings - Resolution powers need clarification and expansion to align with FSB Key Attributes; current toolkit under BA Art. 25–32 is not fully compliant. - FINMA’s recovery and resolution unit operates with limited staff, constraining preparedness and management. - Crisis preparedness, internal FINMA procedures, and multi-agency coordination need strengthening. - Cantonal banks with canton backstops require mechanisms to minimize disorderly failures and taxpayer losses. Recommendations (preserve timings/priorities and specific tool list): - Expand the resolution power toolkit to include or explicitly provide for all resolution powers listed in item 3.2 of the FSB Key Attributes, at a minimum: - (i) power to establish an asset management company for the transfer of assets; - (ii) to ensure the continuity of critical functions; - (iii) power to carry a full or partial wipe out of creditors and shareholders; - (iv) power to use bail-in powers to support a sale in resolution; - (v) power to convert (fully or partially) creditors of the resolved bank into equity holders of bridge banks and asset management companies (FDF, ¶56, 57). Timing: ST. Priority: H. - Remove from the law the power given to creditors of banks not declared as SIB to refuse implementation of resolution measures (FDF, ¶58). Timing: ST. Priority: H. - Provide in the law that any decision to write down liabilities should be permanent and should not grant the holder a claim on the resolved entity if the NCWO principle is breached (FDF, ¶59). Timing: ST. Priority: H. - Develop comprehensive internal resolution manuals for all tools and conduct annual crisis simulations to test crisis preparedness (FINMA, ¶64, 67, 68). Timing: ST. Priority: H. - Provide the liquidator in bankruptcy the power to carry out a transfer of assets and liabilities, mainly insured deposits, without creditor consent (FDF, ¶62). Timing: MT. Priority: M. - Under the Steering Committee for Crisis Management, adopt a national contingency plan, including crisis communication, and conduct regular multi-agency and cross-border crisis simulations (FDF, FINMA, SNB, ¶71). Timing: MT. Priority: H. - Adopt statutory changes to improve recognition of foreign resolution measures, including expedited recognition with minimal formal requirements (FDF, FINMA ¶74, 75). Timing: MT. Priority: M. - Substantially increase staffing level of the Recovery and Resolution Unit (FINMA, ¶129-134). Timing: I. Priority: H. ### Depositor insurance and resolution financing — findings - Swiss Deposit Insurance Scheme (DIS) covers deposits up to CHF 100,000; funding model is ex-post and scheme is privately managed via esisuisse. - Aggregate contributions from banks are capped at 1.6 percent of all insured deposits (approximately CHF 8 billion) with a minimum cap at CHF 6 billion. - No dedicated resolution fund; reliance on government support is evident. - The DIS operates as a narrow paybox model and is not compliant with international best practices (IADI Core Principles CP9, CP14, CP15). Recommendations (preserve timings/priorities): - Review payout legal deadlines and enhance operational requirements of banks to allow speedier payouts with objective of granting insured almost immediate access to insured deposits (FDF, FINMA ¶86). Timing: ST. Priority: H. - Remove cap of 1.6 percent of insured deposits on banks’ contributions to esisuisse and introduce an ex-ante fund with a minimum target level sufficient to cover simultaneous payout of the largest three non-systemic banks that can pose risk to financial stability, supplemented by back-up government funding (FDF, ¶86). Timing: MT. Priority: H. - Provide a pay box plus mandate to the DIS to finance a purchase and assumption of a bank in liquidation under least cost test (FDF, ¶86). Timing: MT. Priority: M. - Make the Deposit Insurance Agency (DIA) a public entity with a statutory mandate and exclude active bankers and industry representatives from management/Board (FDF, ¶86). Timing: MT. Priority: M. - Require the two exempted deposit-taking institutions to become members of the DIA (FDF, FINMA ¶86). Timing: MT. Priority: M. - Implement an ex-post funding mechanism to align with FSB standards allowing public funds to be used for resolution with subsequent recovery from banks. ### SNB bilateral liquidity support (ELA), collateral policy, and PLB — findings - SNB’s existing ELA framework primarily catered to SIBs; LAMC and LASC initiatives broaden collateral framework but key elements of a full-fledged ELA framework are missing or not publicly disclosed. - Missing elements include: forward-looking solvency assessment (to be supplied swiftly by FINMA), remedial measures, conditionalities, and supervisory intrusion. - CS episode: CHF 168 billion provided in liquidity support; initial facilities (LSFF and ELA) depleted quickly; emergency measures ELA+ and PLB were necessary. - ELA+ and PLB were capped at CHF 100 billion each; PLB-EO allows SNB to provide liquidity support loans with federal default guarantees up to CHF 100 billion; emergency law set to expire on December 31, 2027. Recommendations (preserve timings/priorities and proposed content): - SNB should better distinguish ELA within its instrument toolkit, formulate a comprehensive ELA regulation and disclose it (SNB, ¶97, 98). Timing: ST. Priority: H. - SNB should communicate that solvency and viability for granting ELA is evaluated in a forward-looking manner, and FINMA should be able to provide such an assessment swiftly (SNB, FINMA, ¶100, 101). Timing: ST. Priority: H. - Adopt a Public Liquidity Backstop (PLB); enact PLB and establish comparable guarantee of the Federal Council to SNB for ELA purpose, possibly via an MoU, for other counterparties that could be systemic in failure (SNB, FDF, ¶107, 108, 109). Timing: I. Priority: H. - SNB should prioritize collateral preparation with banks, targeting a wide range of asset classes, ensure flexible collateral mobilization approaches, and develop a communication strategy (SNB, ¶102, 104, 120, 121). Timing: C. Priority: M. - Cross-border mobilization of non-standard collateral should be a key component of SNB’s international agenda (SNB, ¶122). Timing: C. Priority: M. - Publish ELA regulation addressing objectives, eligibility, forward-looking solvency, conditionalities, collateral high-level description, and policy parameters (penalty interest, loan term). ### Cantonal banks — findings and recommendation - Some cantonal banks benefit from explicit and unlimited cantonal guarantees; ownership structures can impede resolvability (e.g., when canton is sole owner and cannot be wiped out). - Guarantees in some cases exceed 100 percent of the canton’s GDP, posing severe fiscal challenges. - Recommendation: operationalize potential enforcement of cantonal guarantees to ensure resolvability and prepare operational measures involving Cantons (FINMA, ¶49). Timing: MT. Priority: M. - Recommendation: review bail-in bond compensation terms to provide legal clarity and subordinated status, ensuring discretion over compensation payments. ### Organization, resources, and FINMA staffing — findings - FINMA’s recovery and resolution unit (GB‑R) has about 30 staff members (24 in 2023); approximately 30 percent of time dedicated to recovery plans. - Current allocation equates to around 21 FTEs covering resolution planning, emergency plans, policy, international work, and liquidation duties (about 12 banks per FTE). - Peer benchmarks and staffing recommendations: - FDIC: around 500 FTEs (about 10 insured depository institutions per FTE). - BoE Resolution Directorate: 87 staff (about 12 banks per FTE). - BaFin resolution function: around 100 staff; SRB supports Germany. - Top-down metric recommendation: FINMA should have at least 40 FTEs dedicated to bank resolution for category 1 and 2 banks alone. - Bottom-up conclusion: Recovery and Resolution Unit should have no fewer than 40 FTEs for bank resolution, plus additional staff for recovery planning, early intervention, specialized areas; staffing increase required within next three to five years. Recommendation: - Substantially increase the staffing level of the Recovery and Resolution Unit (FINMA, ¶129-134). Timing: I. Priority: H. ### Crisis preparedness and cross-border cooperation — findings and recommendations - FINMA should develop internal procedures for crisis management covering alternative scenarios and combinations of resolution powers; FINMA’s existing documentation heavily oriented to SPOE for UBS. - Regular simulation exercises should be conducted internally, nationally (with SNB and FDF), and cross-border; plans for annual exercises slated to commence in 2024. - Recommendation: Enhance crisis preparedness under the Steering Committee for Crisis Management by adopting a national contingency plan including crisis communication and conducting regular multi-agency and cross-border simulations with CMG members (FDF, FINMA, SNB, ¶71). Timing: MT. Priority: H. - Recommendation: Review and streamline MoUs (tripartite and bilateral) to include major category 3 banks where relevant. ### Summary table — selected main recommendations (highlights, preserved timing/priority labels) - Early intervention & recovery planning (1–4): develop early intervention framework; remove suspensive appeal effects; require annual proportionate recovery plans for all banks; publish recovery plan guidance (Timing: ST/I; Priorities: H/M). - Resolution planning & resolvability assessment (5–10): adopt resolution plans for all Cat.2 by end-2025; statutory obligation for FINMA to prepare annual resolution plans for Cat.3+; integrate emergency plans into resolution plans; authority to set gone-concern capital for D-SIBs and expand to Cat.2/3; address cross-jurisdictional recognition of gone-concern instruments (Timing: ST/MT; Priorities: H/M). - Resolution framework & crisis preparedness (11–17): expand resolution powers to align with FSB Key Attributes; remove creditor veto for non-SIB banks; make write-down decisions permanent under NCWO; develop comprehensive internal manuals and annual crisis simulations; grant liquidator transfer powers in bankruptcy; enhance national contingency planning and cross-border exercises; improve recognition of foreign resolution measures (Timing: ST/MT; Priorities: H/M). - Deposit insurance & resolution funding (18–22): speedier payout mechanics; remove 1.6 percent cap and introduce ex-ante fund to cover largest three non-systemic banks; provide pay-box plus mandate; establish DIA as public entity; require exempted institutions to join DIA (Timing: ST/MT; Priorities: H/M). - SNB ELA & collateral (23–27): formalize and disclose ELA framework; ensure forward-looking solvency assessments by FINMA; enact PLB and comparable guarantees; expand collateral preparation and cross-border collateral mobilization (Timing: ST/I/C; Priorities: H/M). - Cantonal banks & resources (28–29): operationalize canton guarantees for resolvability; substantially increase Recovery and Resolution Unit staffing (Timing: MT/I; Priorities: M/H). *Source: EXECUTIVE SUMMARY and selected chapters of the technical note examining the Swiss financial safety net and crisis management framework (1cheea2025006-source-pdf).* ### EXECUTIVE SUMMARY __________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Introduction - This technical note examines the Swiss financial safety net and crisis management framework, including bank resolution mechanisms. It summarizes findings from the FSAP mission conducted between October 28 and November 11, 2024. - Focus: authorities’ capacity to address failing and potentially failing banks swiftly and effectively, and preparedness for financial distress. - Assessment draws on: analysis of existing legislation, policies, responses to a pre-mission questionnaire, and discussions with authorities and the private sector. - Evaluated against relevant FSB Key Attributes and IADI Core Principles for Effective Deposit Insurance Systems. This note does not constitute a detailed compliance assessment with either standard. ### Overall assessment and key findings - A strong legal framework and a well-coordinated financial safety net are of critical importance for the stability of the Swiss financial system. - The SNB, FINMA, and the FDF play vital roles in overseeing monetary policy, supervising financial markets, and implementing financial stability policies and measures. - The Credit Suisse (CS) crisis in 2023 revealed vulnerabilities in the Swiss financial safety net and exposed significant gaps in early intervention powers and framework. - Authorities took decisive measures to preserve financial stability, but decided not to implement a resolution of CS based on the TBTF framework. - The crisis emphasized the need for: - enhanced resolution and crisis management preparedness; - clearer roles and effective interaction among authorities to restore public and market confidence and ensure financial stability. ### Early intervention and recovery planning Findings: - Existing legal early intervention powers of FINMA are severely constrained and hinder timely supervisory actions. - A well-defined early intervention framework is necessary to empower the authorities to act decisively. - Not all banks are required to prepare recovery plans; mandating proportionate recovery plans for all banks would improve preparedness and mitigate systemic risks. Recommendations (high-level): - Develop an early intervention framework based on sufficiently early and forward-looking triggers (FDF, FINMA ¶17). Timing: ST. Priority: H. - Remove any potential automatic suspensive effect of an appeal by the bank or other stakeholders to FINMA’s early intervention, recovery, resolvability, and resolution’s measures or decisions (FDF, ¶17). Timing: ST. Priority: H. - Adopt a statutory requirement in an Act that all banks must submit annual recovery plans to FINMA, on a proportionate basis (FDF, ¶19, 21). Timing: ST. Priority: H. - Publish guidance to banks for their recovery plans and adopt internal assessment guidance for FINMA staff (FINMA, ¶23). Timing: ST. Priority: M. ### Resolution planning and resolvability assessment Findings: - Resolution plans are currently required only for category 1 and 2 banks, leaving an important gap because many category 3 banks are large and could generate systemic distress. - Emergency plans need to be integrated into the resolution planning process to clarify responsibilities. - A rigorous assessment of the resolvability of UBS is essential given its systemic risk. Recommendations: - Accelerate the resolution planning and resolvability assessment process to adopt resolution plans for all Category 2 banks by end-2025 and rollout resolution planning for the three most significant banks in Cat. 3 during 2025 (FINMA, ¶35). Timing: ST. Priority: H. - Adopt a statutory obligation for FINMA to prepare annual resolution plans and assess resolvability for all category 3 banks and above, on a proportionate basis, and grant FINMA statutory authority to remove impediments to resolution, including the powers currently provided in the law for the remediation of deficiencies of emergency plans (FDF, ¶28, 37, 44). Timing: ST. Priority: H. - Amend the law to formally integrate what is currently the emergency plan into the resolution plan to be prepared by FINMA (FDF, ¶34). Timing: ST. Priority: M. - Grant FINMA statutory authority to determine, on a case-by-case basis, the gone concern capital requirements for all D-SIB not subject to any legal limit set a priori. Expand such power to all category 2 and 3 banks, irrespective of the classification as systemically important institution. (FDF, ¶43). Timing: ST. Priority: H. - Strive to ensure high likelihood of effective write down and conversion of liabilities issued in other jurisdictions, both by leveraging relevant multilateral organizations or not accepting gone concern capital securities issued on jurisdictions that don’t guarantee the recognition of decisions by Swiss authorities (FINMA, ¶41). Timing: MT. Priority: H. - Publicly articulate the capabilities that banks must have to effectively support their orderly resolution, as planned by FINMA, and adopt internal guidance for FINMA staff detailing the resolution planning procedures and criteria to assess resolvability and remove impediments (FINMA, ¶45). Timing: MT. Priority: M. ### Resolution powers and crisis preparedness Findings: - Resolution powers need clarification and expansion to align with international standards. - FINMA’s recovery and resolution unit operates with limited staff, significantly fewer than peer authorities, constraining effective preparedness and management. - Crisis preparedness, internal FINMA procedures, and multi-agency coordination need strengthening. Cantonal banks with canton backstops need mechanisms to minimize disorderly failures and taxpayer losses. Recommendations: - Expand the resolution power toolkit to include or explicitly provide for all resolution powers listed in item 3.2 of the FSB Key Attributes, at a minimum: (i) the power to establish an asset management company for the transfer of assets; (ii) to ensure the continuity of critical functions; (iii) the power to carry a full or partial wipe out of creditors and shareholders; (iv) the power to use bail-in powers to support a sale in resolution; and (iv) the power to convert (fully or partially) creditors of the resolved bank into equity holders of bridge banks and asset management companies (FDF, ¶56, 57). Timing: ST. Priority: H. - Remove from the law the power given to creditors of banks not declared as SIB to refuse the implementation of resolution measures (FDF, ¶58). Timing: ST. Priority: H. - Provide in the law that any decision to write down liabilities should be permanent and not grant the holder a claim on the resolved entity if the NCWO (No Creditor Worse Off) principle is breached (FDF, ¶59). Timing: ST. Priority: H. - Enhance resolution preparedness by (i) developing comprehensive internal resolution manuals for all tools, not just preferred strategies, and (ii) conducting annual crisis simulations to test crisis preparedness (FINMA, ¶64, 67, 68). Timing: ST. Priority: H. - Provide the liquidator in a bankruptcy procedure the power to carry-out a transfer of assets and liabilities, mainly insured deposits, without the need of creditor consent (FDF, ¶62). Timing: MT. Priority: M. - Under the Steering Committee for Crisis Management, enhance crisis preparedness by (i) adopting a national contingency plan, including crisis communication and (ii) conducting regular multi-agency crisis simulations, including cross-border exercises with CMG members (FDF, FINMA, SNB, ¶71). Timing: MT. Priority: H. - Adopt statutory changes to improve the process for recognizing resolution measures taken by foreign resolution authorities, including an expedited recognition process with minimal formal requirements, while ensuring legal certainty and due process (FDF, FINMA ¶74, 75). Timing: MT. Priority: M. - Substantially increase the staffing level of the Recovery and Resolution Unit (FINMA, ¶129-134). Timing: I. Priority: H. ### Depositor insurance and resolution financing Findings: - The Swiss Deposit Insurance Scheme (DIS) covers deposits up to CHF 100,000; it is not compliant with international best practices. - Current legal cap of 1.6 percent of insured deposits on banks’ contributions to esisuisse limits effectiveness. - There is no dedicated resolution fund to cater for capital needs not covered by bail-in; reliance on government support is evident. Recommendations: - Review the payout legal deadlines and enhance the operational requirements of banks allowing for a speedier payout procedure with the objective of granting insured almost immediate access to their insured deposits (FDF, FINMA ¶86). Timing: ST. Priority: H. - Remove the cap of 1.6 percent of insured deposits on banks’ contributions to esisuisse from the law and introduce an ex-ante fund with a minimum target level sufficient to cover at least the simultaneous payout of the largest three non-systemic banks in the system that can pose more risk to financial stability, supplemented by back-up funding from the government (FDF, ¶86). Timing: MT. Priority: H. - Provide a pay box plus mandate to the DIS to finance a purchase and assumption of a bank in liquidation with the objective of providing insured depositors immediate access to their deposits, under least cost test. (FDF, ¶86) Timing: MT. Priority: M. - The Deposit Insurance Agency (DIA) should be a public entity with a statutory mandate, excluding active bankers and industry representatives from management and the Board (FDF, ¶86). Timing: MT. Priority: M. - Require the two exempted deposit-taking institutions to become members of the DIA (FDF, FINMA ¶86). Timing: MT. Priority: M. - Implement an ex-post funding mechanism to align with FSB standards and allow for public funds to be used for resolution, with subsequent recovery from banks. ### SNB bilateral liquidity support: ELA and collateral policy Findings: - The SNB’s existing ELA framework primarily caters to SIBs; recent signaling broadened collateral framework but key elements of a full-fledged framework are missing or not transparently disclosed. - Missing elements include: forward-looking assessment of solvency (to be supplied swiftly by FINMA) and remedial measures. - The crisis showed that significant deposit outflows can challenge the central bank’s capacity to deploy ELA and jeopardize its balance sheet. Recommendations: - The SNB should better distinguish the ELA within its instrument toolkit, formulate a comprehensive ELA regulation and disclose it (SNB, ¶97, 98). Timing: ST. Priority: H. - The SNB should communicate that solvency and viability for the purpose of granting ELA is evaluated in a forward-looking manner, and FINMA should be able to provide such an assessment swiftly (SNB, FINMA, ¶100, 101). Timing: ST. Priority: H. - Adopt a Public Liquidity Backstop (PLB). The PLB should be enacted, and a comparable guarantee of the Federal Council to the SNB for ELA purpose should be established, possibly via an MoU, for other counterparties that could be systemic in failure (SNB, FDF, ¶107, 108, 109). Timing: I. Priority: H. - The SNB should discuss with banks about collateral preparation, targeting a wider range class of assets and ensuring flexible collateral mobilization approaches and develop an appropriate communication strategy (SNB, ¶102, 104, 120, 121). Timing: C. Priority: M. - The cross-border mobilization of non-standard collateral should be a key component of the SNB’s international agenda (SNB, ¶122). Timing: C. Priority: M. - The SNB should prioritize collateral preparation with banks, targeting wide-ranging asset classes, to facilitate mobilization through flexible approaches and develop a holistic communication strategy to manage counterparties’ expectations while preserving discretion. ### Cantonal banks Findings and recommendations: - In the case of cantonal banks backstopped by their cantons, mechanisms should be in place to minimize the risks of disorderly failures and taxpayer losses. - Operationalize the potential enforcement of the guarantee provided by the Cantons to the Cantonal Banks to ensure resolvability (FINMA, ¶49). Timing: MT. Priority: M. ### Organization and resources Findings: - FINMA’s recovery and resolution unit is understaffed relative to peers, impairing its ability to conduct thorough assessments and establish robust recovery and resolution plans. Recommendation: - Substantially increase the staffing level of the Recovery and Resolution Unit (FINMA, ¶129-134). Timing: I. Priority: H. ### Crisis preparedness and cross-border cooperation Findings: - FINMA should develop internal procedures for crisis management with alternative scenarios and combinations of resolution powers. - Regular simulation exercises should be conducted internally, nationally (with SNB and FDF), and cross-border. - Improve statutory processes for recognizing foreign resolution measures and provide expedited recognition with minimal formal requirements while ensuring legal certainty and due process. Recommendation: - Enhance crisis preparedness under the Steering Committee for Crisis Management by adopting a national contingency plan, including crisis communication, and conducting regular multi-agency crisis simulations, including cross-border exercises with CMG members (FDF, FINMA, SNB, ¶71). Timing: MT. Priority: H. ### Summary table: Main Recommendations (selected highlights) - 1–4 (Early Intervention and Recovery Planning): develop early intervention framework; remove suspensive appeal effects; require annual proportionate recovery plans for all banks; publish recovery plan guidance (Timing: ST/I; Priorities: H/M). - 5–10 (Resolution Planning and Resolvability Assessment): adopt resolution plans for all Cat.2 by end-2025; statutory obligation for FINMA to prepare annual resolution plans for Cat.3+; integrate emergency plans into resolution plans; authority to set gone concern capital for D-SIBs and expand to Cat.2/3; address cross-jurisdictional recognition of gone-concern instruments (Timing: ST/MT; Priorities: H/M). - 11–17 (Resolution Framework and Crisis Preparedness): expand resolution powers to align with FSB Key Attributes; remove creditor veto for non-SIB banks; make write-down decisions permanent under NCWO; develop comprehensive internal manuals and annual crisis simulations; grant liquidator transfer powers in bankruptcy; enhance national contingency planning and cross-border exercises; improve recognition of foreign resolution measures (Timing: ST/MT; Priorities: H/M). - 18–22 (Deposit Insurance and Resolution Funding): speedier payout mechanics; remove 1.6 percent cap and introduce ex-ante fund to cover largest three non-systemic banks; provide pay-box plus mandate; establish DIA as public entity; require exempted institutions to join DIA (Timing: ST/MT; Priorities: H/M). - 23–27 (SNB ELA and Collateral): formalize and disclose ELA framework; ensure forward-looking solvency assessments by FINMA; enact PLB and comparable guarantees; expand collateral preparation and cross-border collateral mobilization (Timing: ST/I/C; Priorities: H/M). - 28–29 (Cantonal Banks and Resources): operationalize canton guarantees for resolvability; substantially increase Recovery and Resolution Unit staffing (Timing: MT/I; Priorities: M/H). *Source: EXECUTIVE SUMMARY of the technical note examining the Swiss financial safety net and crisis management framework.* ### 2. The main sectorial focus is on the banking sector. The banking sector is a key driver of ### 2. The main sectorial focus is on the banking sector. The banking sector is a key driver of ### Banking sector overview and systemic footprint - The banking sector contributed 5 percent of Swiss GDP and employed over 100,000 people in 2022. - Total banking assets reached CHF 3,400 billion in 2023, about 4.3 times Swiss GDP. - The five largest banks account for 60 percent of total banking assets. - By the end of 2023, UBS (post CS acquisition) had assets exceeding CHF 1,400 billion (180 percent of Swiss GDP), making it the largest G‑SIB relative to the size of its home country’s economy. - Besides UBS, three designated domestic systemically important banks (D‑SIBs) are PostFinance, Raiffeisen Group, and Zürcher Kantonalbank, with total assets of CHF 626 billion, roughly 79 percent of Swiss GDP. - There are 24 category 3 banks deemed significant and high on traditional retail activities. - The assessment covers the entire banking sector, not only systemic banks, because medium-sized and clusters of small banks can pose systemic risks. ### Credit Suisse failure and authorities’ crisis response - Credit Suisse (CS) reached the brink of failure in March 2023; the Swiss authorities facilitated its acquisition by UBS Group AG. - On March 19, 2023, UBS agreed to buy Credit Suisse for approximately $3.3 billion in an all-stock deal. - The Swiss National Bank (SNB) provided CHF 168billion in liquidity support to Credit Suisse for a smooth transition. - The Swiss government offered a guarantee to cover potential losses up to CHF 9 billion; the first CHF 5 billion of losses would be supported by UBS. - AT1 instruments were fully written down, with a write-down amounting to approximately CHF 16 billion. - Box 1 (chronology of actions): - March 15, 2023: FINMA and SNB released a joint statement confirming CS met capital adequacy and liquidity requirements; SNB indicated liquidity assistance would be available. - March 16, 2023: SNB provided CHF 38 billion under ELA, CHF 10 billion through LSFF; Federal Council enacted emergency legislation (PLB-EO) and permitted UBS to make merger decisions without shareholder approval. - March 17, 2023: SNB granted CHF 20 billion under ELA+. - By March 20, 2023: SNB extended CHF 30 billion under ELA+ and CHF 70 billion through the Public Liquidity Backstop (PLB). - PLB-EO allowed SNB to provide liquidity support loans with federal default guarantees up to CHF 100 billion. - The Federal Department of Finance provided federal guarantees including a federal guarantee of up to CHF 9 billion on a specific portfolio of hard-to-value assets, applicable if UBS incurred losses exceeding CHF 5 billion. ### Assessment of the "Too Big to Fail" (TBTF) regime and lessons learned - Switzerland’s TBTF regime comprises stricter capital and liquidity requirements and a resolution framework intended to provide FINMA with tools for orderly resolution of SIBs, including gone-concern loss-absorbing capacity to avoid public funding. - The TBTF regime was not used to resolve CS; the failure was addressed outside the resolution framework, indicating shortcomings in national implementation of post-financial crisis reforms. - The 2019 FSAP and the recent FSB Peer Review identified persistent gaps that should be addressed. - UBS’s size after the CS acquisition implies that a potential failure would have lasting effects on the Swiss financial system and Switzerland’s status as an international financial center. - Authorities need to enhance credibility of the financial safety net and increase legal and operational readiness to act preemptively and decisively. ### Implementation of prior recommendations and governance capacity - From the 23 recommendations in the 2019 Technical Note, at least 15 have not been implemented. - After the CS failure, authorities are considering implementing selected outstanding recommendations; these steps are described as tardy but welcome and should proceed urgently. - The Note will assess FINMA’s current resources related to recovery and resolution functions and elements of the Cantonal Banks system, as well as the SNB’s lender of last resort function and crisis coordination arrangements. ### Institutional framework of the financial safety net - Main institutions: SNB, FINMA, and the Federal Department of Finance (FDF). esisuisse plays a limited role as a private deposit insurance scheme with a narrow mandate. - Memoranda of Understanding: - SNB, FINMA, and FDF have an MoU for information exchange and crisis management cooperation. - esisuisse has a bilateral memorandum with FINMA. - A bilateral MoU facilitates regular meetings and information sharing between SNB and FINMA. - SNB: - Serves as monetary authority and lender of last resort with a mandate to contribute to financial stability. - Designates systemically important banks and applies to the Federal Council for activation/adjustment/deactivation of the countercyclical capital buffer. - Oversees systemically important FMIs and evaluates emergency plans for SIBs (limited to lender of last resort function). - FINMA: - Supervisory and resolution authority for banks and FMIs. - Since 2016 has a dedicated unit for recovery and resolution planning, resolution and bank liquidation (GB‑R division) with 30 full-time equivalents (FTEs). - GB‑R division responsibilities: recovery and resolution planning, international cooperation, approval of SIBs’ emergency plans, intervening in restructurings, managing resolutions and liquidations under the bank-specific bankruptcy regime of the BA (Art. 25, 33 et seq. of the BA), tasks concerning the Swiss DIS, approving self-regulatory actions of the banking industry, and overseeing payout of uninsured deposits. - FDF: - Responsible for financial stability policies and relevant laws; head of FDF is member of Swiss Federal Council and can use broad emergency powers. - State Secretariat for International Finance represents Switzerland’s interests in financial matters and implements Federal Council financial market policy. - esisuisse: - Private self-regulatory body providing funding for deposits booked in Switzerland up to CHF 100,000 per depositor and per bank. - Narrow mandate, ex-post financed, activated only when failed bank’s liquidity is insufficient to pay insured depositors; payout executed by liquidator under FINMA supervision. ### Early intervention: legal and operational gaps - Legal limitations on FINMA’s early action: - Article 31 FINMASA authorizes action to ensure compliance but is broad and lacks a detailed list of actionable options; mainly used when a breach was already identified. - Article 36 FINMASA allows FINMA to appoint an investigating agent who can implement supervisory measures, explore restructuring, or replace management bodies; this option is not preferred for early corrective actions due to reputational damage. - Banking Act (Art. 26 BA) permits protective measures (issuing instructions to governing bodies, appointing an investigator, stripping governing bodies of legal representation, removing them from office, dismissing auditors, restricting business activities, prohibiting payments, ordering deferment of payments, or closing the bank) but these are triggered only when reasonable grounds exist to believe the institution is over-indebted, has serious liquidity problems, or fails to meet capital adequacy requirements after a deadline set by FINMA; triggers are narrow and intended for use when resolution or liquidation is being prepared. - The CS failure highlighted lack of effective early intervention: despite difficulties for several years, little to no corrective or early intervention measures were implemented; an existing recovery plan was not mandated by FINMA. - Recommendation from prior FSAP reiterated: establish an explicit early intervention framework in law with early, forward-looking triggers and a comprehensive toolkit of measures. Suggested design principles: - Triggers should be early and forward-looking, with less intrusive measures applied initially and more intrusive measures as breaches near. - Toolkit should include at least: (i) require bank to implement recovery options or additional options; (ii) request convening of shareholder meeting for specific decisions; (iii) remove or replace members of management body; (iv) request preparation and negotiation of a debt restructuring plan; (v) require change of business strategy or cessation/limitation of business lines; (vi) require changes to legal and operational structure. - Legal framework should not allow appeals to automatically suspend supervisory measures. ### Recovery planning: scope and gaps - Current legal requirement (Art. 64 BO): only the four SIBs are legally required to prepare and maintain recovery plans. - FSB Key Attributes (KA 11.1) recommend an ongoing process for recovery and resolution plans covering at minimum banks that could be systemically significant or critical if they fail; this scope is broader than just designated SIBs. - Based on Key Attributes, at least all category 3 banks should be included in the scope of recovery plans. - Category 3 comprises middle-size cantonal banks and larger regional banks, in total 29 banks. Category 1 and 2 comprise one G‑SIB and the three domestically focused SIBs. *SWITZERLAND INTERNATIONAL MONETARY FUND* ### 19. The framework would greatly benefit from extending the requirement to prepare ### Recovery and Resolution Planning Framework ### Recovery Planning: scope, legal basis, and implementation - Finding: Recovery planning is a tool of significant supervisory importance that should be owned by the bank’s management and integrated into its risk management framework. - Finding: For any bank, whether systemic or not, having management prepare for situations where extraordinary measures may be needed is considered good practice. - Recommendation: Authorities should expand the scope of recovery planning to include all banks, on a proportionate basis; Category 4 and 5 banks especially cannot be expected to provide the same level of detail than banks in categories 1,2 and 3. - Finding: FINMA has approved four recovery plans for its SIBs with the involvement of the supervision division and has been reviewing the plans annually. - Finding: The assessment is informed by international guidance from organizations such as the FSB, European Banking Authority (EBA), and Bank of England, but there is no policy document detailing FINMA’s general recovery planning expectations and requirements, apart from individual guidance provided to the four SIBs. - Finding: Some large banks’ recovery plans include early ‘orange’ triggers at a CET1 level less than half their current level, which makes a recovery plan of little worth as it is already too late to execute credible recovery actions. - Finding/Case: In the case of CS, the recovery plan was not formally activated by the bank; after the CS failure, FINMA requested SIBs to recalibrate the early warning and recovery triggers of their recovery plans. ### Legal foundation and regulatory powers - Finding: The requirement for preparing recovery plans is established in an ordinance rather than an Act, which may affect the enforceability of the framework by FINMA. - Finding: Article 64 of the Banking Ordinance (BO) does not substantively regulate the content of these plans or the criteria for their assessment, nor does it grant FINMA explicit authority to outline these requirements in an ordinance or circular. - Finding: According to FINMA, this limitation has diminished its ability to ensure that banks comply with the necessary improvements on an annual basis. - Recommendation: Authorities should reassess the legal basis for mandating recovery plans and provide FINMA with a clear legal framework that empowers it to enforce compliance and implementation of necessary enhancements to these plans. - Note: This recommendation also applies to the legal base of resolution plans. ### Enhancing credibility and operational readiness of recovery plans - Recommendation: FINMA should, in addition to assessing compliance of recovery plans with requirements of the law, place more focus on outcomes. - Recommendation: Banks should be expected to integrate their recovery plans with contingent funding plans and other contingency plans, and to trigger activation of the plans well before regulatory minima are reached. - Recommendation: Recovery options should include radical options, which would imply major changes to firms’ strategies or are not easily implementable, such as disposals of major material entities. - Recommendation: FINMA should establish its own recovery plan guidance to ensure consistency of impact across banks while allowing firm-specific scenarios and to detail how FINMA assesses proportionality based on banks’ size, complexity, and interconnectedness. - Finding: Very small banks with simple business models should be permitted to prepare simplified recovery plans. - Finding: FINMA is undergoing a process of revision of its existing guidance by making a gap analysis of current recovery plans with the goal of improving overall quality, but the lack of explicit regulation powers limits enforcement. ### Liquidity focus and central bank coordination - Finding: Recovery plans should place greater emphasis on liquidity issues; liquidity is crucial for a bank's ability to successfully navigate recovery plans and address potential deposit outflows. - Recommendation: FINMA should provide clear guidance on expected liquidity preparations, including a comprehensive list of liquidity-generating options and identification of all assets that can be mobilized and collateralized within the framework of central bank facilities. - Recommendation: For these purposes, banks should communicate with the SNB, including assets not currently meeting eligibility criteria but that may be considered during stress. - Finding: Due to the SNB’s operational discretion in providing ELA, quantitative targets cannot be set ex ante for collateral only eligible for ELA. - Recommendation: FINMA (or SNB) could promote collateral prepositioning and contractual practices that facilitate collateral mobilization and transferability. - Footnote summary (from source): Central bank operational discretion in providing ELA implies case-by-case decision-making, broader and potentially lower-quality collateral for ELA, challenges for pre-commitment on collateral parameters such as haircuts, and the possibility of overcollateralization during an ongoing ELA case. ### Resources and scaling - Finding: The significant expansion of the scope of recovery plans will require additional resources for FINMA. - Finding: The current staffing levels are insufficient to support existing workload, let alone any increase; currently, only four recovery plans are reviewed annually. - Projection/Recommendation: Increasing the number of plans reviewed to approximately 250 will necessitate a substantial increase in staff dedicated to this function and could be phased over a longer period. - Finding: The marginal cost of reviewing each plan, particularly those from less complex banks, will be much lower than the initial cost for the four SIBs. ### Emergency plans, resolution planning, and scope - Finding: According to Article 60 BO, emergency plans are to be prepared by banks detailing how their critical functions in Switzerland would be preserved if the bank failed; Article 64(2) provides that resolution plans are prepared by FINMA and apply to the group, detailing how FINMA would resolve the group in case of failure. - Finding: Since the requirement to prepare resolution plans entered into force more than 10 years ago, only resolution plans for the two G-SIBs were prepared; one G-SIB (CS) failed in 2023. - Finding: Currently only UBS has a resolution plan; however, this plan has not been prepared by FINMA but by the bank itself according to documentation consulted by the FSAP mission. - Status/Action: FINMA is in the process of formally establishing its own resolution plan for UBS in the aftermath of the integration of Credit Suisse and is starting to prepare resolution plans for two other D-SIBs in 2024; for the other D-SIB, only the emergency plan is being assessed as it is not deemed implementable yet. - Finding: Based on limited experience, FINMA has provided guidance to banks preparing a resolution plan, including information requests; banks provide data and resolution options, while FINMA should be the one preparing and controlling the content of the plan. - Requirement: Annually, banks must submit information for resolution planning or when requested by FINMA. ### Expanding resolution planning coverage and proportionality - Finding: KA 11.1 specifies jurisdictions should have an ongoing process for recovery and resolution plans covering banks that could be systemically significant if they fail; in Switzerland this has been implemented narrowly where only formally declared SIBs are subject to resolution planning. - Recommendation: The scope should include banks that may become systemic depending on circumstances; Category 3 banks, described as “large and complex” and posing “significant risk,” should be included. - Recommendation: Given the complexity and resource intensity, the law should allow FINMA to prepare simplified resolution plans for banks posing a small risk to the system. ### Emergency plans: role, assessment, and implementability - Finding: The four SIBs must submit emergency plans for their Swiss operations to FINMA; for internationally active banks like UBS, the emergency plan acts as a fallback if the preferred Single Point of Entry Bail-in strategy cannot be executed. - FINMA’s emergency plan assessment examines whether: - (i) continuation of systemically important functions is ensured; - (ii) legal and financial relations within the group do not obstruct the continuation of these functions; - (iii) capital and liquidity planning foresee sufficient resources; - (iv) suitable processes, infrastructure, and human resources are in place; - (v) intra-group agreements are recorded; - (vi) the emergency plan complies with relevant foreign laws. - Finding: Emergency plans must be updated annually; FINMA has spent the last decade assessing feasibility and collaborating with banks to remove obstacles to implementation. - Status: Three of the four SIBs have an approved emergency plan. Two plans correspond to domestic D-SIBs and were approved in 2023. One emergency plan for a D-SIB remains unapproved due to “implementability” (resolvability) considerations related with how bail-in powers would be executed under a specific corporate structure. - Finding: Until recently, FINMA’s policy was to only start preparing resolution plans for SIBs with approved and implementable emergency plans; as a result, no resolution plans were prepared for any SIBs, though FINMA is starting the process now. ### FINMA enforcement powers and structural changes - Finding: When a plan is deemed not “implementable,” FINMA requests changes within a specified deadline and can use special enforcement powers (Art. 10(2) BA, Art. 62(1)(2) BO), including creating an independent legal entity in Switzerland for transferring systemically important functions or adjusting the bank’s structure. - Finding: Banks can appeal FINMA’s decisions; FINMA transmitted that it has not exercised these powers as UBS and CS made necessary changes to their structure by founding a dedicated legal entity for Swiss systemically important functions to benefit from a rebate on gone concern capital requirements in place until end 2022 (Art. 65 and 66 BO old version). - Status: The SIB for which the emergency plan is not yet considered implementable is in the process of making the necessary changes and removing impediments. ### Resolution strategy, interaction with emergency plans, and reform proposals - Finding: FINMA’s preferred resolution strategy for UBS is the Single Point of Entry (SPOE) bail-in at the group holding level; UBS is required to maintain additional funds in the form of bailinable bonds issued by the group holding company, under Swiss law and subordinate to other liabilities. - Finding: The resolution strategy for domestic SIBs includes a recapitalization process involving conversion of gone-concern capital; D-SIBs have a substantial lower gone-concern capital (60 percent discount) than UBS, which raises substantial concerns regarding resolvability. - Finding: The relationship between resolution plans and emergency plans is complex with overlaps; emergency plans focus on Swiss functions while resolution plans encompass all bank functions—this distinction mainly pertains to internationally active banks. - Finding: For most retail banks, the dual planning complicates and slows down the resolution process; having two similar plans, one drafted by FINMA and one by banks, is inefficient. - Recommendation: Emergency plans and resolution planning should merge into a single process. Resolution plans should be at the core of this unified process, drafted by FINMA and not by the banks themselves; FINMA should develop policy guidance to clarify expectations and criteria for assessing resolution plans. - Recommendation/Target date: FINMA should focus on finishing the first iteration of the resolution plans for all D-SIBs by end-2025; these plans should be prepared by FINMA, with banks providing information and draft elements (including playbooks). - Recommendation/Next steps: FINMA should start in 2025 the resolution planning process for at least the three most significant non-SIBs; FINMA should bilaterally articulate with these banks and voluntarily involve them in the process, and if banks refuse, FINMA should prepare a simplified resolution plan even without the participation of the bank. ### Resolvability assessment: current scope and needed reform - Finding: FINMA only assesses the G-SIBs’ resolvability as required by law (Art. 65a BO); for D-SIBs resolvability is assessed under the emergency plan framework, creating overlap. - Finding: For the existing G-SIB, FINMA conducts resolvability assessments per the agreed FSB Resolvability Assessment Process and uses the FSB Resolvability Assessment template, asking G-SIBs to establish a self-assessment which FINMA then scrutinizes to inform RAP letters to the FSB chair. - Finding: Before the CS failure, both G-SIBs had implemented several organizational measures to improve resolvability, including a non-operational holding company to support a SPOE bail-in strategy; however, the CS failure was addressed outside any established framework, through emergency legislation. - Recommendation: Any bank subject to resolution planning requirements, including category 3 banks, needs to be subject to a formal resolvability assessment procedure that is proportional and tailored to the preferred resolution strategy FINMA selects. - Recommendation: The law should be revised to include an explicit provision giving FINMA power to assess the resolvability of all banks for which it prepares a resolution plan, and powers to remove impediments to resolvability. - Recommendation: Merging emergency plans and resolution plans into a single resolution plan would streamline the resolvability assessment process and make it more efficient. ### Special monitoring for UBS and lessons from CS - Finding/Case: In the case of CS, authorities opted not to use resolution powers or execute the resolution plan; instead they sold the bank to UBS outside a resolution process. This outcome indicates that resolution impediments were not addressed prior to the crisis sufficiently to provide confidence that the resolution could be executed without endangering financial stability. - Recommendation: The resolvability of UBS should be specially monitored; prepare the resolution plan carefully and ensure impediments to resolvability are addressed effectively ahead of time. - Finding: The lesson is more relevant now as the option for a domestic sale of UBS is close to impossible. *SWITZERLAND INTERNATIONAL MONETARY FUND* ### 39. While uncertainties will always challenge the execution of the preferred path for ### While uncertainties will always challenge the execution of the preferred path for resolution, second best scenarios should always be considered and tested in advance. ### Resolvability planning and UBS / CS lessons - FINMA should enrich its resolvability assessment of UBS, address impediments similar to those faced by Credit Suisse (CS), and prepare alternative resolution strategies should the preferred approach prove unfeasible. - Resolution plans should be based on the premise that no extraordinary government support would be needed. - The activation of the envisaged PLB (see section on the SNB Bilateral Liquidity Support) should be triggered only in exceptional cases where this measure would be necessary to secure financial stability. - Resolution plans should focus on assessing conditions to maximize the usability of collateral for SNB lending if needed. - The KA framework objective: systemically important institutions become resolvable without taxpayer exposure to loss from solvency support while maintaining continuity of vital economic functions. ### Box 2 — Recognition of bail-in decisions by U.S. authorities (summary of legal constraints) - Bail-in conversion of foreign-law debt held by US investors must comply with U.S. securities laws, including registration with the SEC or qualification for an exemption. - The most likely exemption, under section 3(a)(9) of the 1933 Securities Act, has stringent conditions that may not always be met. - Requirements for the 3(a)(9) exemption include: - The issuing entity does not change. - The holders of the instruments do not change. - There is no solicitation payment or requirement for bondholders to contribute anything other than their instruments. - Legal complexity can hinder swift execution of a bail-in; the registration process is lengthy and complex. - Many global banks issue significant debt in the U.S. market, exposing gone-concern capital (TLAC, MREL) to aspects of US law even if governing law is foreign. - Because ex-ante exemptions for bail-in scenarios are difficult to obtain, resolution authorities rely on legal opinions by US counsel, creating uncertainty. - The absence of explicit legislative provisions in the US to recognize foreign resolution actions (as recognized in the 2020 FSAP) is an additional challenge. - Bilateral and multilateral cooperation is crucial to provide legal certainty and enable execution of a bail-in of debt securities. ### Feasibility of solvent wind-down - FINMA should assess the credibility of orderly solvent wind-down tools. - Concern: maturity mismatch in banks' balance sheets means winding down activities mainly funded with short and medium term liabilities will create funding needs the bank may be unprepared to meet, posing a significant impediment to resolvability. ### Impediments to bail-in of securities traded and placed in foreign markets - Uncertainty regarding recognition of bail-in decisions by foreign authorities is a significant concern, especially when gone-concern capital is issued under Swiss law but registered/listed under U.S. regime. - This triggers the need for US authorities to recognize and authorize exchange of debt instruments with equity. - Recommendation: resolve uncertainty in cooperation with U.S. authorities; if not possible, FINMA should find alternative ways to ensure high likelihood of effective write down and conversion of liabilities issued in the US or other jurisdictions. - If material impediments prevent effective write down/conversion, authorities should consider deducting all gone-concern capital instruments held by U.S. persons from the eligible instruments pool. ### Resolvability assessments for D-SIBs and Category 3 banks - No D-SIB has undergone a resolvability assessment so far due to absence of a resolution plan for this category and because law does not provide FINMA powers to undertake this assessment. - Art. 61 BO provides FINMA power to assess “implementability” of emergency plans, overlapping with potential resolvability assessment. - If resolution plans are prepared for category 3 banks (as recommended), all banks with resolution as preferred strategy should be assessed for resolvability. - Proportionality should guide assessments: larger and more interconnected banks face more intrusive assessments and measures to remove impediments. ### Loss absorption capacity: numerical standards and recommendations - Loss absorption requirement for G-SIBs: around 26 percent in relation to RWA. - D-SIBs require 18.13-20.72 percent (12.86 percent minimum CET1 capital and between 5.27-7.86 percent of gone-concern capital), much lower than closest EU peers. - EU comparator: Banking Union banks have on average MREL targets of 28% including the Combined Buffer Requirement (CBR). - Recommendation: Authorities should review legislation and allow FINMA to determine gone-concern capital requirement on a case-by-case basis without a pre-decided discount. - Recommendation: All category 3 banks should be subject to a gone-concern capital requirement if FINMA considers resolution the preferred option. ### FINMA powers to address structural impediments to resolvability - Current gap: no explicit power for FINMA to require changes in legal or business structure of a bank to enhance resolvability. - Recommendation: Strengthen FINMA’s powers to adopt measures to reduce complexity and cost of resolution, including: - Require banks to modify their structures. - Restrict or discontinue specific activities. - Limit exposures to certain group entities or SPVs. - Impose additional reporting requirements. - Enforce sanctions. - Suggestion: Powers in Art. 62 BO to address deficiencies in emergency plans should be granted to FINMA for all banks subject to resolution, including category 3 banks. ### FINMA guidance, transparency, and internal procedures - FINMA should publicly articulate expectations for banks’ capabilities to support orderly resolution and to support preparation of FINMA’s resolution plans. - FINMA should adopt internal guidance for staff detailing resolution planning procedures and criteria to assess resolvability and remove impediments. - FINMA should disclose more comprehensively results of resolvability assessments and measures banks are implementing. - The FSB Resolvability Assessment Process template should not be used as a benchmark for disclosure requirements, as it is a very high-level document not designed for bank-by-bank assessment. ### Cantonal banks: guarantees, operational challenges, and legal issues - Cantonal guarantees exist under federal and cantonal law; Swiss Federal Banking Law of 1934 outlines legal framework allowing cantons the option to guarantee some or all liabilities. - Historical example: During the Swiss Banking Crisis of the 1990s, Geneva’s guarantees were invoked, resulting in taxpayer losses amounting to 9 percent of the canton’s income; this led to withdrawal of Geneva’s guarantee. Bern and Vaud followed after providing financial support. - Some cantonal banks benefit from an explicit and unlimited cantonal guarantee; creditors would have a claim on the Canton in case of default. - Ownership complication: in some cases the Canton is the only entity entitled to be the owner of the bank, posing challenges if the canton cannot uphold the guarantee (cannot wipe out shareholder if shareholder is the Canton). - Recent legislative change: permits FINMA to wipe out specific types of bail-in bonds issued for this purpose, but not to convert them into equity (therefore not diluting existing shareholders). Before this change FINMA could not even wipe out liabilities. - Terms of bail-in bonds: bailed-in bond holders have the right to get compensation from the resolved bank during a period of 10 years under certain conditions (bank complying with capital requirements plus a buffer and having an annual profit allowing payment of compensation). - This compensation entitlement confers to bailed-in creditors an equivalent status of equity holders, potentially circumventing prohibition on converting creditors into shareholders. - Uncertainty: unclear if payment of compensation is totally discretionary; if not discretionary it could have accounting consequence of classifying these bailed-in credits as contingent liabilities. - Recommendation: Authorities should review legislation and provide legal clarity by providing a clear subordinated status to these bailed-in creditors, including total discretion in providing any compensation. - Operational preparedness: Authorities should prepare operational measures for potential failure of cantonal banks that take into account cantonal guarantees. - Operational challenges of executing guarantees should be addressed during resolution planning and resolvability assessment. - This is critical where guarantees represent a very high share (more than 100 percent) of the GDP of the cantonal bank–providing canton; in some cases guarantees represent a very high share (above 100 percent) of the GDP of the Canton providing it. - FINMA should evaluate economic and legal challenges and make operational preparations involving the Cantons to avoid the need for execution of guarantees by creditors where impossible. ### Resolution powers and crisis preparedness - Swiss law provides FINMA with bank resolution powers under the BA in Art. 25 to 32, but the toolkit is not totally compliant with the FSB KA (KA 3). - Art. 25 BA: if a bank is failing or likely to fail, FINMA may order “restructuring procedures” and prepare a “restructuring plan” if effective restructuring appears likely. - Possible restructuring measures (Art. 25 BA; plan may contain one or more of): - (i) sale of assets and liabilities or the shares of the failing bank to a purchaser; - (ii) transfer of assets and liabilities to a bridge bank; - (iii) change of the legal form of the bank; - (iv) write-down of equity and liabilities and conversion of liabilities into equity to recapitalize the failing bank (capital measures under the BA); - (v) Suspension of early termination rights in financial contracts; - (vi) Appointment and dismissal of its governing bodies. - Creditor voting: creditors of banks that are not classified as systemically important have the power to reject the restructuring plan; creditors of SIBs do not have such power. - Valuation and creditor protection: restructuring plans must be based on a prudent valuation of assets and liabilities and prudent estimate of restructuring requirements (Art. 30c para. 1 lit. a BA); valuation is carried out by the bank based on valuation capabilities FINMA sets for SIBs in resolution planning. - Judicial review and appeals: - Appeals must be filed within 10 days (Art. 37g quater BA). - Generally, appeals in resolution proceedings have no suspensory effect, except in certain cases (Art. 37g quinquies BA). - The Federal Administrative Court can review appropriateness of FINMA’s decisions. - Successful appeals do not revoke restructuring plans; court may award compensation (Art. 37gbis (1) BA), typically in shares or equity interests, options or debtor warrants (Art. 37gbis (2) BA). - Creditors can appeal if the restructuring left them worse off than in immediate bankruptcy (NCWO principle). - If FINMA approves a restructuring plan knowing NCWO requirement is not fulfilled, compensation must be set in the restructuring plan and be in a form other than shares or equity interests. - CS failure: addressed outside the resolution framework; authorities opted against using resolution powers owing to concerns about crisis of confidence and legal/implementation risks of bail-in powers. Recommendation: authorities should use resolution framework to deal with failures of potential systemic banks and avoid ad-hoc solutions. - Recommendation: Review framework where inherent legal risks exist with certain resolution tools, minimize these risks, and ensure robust management of future crises so stakeholders expect problems to be addressed under a known legal framework. *Source: Excerpt from IMF country report chapter on Switzerland (content unit provided).* ### 57. The resolution toolkit should be expanded. While existing legislation provides relevant ### The resolution toolkit should be expanded. ### Gaps in legal framework and recommended scope of toolkit - Existing legislation provides relevant resolution measures and powers, but there are notable gaps that must be addressed. - The toolkit should encompass all resolution powers outlined in item 3.2 of the FSB Key Attributes or at least make clear that the legal framework explicitly provides for such tools. - Specific additions recommended: - Authority to establish an asset management company for the transfer of non-performing or hard-to -value assets. - Mandates to ensure continuity of critical services by requiring other companies within the same group to continue providing essential services to the entity in resolution, its successors, or acquiring entities. ### Bail-in and transfer powers - Bail-in should be usable together with transfer powers. - Bail-in powers should allow for both a full and partial write-down and conversion of liabilities. - The framework needs to allow, or make clear, that bail-in powers can be used in combination with the use of transfer powers to provide legal certainty to FINMA to: - write down shareholders and creditors before selling the bank to an interested purchaser, enabling a sale in resolution even when the purchaser gives a negative net asset value to the bank; - convert creditors of the resolved bank into equity holders of bridge banks and asset management companies. - Noted interpretative issue: authorities have indicated that the law may be interpreted as permitting only a "full" write-off of shareholders, which in the case of Credit Suisse was deemed unnecessary. ### Creditor rights, restructuring plans, and the NCWO principle - Current law: The Banking Act (BA) grants creditors of banks not classified as systemically important the authority to reject a restructuring plan; this power is not extended to creditors of systemically important banks. - Recommendation: Amend the law to eliminate the possibility for creditors to reject the plan to implement resolutions for non-systemically important banks so that resolution of all banks adheres to the same regulatory framework regarding the authority of resolution entities to execute actions. - Rationale: Any bank can become systemic in failure; creditor vetoes could place Swiss financial stability at risk. Even submitting a plan to creditors and setting a deadline can make resolution options unfeasible. - Compensation rules: - Any compensation awarded to creditors if the NCWO principle is violated must not impact the balance sheet of the resolved bank. - Authorities should legislate that any decision to write down liabilities is permanent and does not confer a claim on the resolved bank if the NCWO principle is breached. - An industry funded compensation mechanism should be established within the law to ensure affected creditors are adequately addressed. - Risk noted: Allowing compensation to be a claim against the resolved bank could diminish the bank's equity, potentially causing capital requirement breaches and triggering additional bail-in, creating a cyclical risk of repeated bail-ins. ### Valuation process - Concern: The valuation process seems too dependent on banks. - Current FINMA requirements mandate the bank to provide valuation for the restructuring plan. - Recommendation: Authorities may differentiate between supplying information and preparing the valuation; valuations involve discretion in assumptions and methodologies and can be influenced by resolution strategy. Valuation should not rest solely with the bank to ensure an unbiased process and enhance integrity of the resolution framework. ### FINMA's role in liquidation and powers of the liquidator - FINMA serves as the exclusive authority for initiating bankruptcy liquidation proceedings against Swiss banks and can revoke a bank's operating license and open bankruptcy liquidation proceedings when the institution is no longer viable and there is no prospect of restructuring. - Liquidation procedures follow modified bankruptcy liquidation procedures established in the BA and Banking Ordinance of FINMA (BIO-FINMA). - Upon initiating bankruptcy liquidation proceedings, FINMA appoints a liquidator (typically experienced lawyers or auditors) to liquidate assets and ensure orderly payment of liabilities and depositors. In certain cases, FINMA may take on the liquidator's responsibilities directly. - Transfer of liabilities currently depends on creditor’s consent as per general private law principle, making Purchase and Assumption transactions nearly impossible because consent from all transferred creditors would be required. - Recommendation: Review this requirement and provide the liquidator the power to perform a transfer of assets and liabilities without the consent of creditors. - FINMA maintains a supervisory role throughout liquidation, coordinating and overseeing liquidation activities, issuing binding orders to the liquidator, and ensuring insured deposits are prioritized in the liquidation process. ### Operational readiness for bank liquidation procedures - Bank liquidation is the default option for institutions that do not pose a risk to financial stability upon failure; processes must be orderly to contain risks. - Recommendation: FINMA should develop a comprehensive procedures manual for managing banks facing insolvency, detailing steps liquidators must follow to execute payout of insured deposits. - These procedures should be rigorously tested and simulated by FINMA in collaboration with potential liquidators and esisuisse, the funding mechanism of the Deposit Insurance Scheme (DIS). - Recent insolvency cases referenced: FlowBank SA declared insolvent in June 2024; Mogli AG entered liquidation in 2022. ### Crisis preparedness — weaknesses and recommended actions - FINMA has prepared extensive preparatory documents for the resolution of CS, primarily focused on single point of entry bail-in for that bank and not on all resolution measures applicable to any bank. - Coordination with domestic agencies occurs through existing MOUs and committees, but lack of a comprehensive and general procedure manual may hinder effective crisis response. - Engagement with foreign agencies is contingent on specific situations, potentially causing gaps in international coordination. - Shortcoming: Absence of crisis simulation exercises to date; plans for annual exercises set to commence in 2024, but prior testing is lacking. - Recommendations: - Develop comprehensive internal procedures manuals for all resolution tools; manuals should be living documents, continuously updated by a dedicated team and can leverage material prepared in the run-up to crisis of CS. - Implement annual crisis simulation exercises, including scenarios such as the resolution of a domestic systemically important bank. - Collaborate with external experts specializing in crisis simulations and conduct cross-border exercises to align strategies with international best practices. ### Domestic arrangements and cross-border cooperation - The FDF, SNB, and FINMA formalize collaboration through a tripartite MoU to bolster Swiss financial system resilience by ensuring aligned actions during a crisis and obliging information sharing, including non-public data. - A separate bilateral MoU between FINMA and the SNB addresses collaboration on assessment of SIBs and/or the banking system, contingency planning and crisis management. Recommendation: review this MoU to add the major banks of category 3, which can potentially generate systemic risk. - Two committees under the tripartite MoU: - Steering Committee: strategic oversight during crises; comprises high-ranking officials including the Head of the FDF, the SNB Chairman, and the FINMA Chairman. - Committee on Financial Crises: preparatory groundwork; chaired by FINMA's CEO and includes senior representatives from the FDF and SNB and the Director of the Federal Finance Administration for state guarantee discussions. - Recommendation: Advance a comprehensive framework under the Steering Committee for Crisis Management, starting with a national contingency plan and a national crisis communication plan; implement regular multi-agency simulation exercises and cross-border exercises with CMG members. - Existing cross-border arrangements: - FINMA chairs the Crisis Management Group (CMG for UBS) including authorities from the United States, the United Kingdom and the EU, with the SNB in an observer capacity. - FINMA organizes two three multi-day meetings annually to ensure alignment among jurisdictions on crisis response strategies. FINMA also cooperates with Asia-Pacific authorities where UBS operates and holds bilateral discussions; FINMA organizes meetings semi-annually to ensure alignment among jurisdictions on crisis response strategies. - Recognition of foreign resolution decisions: - Governed by Article 37g of the Swiss Banking Act; requires foreign resolution actions not be manifestly incompatible with public policy. - Procedural complexity: need for extensive documentation such as official translations with an apostille can cause delays and confusion. - Recommendation: Review relevant legal provisions, including Article 37g, and establish an expedited procedure with minimal formal requirements while ensuring legal certainty. ### Depositor insurance — structure, caps, and payout mechanics - Key features of the Swiss DIS: - Aggregate contributions from banks are capped at 1.6 percent of all insured deposits in Switzerland which corresponds to CHF 8 billion with a minimum cap at CHF 6 billion. - Within that limit, scheme coverage is for deposits up to CHF 100,000 per depositor and bank. - Insured deposits correspond to the legal concept of "privileged deposits," but only include funds at Swiss branches while excluding retirement assets. - Main participants: FINMA and esisuisse. Roles: - FINMA: mandate to manage and supervise main elements of the scheme, appointment of liquidators, overseeing payout of insured deposits, and supervising/imposing requirements on banks to facilitate entry into liquidation and orderly payout. - esisuisse and FINMA: tasked with implementing the deposit insurance scheme set out by law and protecting client deposits with banks and securities firms in Switzerland. - Payout process steps: - System activated by bankruptcy or protective measures by FINMA. - If a bank’s liquidity is sufficient: insured deposits are paid out through the liquidator in full or pro-rata from the bank’s resources, supported by banks maintaining collateral consisting of tangible unencumbered assets in Switzerland equivalent to 125 percent of privileged deposits. - If the bank lacks liquidity: esisuisse provides necessary additional funds for payouts. FINMA informs esisuisse of the required amount, which must be available within seven days of notification from the liquidator. - The liquidator develops a payment plan and contacts depositors for instructions. *Italic: Excerpted from the IMF country report chapter on Switzerland (source PDF).* ### 78. esisuisse operates as a privately managed deposit insurance system under the ### esisuisse operates as a privately managed deposit insurance system under the oversight of the Swiss Federal Council ### Governance and legal status - esisuisse is established as a Swiss association and operates as a privately managed deposit insurance system under the oversight of the Swiss Federal Council. - It is mainly self-regulated, with regulations subject to FINMA approval and oversight of the Swiss Federal Council. - esisuisse is the agency in Switzerland that provides deposit insurance (self-regulation agency for depositor protection). - The articles of association, requiring FINMA approval, limit the Board's knowledge to possible payouts and anticipated contributions. - esisuisse’s private legal nature excludes it from being part of the financial safety net; cooperation between public authorities and esisuisse is limited. - Governance structure: Board of Directors with 13 non-executive members, primarily active bankers from member institutions; at least four members must be independent individuals not connected to any bank or securities dealer. - Only the Executive Board (CEO and COO) receives information about banks undergoing liquidation from FINMA, to address potential conflicts of interest. ### Membership and coverage - Members: 257 total members (235 active banks, 18 active securities firms, 4 banks about to cease operations). - Coverage: all deposits made by individuals and entities in Switzerland up to CHF 100,000. - Two non-bank deposit-taking institutions (COOP and the Federal Employees Savings Bank) are not members of esisuisse. ### Funding model and caps - No ex-ante contributions are collected from industry. - esisuisse funds are capped at 1.6 percent of total insured deposits. - Maximum obligation of banks revised to be based on 1.6 percent of the total amount of secured deposits, with a minimum requirement of CHF 6 billion (Article 37h para. 3 let. b. of the BA). - The cap of 1.6 percent of total insured deposits is approximately CHF 8 billion. - If deposit insurance is insufficient because of the overall industry cap of 1.6 percent of total insured deposits, payouts are issued pro-rata, resulting in only partial payments to insured depositors who may have to wait potentially several years until all assets are realized. - Recent legal changes require banks to deposit easily realizable high-quality securities or Swiss francs in cash with a third-party custodian for half (50 percent) of their contribution obligations and pledged to esisuisse; alternatively, smaller institutions can provide an equivalent guarantee in the form of a cash loan to the deposit guarantee scheme (Article 37h para. 3 let. c. of the BA in connection with Article 42f BO). - Such pledged securities can be liquidated if the obligated bank cannot provide necessary liquidity. ### Paybox model, payout timing, and operational readiness - The depositor protection scheme operates under a very narrow paybox model and does not meet international standards (CP 14). esisuisse funding is restricted to covering insured deposits and is prohibited from financing P&A transactions in liquidation or resolution measures. - Legal priority: the law grants priority to insured depositors in liquidation, increasing probability of close to 100 percent recovery rates, but timing of recoveries can be very long. Recovery processes in liquidations can take 10 to 20 years. - Revised payout deadlines (Entered into force on January 1, 2023): - Payments from the deposit guarantee to the investigating officer or bankruptcy liquidator must occur within seven days of receiving the bankruptcy notification. Previously: 20 days to transfer the funds. (Articles 37h para. 3 let. a. and 37j of the BA.) - The investigating officer or bankruptcy liquidator must pay depositors within seven days of receiving the payment instructions from the depositors. Previously: no specific time limit. - Despite legal deadlines, actual payout experience can be slower: example in a recent case where the payout took over a month. If all legal deadlines are used fully, the total payout period can be too long relative to depositor sensitivity and speed of deposit outflows. - FINMA, in cooperation with esisuisse, should set operational requirements to allow a payout as quick as possible and ensure operational readiness of appointed liquidators to carry out payouts in short timeframes. ### 125-percent liquidity requirement and implications - Banks must hold relatively liquid assets in Switzerland amounting to 125 percent of privileged deposits, including insured deposits. This can potentially eliminate the need for funding from esisuisse. - According to FINMA, most banks satisfy a portion of this requirement with cash deposited at the SNB, and the remainder with assets located in Switzerland, especially mortgages that can be converted into cash relatively swiftly. - FINMA can increase this requirement; according to FINMA most banks already maintain levels above 125 percent. - Example: in the recent failure of a small bank, FINMA required the bank to bolster its liquid assets to 250 percent of insured deposits, enabling full payouts by the liquidator without esisuisse funds. - Banks are required to report compliance with the 125-percent requirement annually; in crisis cases, FINMA intensifies supervision. ### Shortfalls against international standards and systemic implications - The ex-post funding mechanism, the 1.6 percent cap on total insured deposits, and the lack of a formal public backup deviate from international standards (IADI Core Principles CP9, CP14, CP15). - A cap on bank contributions diverges from peer jurisdictions and IADI Core Principles by not fully guaranteeing that all insured depositors up to a limit are protected and reimbursed. - A deposit insurance fund should set a target level for minimum funds to accumulate over time from banks (CP9) to mitigate procyclical impacts during payouts and to serve as equity to absorb losses and a liquidity source for immediate payouts if multiple banks face challenges. - The current pledged-asset “ex-ante contribution” model may be difficult to explain to the public and can be withdrawn when banks exit the scheme, preventing accumulation of independent DIS funds. ### Recommended reforms to align with international best practices - Review payout legal deadlines to allow for a speedier payout process and make it compliant with the reimbursing criteria of CP15, including the 7-day limit. - FINMA, in cooperation with esisuisse, should enhance operational requirements of banks to streamline the payout process, aiming to decrease the payout period to the shortest time possible, potentially enabling immediate access for depositors to their insured deposits; this requires significant operational readiness from banks and authorities. - Remove the DIS cap to make the scheme consistent with public policy objectives (CP13). - Introduce ex-ante funding, with a public nature, and a target level sufficient to payout insured depositors in the case of a simultaneous failure of three banks not classified as systemic; this should be supplemented by back-up funding from the government and would make the DIS compliant with CP9. The target level should be estimated by the authorities based on credible scenarios of outflows and considering the 125-percent Swiss-asset requirement. - Expand the DIS mandate to a pay box plus model, allowing it to fund resolution measures subject to safeguards (least-cost test), in accordance with CP14. - Establish the Deposit Insurance Agency (DIA) as a public entity with a statutory mandate, excluding active bankers and industry representatives from management and the Board. - Require the two exempted deposit-taking firms to become regular DIS members. ### Resolution financing and temporary public backstop - Switzerland currently lacks a dedicated resolution financing arrangement to cover potential losses associated with bank resolution. FSB Key Attributes (KA 6.3) require a resolution financing arrangement. Options include bank-financed deposit insurance, a dedicated resolution fund, or a mechanism for ex post recovery from industry of costs incurred by providing temporary financing for resolution efforts. - Modifying esisuisse’s mandate and funding models could introduce a new funding source but would be limited; establishing a new ex-ante fund would require time. - An ex-post financing mechanism is recommended to avoid burdening taxpayers and to address moral hazard concerns; it would allow authorities to allocate public funds for resolution and subsequently recover those funds from banks after the resolution decision, subject to conditions: - Procedure to identify failing institutions as systemic and determine when temporary public funds are necessary. - Mechanism to ensure quick access to public funding. - Legal framework linking temporary support to recovery of funds from stakeholders and, if needed, from the broader banking industry through levies (KA 6.2), implemented gradually to mitigate procyclicality. - The government—not the SNB—would be the appropriate authority to provide temporary public funding. ### SNB Emergency Liquidity Assistance (ELA) and public liquidity backstop - National Bank Act (NBA) Article 9 authorizes the SNB to lend to a broad set of counterparties to contribute to financial stability (Article 5, Paragraph 1, e.). The SNB Guidelines on the monetary policy instruments (Section 6) require an ELA applicant to be solvent and that the total amount of the ELA loan must be fully collateralized. - The Act does not explicitly recognize the stability of the financial system as a shared responsibility between the SNB and the Federal Council. The Federal Council could swiftly enact an emergency law to provide a guarantee to the SNB covering potential ELA-related losses (as demonstrated by the CS case). The role of the Federal Council in financial stability is contemplated in the draft of the Public Liquidity Backstop (PLB) Law within the Swiss TBTF resolution framework for SIBs. - Until 2023, the SNB’s ELA has primarily been operative only for SIBs because only SIBs were positioned to use the instrument (participated in ELA preparedness exercises, simulations, collateral stocktaking, and mobilization exercises). There are no legal impediments to broad ELA eligibility, including institutions eligible for SNB standard operations and FMIs. - The SNB does not have a comprehensive public regulation spelling out the ELA operational framework; details are discussed bilaterally with counterparties and documented in non-public MoUs. Existing references include Section 6 of the Guidelines on monetary policy instruments, Section 5 of the Liquidity Against Mortgage Collateral (LAMC) instruction sheet, Financial Stability Reports, the Federal Council Report on Banking Stability (FCRBS), and the draft PLB Law. *Source: Excerpt from IMF Switzerland country report chapter on depositor protection, deposit insurance, resolution financing, and SNB ELA.* ### 93. Since 2019, the SNB has taken initiatives to broaden its set of ELA counterparties, but ### Since 2019, the SNB has taken initiatives to broaden its set of ELA counterparties, but ### SNB initiatives and current scope - As of 2024, all Swiss banks can access the SNB’s liquidity under the LAMC, provided they meet the required legal and operational preparations. - In 2024 the SNB announced the Liquidity Against Security Collateral (LASC) initiative and is currently working on its operationalization. - The LAMC initiative—and the LASC once implemented—will enhance the SNB’s liquidity provision capacities by broadening the collateral framework. - The LAMC instruction sheet mentions ELA but lacks key components for an effective ELA framework, including: - absence of (i) a public reference to a flexible assessment of solvency for ELA propose, which are based on compliance with the minimum capital requirement (see Section 5.2 of the instruction sheet) rather than a forward-looking approach, and - (ii) a reference to remedial measures and conditionalities, as well as the supervisory intrusion that the provided liquidity could be tied to. - Initiatives currently cover only some asset classes — securities and mortgages. - The absence of a public reference to the forward-looking assessment of solvency could ex post fuel moral hazard, especially if that assessment is used instead of the announced hard-wired compliance with minimum capital requirements. - The lack of conditionalities and supervisory intrusion might limit SNB’s (or FINMA) capacity to address potential root causes of liquidity stress and to contain financial stability risks. - These elements (conditionalities and supervisory intrusion) would, however, be available to the SNB and the FINMA within the resolution framework in the TBTF regime, which has thus far been reserved for SIBs. ### Testing of the ELA framework during the CS crisis (empirical findings) - Initially, liquidity outflows surpassed the assumptions that underpinned prudential liquidity regulations, resulting in substantial demand for SNB support. - Then-existing support mechanisms included: - the LSFF, an overnight facility collateralized by HQLA assets, and - the ELA collateralized primarily by non-HQLA securities and mortgages. - CS quickly depleted LSFF and ELA against mortgage collateral, withdrawing CHF 48 billion, beyond which it couldn’t pledge or transfer any further securities to the SNB. - Ex post, it required CHF 168 billion to stabilize the situation. - To address the remaining liquidity gap of CHF 120 billion, the authorities implemented measures under emergency law: the additional ELA (ELA+) and the Public Liquidity Backstop (PLB). - Both initiatives were developed by SNB in collaboration with the Federal Council, with each provision capped at CHF 100 billion. - The ELA+ was made available to CS on March 16 and to UBS on March 19; CS ultimately utilizing CHF 50 billion—CHF 20 billion on March 17 and CHF 30 billion on March 20, 2023. - The PLB was introduced on March 16 (adopted on March 19), opening the possibility for the SNB to provide liquidity guaranteed by the Federal Government in case of CS default. - CS drew CHF 70 billion on March 20 at the SNB under the PLB instrument. - The emergency law limits the ELA+ to the specific takeover of CS by UBS and is set to expire on December 31, 2027. - Under this law, ELA+ can only be provided if there is a valid credit agreement between the SNB and CS. The initial agreement signed in March 2023 was terminated in August 2023 following the repayment of the ELA+ loans by CS. ### Risks from ELA+ and lessons on collateralized lending - The SNB’s implementation of the ELA+ marked a departure from established international practices, increasing the risk to its balance sheet. - The introduction of the ELA+ exposed the SNB to substantial risk despite CHF 100 billion cap and preferential rights in bankruptcy proceedings. - Potential real losses cannot be dismissed due to the granularity required for an accurate risk assessment in a liquidation scenario. - Collateralized lending remains widely accepted among central banks because it: - facilitates mobilization of collateral with high legal certainty, - adheres to specific eligibility criteria, - ensures proper valuation, and - allows application of sound risk control measures. - Collateral should ideally be mobilized ex ante, with due diligence conducted prior to granting ELA. - The ELA+ precedent may discourage other ELA stakeholders from taking necessary actions to improve collateral availability. ### Governance and clarity: distinguishing ELA within SNB toolkit - First step: better distinguish ELA within the SNB’s instrument toolkit to clarify: - ELA’s financial stability objective that extends beyond banks declared as SIBs, - its role as a liquidity-providing instrument complementary to resolution frameworks. - The ELA framework should be scalable and flexible, allowing central bank discretion on certain policy parameters to mitigate moral hazard. - Providing ELA shouldn’t be considered a hard-wired operation and might be subject to conditionalities and supervisory intrusion. ### Recommended public ELA regulation (structure and content) - A comprehensive ELA regulation could be structured around the following points: - (i) the financial stability objective underlying the operation and its discretionary nature; - (ii) the eligibility criteria for ELA applicants; - (iii) the requirement for forward-looking solvency and long-term viability of the ELA applicant; - (iv) the systemic relevance of the applicant at the time of the ELA request; - (v) the requirement for the loan to always be fully collateralized with an high level description of the collateral framework; - (vi) a list of potential ELA-related conditionalities; - (vii) a reference that receiving ELA might be tied to supervisory intrusion, including legal powers for the SNB and FINMA to conduct enhanced oversight; and - (viii) the reference to policy parameters, including a penalty interest rate for the loan and the term of the loan. - A comprehensive framework along these lines enables ELA to effectively serve as a liquidity-providing instrument for financial stability purposes. ### Communication and transparency - The regulation should be part of a comprehensive ex-ante communication strategy around ELA to: - manage expectations of other ELA stakeholders, - ensure SNB’s accountability, and - ensure compliance to sound governance. - Bilateral MoUs should be reserved for bank-specific issues such as collateral reporting or preparation. - The level of transparency should not diminish central bank discretion or freedom to decide case-by-case if liquidity support is provided, in which form and under which conditions. ### Solvency assessment: forward-looking approach - The SNB should communicate that solvency for the purpose of granting ELA is evaluated in a forward-looking manner, and FINMA should be able to provide such an assessment swiftly. - Distinguishing liquidity from solvency problems can be complex in practice, especially during crisis. - For ELA purposes, an institution is deemed forward-looking solvent if it has a credible prospect of maintaining or restoring its capital above the prudential minima within a reasonable period (e.g., 6 to 12 months). - A comparable assessment is contemplated within the current resolution framework of the TBTF regime and could be adapted for ELA to non-SIBs. ### ELF and two-regime distinction - The recently announced Extended Liquidity Facility (ELF) enhances identification of ELA and improves transparency but should be complemented by comprehensive guidelines. - The announcement distinguishes between two liquidity provision regimes designed to address extraordinary liquidity stress: - one for banks with unquestionable solvency seeking a limited amount of liquidity (comparable to standing liquidity instruments with expanded collateral), and - a second regime for banks whose solvency requires close monitoring (resembling a modern and flexible ELA with forward-looking solvency assessment). - SNB is encouraged to publish guidelines on these regimes along the lines discussed above. ### Viability assessment for ELA - Viability assessment should adopt a forward-looking perspective evaluating: - the longer-term viability of the entity’s business model, - lending practices, - whether the applicant’s ability to repay the ELA depends on specific reforms (e.g., changes in management or lending strategies), - whether alternative solutions, such as resolution, may be more suitable, - whether the applicant will be able to keep necessary licenses, - exposure to litigation or exclusion from financial market infrastructures. ### Collateral preparation, scope, and proposals - Wide-ranging collateral preparation ensures adequacy of collateral mobilization methods and related legal requirements. - Existing collateral preparation agreements pre-define scope of eligible assets and preset legal requirements but are restrictive in asset types (securities and mortgages) and participation is not mandatory. - The SNB should continue efforts to address assets currently not handleable due to type or legal impediments preventing mobilization. - Proposed more flexible approach: - All ELA-eligible counterparties submit a list of assets (domestic or abroad) to the SNB for due diligence verification regarding their eligibility for ELA, without transferring legal title. - Although title is not transferred, the SNB should ensure that collateral will not be encumbered at the time of ELA (e.g., Swiss mortgages that should be kept unpledged to meet deposit insurance requirements). - The SNB and counterparties can discuss ways to facilitate transfer or pledge of collateral during crisis, including contractual changes to documentation of some credit claims. - Because collateral is not mobilized nor encumbered ex ante, the SNB need not be specific on all collateral policy parameters during preparation; at the end of the process such collateral is prepared and ready for ELA even if it cannot be part of the bank liquidity management process. - The non-transferability of some credit claims, mainly older mortgages, severely limited the SNB’s liquidity provision capacity in the CS case. - The SNB successfully implemented mobilization of credit claims under the COVD-19 Refinancing Facility, an experiment that could be leveraged going forward. ### ELA eligibility expansion and powers for preparedness - Expanding ELA eligibility to all banks might require granting additional powers to the SNB and FINMA. - Current TBTF regime does not mandate banks to prepare for ELA but provides incentives for SIBs (partial reduction in HQLA requirements) to prepare mortgage collateral. - Measures to improve collateral preparedness would be necessary for other institutions, especially if resolution planning is required for all banks. - Options considered in the FCRBS include legal requirements or expanding incentives via reduction of HQLA requirements to all banks. - SNB could assess amounts of liquidity that could be provided against certain collateral classes (such as high-quality mortgages) but cannot safely do so for assets of lesser quality due to operational discretion and uncertainty around valuation and risk mitigation measures. - Additional powers could be granted to SNB and FINMA to enhance participation of banks in simulation exercises testing other aspects of the ELA framework. ### Simulation exercises: design tradeoffs - When designing simulation exercises, balance is needed between information disclosed to participants and safeguarding SNB’s discretionary operability. - Key tradeoffs: - Solvency assessment: forward-looking solvency should be defensible ex-post but remains probabilistic with parameters decided case-by-case. - Collateral policy: restricting collateral to high-quality assets enables ex-ante commitments on acceptance, valuation, and risk mitigation, but a restricted scope may reduce the amount of liquidity the central bank can provide. - Broader collateral pools may incentivize higher participation absent legal requirements but could disincentivize adequate liquidity management by banks if risk control measures cannot be accurately calibrated. *International Monetary Fund — SWITZERLAND (excerpts from the source content provided)* ### 108. Providing for a Public Liquidity Backstop (PLB) in the law is essential for effective ### 1cheea2025006-source-pdf - 108. Providing for a Public Liquidity Backstop (PLB) in the law is essential for effective ### Public Liquidity Backstop (PLB) — legal status and role - Swiss authorities could promptly activate emergency laws to provide a PLB during the CS case, but the PLB has yet to be formalized on ordinary law, reducing legal certainty and transparency. - The PLB would serve as the third line of defense against liquidity stress, behind tighter capital and liquidity requirements and the ELA itself. - Liquidity outflows observed during the 2023 episodes can be substantial, making potential ELA amounts difficult to collateralize, particularly for SIBs. - Conveying government support for granting ELA into ordinary law is part of measures proposed in the FCRBS to strengthen the Swiss TBTF regime for systemically important banks. ### Government guarantee for ELA — scope and operational considerations - International practice shows a government guarantee to the central bank for ELA purposes could be granted for a broader set of situations, to be decided case-by-case. - Situations where a government guarantee may be required: - risk of under-collateralization—the government would cover the remaining (un-collateralizable) liquidity needs; - the institution’s solvency is uncertain—with uncertainty originating from the forward-looking dimension of the solvency assessment; - ELA used for providing liquidity-in-resolution and concerns about the exit strategy (e.g., institutions undergoing resolution where solvency or viability is doubtful, or SNB’s liquidity provision cannot be fully collateralized). - Under sufficient legal provision, operational parameters of a government guarantee for ELA might be contemplated within an MoU, while safeguarding the SNB’s independence. - An extended government guarantee complements resolution of non-SIBs: if a bank satisfies resolution criteria and normal insolvency procedures could jeopardize financial stability, it should receive central bank liquidity support on the same terms as those applied to SIBs. - Broadening guarantee cases aligns with recommendations to expand resolution planning to category 3 banks and allow FINMA to apply resolution measures to any bank without creditors’ consent. ### Collateral policy — current SNB framework for monetary policy instruments - Eligibility is restricted to marketable assets within a predefined collateral basket established by the SNB. - Eligible securities include bonds with a minimum rating of AA- issued by public entities and corporate entities, and covered bonds issued by non-domestic banks and financial institutions. - Banks can rely on the HQLA classifications provided by the SNB via the SNB GC Basket (per FINMA Circular 2015/2 “Liquiditätsrisiken – Banken”, margins 148 and 149). - Accepted bonds are diversified across issuers, countries, and currencies; bonds in foreign currency represent around 95 percent of the outstanding amount of eligible (As of the end of October 2024). - For monetary policy instruments the SNB applies no haircuts, but implements overcollateralization and controls for securities with close links (own-used). - For the LSFF, counterparties must mobilize collateral covering at least 110 percent of their credit limit at the LSFF. - The SNB does not accept counterparties’ own securities or those issued by persons or companies holding at least 20 percent of the capital or voting rights in a counterparty, or vice versa. ### Collateral policy — ELA-specific arrangements and diversity - Legally, there are no restrictions on asset types the SNB might accept for ELA. - LASC and LAMC initiatives broaden the SNB’s collateral framework: - LASC scope will be defined by a collateral schedule and includes a broad range of non-HQLA bonds, equities, and securitized loans such as ABS. - LAMC accepts mortgages for residential, investment, and commercial properties. - Mobilization tests for non-marketable assets are mandatory for SIBs and for Swiss banks participating in LAMC and, in the future, in LASC. - Participation in LAMC and LASC is not mandatory for non-SIBs. ### Valuation, haircuts, and transparency - Valuation of marketable securities is conducted by third-party agents (TPA); the principal TPA, SIX, marks eligible securities to market twice a day and exercises margin calls. - Because valuation is mainly market-based, only securities with a market price can be used on a given day. - Haircuts: - No haircuts applied for collateral eligible for monetary policy instruments (but overcollateralization via margining is applied for LSFF). - Haircuts apply to collateral eligible for instruments for non-monetary policy operations: ELA-collateral mobilizable by SIBs, mortgage collateral under LAMC, and will be applied to HQLA and non-HQLA LASC-collateral. - ELA haircuts are determined by the SNB using Value-at-Risk models to capture exchange-rate, credit quality, and liquidity risks; the SNB does not publish its applicable haircuts but communicates them bilaterally to counterparties. - For LAMC collateral, applicable effective average haircuts range from 10 to 15 percent. - Recommendations: - SNB should better integrate theoretical valuation in its daily workflow while keeping full control of the valuation methodology. - SNB should apply risk-based haircuts for monetary policy collateral, maintain full control of the methodology, and publish applicable haircuts along with the list of eligible securities. - Publishing haircuts and revising them at low frequency (e.g., every two years) would reduce procyclicality and help counterparties manage liquidity. ### Non-standard collateral, securitization, and cross-border mobilization - Significant asset classes are eligible only in securitized form, including corporate, household, and foreign loans. - Requiring securitization for critical classes of foreign collateral could restrict SNB liquidity provision capacity, especially to globally active banks. - Cross-border mobilization of non-standard collateral is a key international task: - Progress exists for marketable securities that can clear with foreign triparty custodians. - Scaling to non-standard collateral may require significant additional or orthogonal efforts. - For a G-SIB liquidity backstop, the SNB could engage with central banks in jurisdictions where counterparties hold significant foreign assets to discuss collateral mobilization under local laws. ### Communication, discretion, and ex-ante ELA regulation - Balance required between discretion (to prevent moral hazard) and transparency (for accountability and counterparty preparedness). - Conservative collateral frameworks allow transparency; discretion is needed for lesser-quality assets. - Typical ELA applicants are under stress and may have liquidated or encumbered high-quality collateral. - Recommendation: include a list of eligible asset classes in the ELA regulation (even at a high level) to incentivize counterparties to prepare collateral. - Central banks can define collateral preference order, valuation methodologies, and risk control measures; these should be specified in ELA regulation where appropriate. - Principle of risk equivalence for risk-based haircut calibration should guide ELA measures, but full transparency may not be achievable for ELA-only collateral; discretion on concentration limits and overcollateralization should be permitted and mentioned in the ELA regulation. ### Collateral scanning, MoU, and integration with PLB/government guarantee - SNB should conduct collateral scanning more systematically: compare counterparties’ short-term runnable liabilities to the amount of collateral the central bank can effectively mobilize operationally and legally, value, and implement risk controls. - Collateral scanning so far is done with SIBs and non-SIBs participating or planning to participate in LAMC and LASC; generalizing to all ELA-eligible counterparties and asset classes requires better standardization. - A comprehensive collateral policy is essential for preparing the MoU on the PLB and the government guarantee, since a government guarantee is needed in cases of ELA under-collateralization. - Liquidity potentially available under ELA should be included in internal discussions with FINMA and the Federal Council when delineating necessary liquidity provision under the PLB or the government guarantee. ### Resources and organization — resolution function - The resolution function is challenging and resource intensive. - FINMA’s resolution unit (GB-R) also handles significant supervisory functions, including recovery planning, early intervention, and liquidation, and is responsible for resolution of FMIs, insurance companies, and collective investments. - When evaluating resource impacts, FINMA should benchmark staffing against peer authorities with similar mandates and use a bottom-up approach to identify specific resource needs. - Combining cross-jurisdiction benchmarking with a bottom-up approach reveals that FINMA’s current staffing for recovery and resolution is significantly below the lower end of comparable G-SIB jurisdictions. *Italic: Source: 1cheea2025006-source-pdf - 108. Providing for a Public Liquidity Backstop (PLB) in the law is essential for effective* ### 126. FINMA’s recovery and resolution unit is relatively small, with about 30 staff members ### 1cheea2025006-source-pdf - 126. FINMA’s recovery and resolution unit is relatively small, with about 30 staff members ### Staffing and workload - FINMA’s recovery and resolution unit has about 30 staff members (24 in 2023). - Approximately 30 percent of their time is dedicated to recovery plans. - Only four SIBs and two systemically important FMIs are required to draw up recovery plans and have approved plans. - Remaining time (around 21 FTEs, or 12 banks per FTE) is spent on: - resolution planning (including FMIs), - Swiss Emergency Plans, - policy and international work, - bank liquidation functions for all institutions supervised by FINMA. ### Peer comparisons and implied staffing benchmarks - FDIC (United States): around 500 FTEs for resolution tasks (about 10 insured depository institutions per FTE), with additional support from the Fed and OCC for crisis management. - BoE Resolution Directorate: 87 staff (about 12 banks per FTE). - BaFin’s resolution function: around 100 staff, supported by the SRB, which dedicates about 20 percent of its time (around 100 FTEs) to Germany, resulting in about 10 banks per FTE. - Using BaFin’s staffing level per bank, GB-R should have 26 FTEs dedicated solely to banking resolution (statement in source). - For larger institutions: - FINMA has about 7.5 FTEs per SIB. - BoE Resolution Directorate has around 11 FTEs per each of the eight major banks under the U.K. Resolvability Assessment Framework. - BaFin and the SRB have about 10 FTEs for each of the 21 significant institutions in Germany. - Top-down metric recommendation: for category 1 and 2 banks alone, FINMA should have at least 40 FTEs dedicated to bank resolution. ### Resource shortfalls, functional needs, and recommendations - Bottom-up perspective: the metrics above underestimate the resource shortfall due to fixed costs of maintaining expertise across domains and the need for comprehensive recovery planning. - Key areas requiring sufficient expertise and staffing: - recovery plan assessment, - resolution plan assessment, - enhancement of FINMA’s resolution preparedness, - legal support, - policy development, - international cooperation. - Current gaps: - Some specialized fields, such as corporate finance and valuation, are significantly understaffed. - If all banks are mandated to prepare recovery plans, current allocation (30 percent of total staff, around 9 FTEs) will be inadequate. - If FINMA develops resolution plans for category 3 banks, the previously mentioned 40 FTEs will be insufficient. - Preparing resolution manuals is resource-intensive and does not scale with number of banks. - Practices in peer jurisdictions: - Specialized units for resolution preparedness (manuals, contingency planning, crisis simulations, etc.) exist in other authorities. - Hiring expert staff from audit firms and law firms during a crisis is common practice; requires procurement processes and pre-selection of relevant firms. - Such external resources should be funded and directed exclusively by FINMA, with no intervention from any other entity. - Minimum staffing conclusions: - Recovery and Resolution Unit should have no fewer than 40 FTEs for the resolution of banks function alone (top-down peer comparison). - This 40 FTEs must be complemented by additional staff for recovery planning, early intervention, and specialized areas (e.g., resolution preparedness), increasing the minimum by a substantial margin. - FINMA should conduct a comprehensive bottom-up assessment of its tasks and benchmark them against peer authorities to decide correct staffing levels. - Implementation challenge: - Achieving adequate staffing will be a considerable challenge; current situation is unsustainable and must be addressed within the next three to five years. - If FINMA cannot bolster workforce and implement a rigorous work plan over the next three to five years, authorities will need to find solutions and support FINMA to ensure crisis management and resolution function has necessary resources and critical mass. ### Resolution of FMIs and legal framework - FMIA establishes a framework for insolvency and resolution of FMIs; insolvency regime applies to all FMIs supervised by FINMA regardless of systemic importance. - For systemically important FMIs, additional requirements for recovery, orderly wind-down and resolution planning are imposed. - All systemically important FMIs supervised by FINMA have drawn up a recovery plan and an orderly wind-down plan; each has been assessed and approved by FINMA. - FINMA is tasked with creating resolution plans for systemically important FMIs; as of the source text: - FINMA has not prepared any resolution plans for these FMIs, but work was under way and had progressed well in 2024. - Resolution strategies have been defined and building blocks of resolution plans have been developed. - Resolution planning requirements specifically apply to SIX x-clear and SIX SIS. - Swiss Interbank Clearing (SIC), which operates on behalf of the SNB, is not subject to additional planning requirements but is subject to dedicated requirements, including recovery planning, under the NBO, subject to SNB oversight. - Legal framework review: - Ongoing comprehensive review aims to introduce FMI-specific rules, in particular CCP-specific resolution tools, to align Swiss FMI legislation with FSB recommendations and international best practices. - Motivation: existing bank-oriented resolution tools may not adequately address specific challenges of FMIs, especially CCPs, given their unique operational characteristics and risks. - Review will enhance Switzerland’s preparedness to handle potential crises involving FMIs and improve efficiency and effectiveness of resolution processes. *Source: Extract from IMF staff report chapter on FINMA recovery and resolution unit and FMI resolution (paragraphs 126–132).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1cheea2025006-source-pdf.pdf_