## _cr07198 — Section 1 and Section 2

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---

### Introduction
- Purpose: Factual update of the 2001 assessment of Switzerland’s compliance with the 1997 Basel Core Principles for Effective Banking Supervision (BCP), incorporating follow-up on the 2001 FSAP recommendations.
- Based on: factual update prepared by the Swiss Federal Banking Commission (SFBC); interviews with SFBC staff, external auditors, industry and professional associations; legal and background documents.
- Timing: completed in May 2007; follows the revised BCP that came into effect October 2006.
- Note: update is based solely on laws, supervisory requirements, and practices in place at the time of assessment. Draft initiatives not yet final (e.g., draft FINMA Act) were noted but not treated as implemented.

### Overview: Supervisory Scope
- SFBC responsibilities:
  - Supervises all banks in Switzerland, securities firms, exchanges, and investment funds.
  - Headed by a commission whose members are appointed by the Swiss Federal Council.
- Organizational structure:
  - Large Banking Groups Department dedicated to supervision of the two large banks; includes a risk management unit, on-site reviews unit, and units for continuous off-site supervision.
  - Banks/Securities Firms Department supervises small and midsized banks.
  - Additional units for licensing and problem banks.
- Cross-border and cooperative engagement:
  - Improved outreach to foreign supervisors and collaboration with external auditors and industry.
  - Relationship with host supervisors of the two large banks (Federal Reserve Bank of New York and the Financial Services Authority (FSA)) cited as a model for cross-border cooperation.
  - Regular consultation with industry and participation in Basel and international working groups.
- Capacity concern:
  - SFBC needs to continue advancing staff expertise and advanced skills to supervise complex, globally active banks.

### BCP factual update — Summary findings and progress
- Overall assessment:
  - SFBC has addressed most areas in the “Recommended Action Plan—Basel Core Principles” from the 2001 FSAP.
  - Two noteworthy remaining concerns: SFBC’s budgetary independence and liquidity monitoring.
- Update organized by the seven broad categories of the 2006 Revised BCP.

H3: Objectives, independence, powers, transparency and cooperation (Principle 1)
- FINMA integration:
  - Supervision to be integrated under a new supervisory body, FINMA; draft FINMA Act under Parliamentary discussion.
  - Authorities anticipate statute adoption in 2007.
  - FINMA expected to become operational mid to late 2008 (originally envisaged January 1, 2008).
- Concerns regarding draft FINMA Act:
  - Some provisions in Article 7 could give industry excessive leverage and provide cover for forbearance.
  - Budgetary independence not yet achieved: SFBC is still part of central government expense calculation; expected to change when draft FINMA Act is adopted.
  - Provisions that could affect operational and budgetary independence include:
    - Federal oversight of strategy and policy issues applicable to the financial center (Article 21).
    - Remuneration scale of FINMA employees (Article 13).
    - Approval of the oversight tax to fund FINMA (Article 15).
  - Authorities’ clarification: Article 21 intended as exchange channel; Federal Council not competent to overrule FINMA single case decisions and regulations; powers over oversight tax and remuneration intended as checks and balances.

H3: Licensing and structure (Principles 2–5)
- Licensing practice:
  - SFBC grants roughly 8–10 licenses a year.
  - In reviewing applications SFBC evaluates corporate governance, risk management, internal controls (including detection and prevention of criminal activities), and ultimate shareholders when evaluating ownership changes.
  - SFBC publishes a list of licensed banks and branches of foreign banks in three languages on its website.
- Remaining exception:
  - Banking Ordinance permits nonbank employer-sponsored deposit-taking entities (Betriebssparkassen) that are not licensed or regulated as financial institutions.
  - Federal Council and Parliament determined in 2005 that systemic risk from the few remaining Betriebssparkassen was negligible; exception remains.
  - Federal Council decided to enhance depositor protection via active information about Betriebssparkassen risks.
  - Basel Core Principles Methodology allows such exceptions if nonbank deposit-taking entities do not hold a significant proportion of deposits in the financial system.

H3: Prudential regulation and requirements (Principles 6–18)
- Regulatory guidance issued:
  - SFBC issued circulars addressing corporate governance, internal controls, large bank supervision, supervisory reporting, audit, audit companies, anti-money laundering and self-regulation.
  - Five circulars relating to Basel II entered into force January 1, 2007 covering credit, market, operational, capital adequacy disclosure and large exposures.
  - Capital Adequacy Ordinance entered into force January 1, 2007.
  - Earlier SFBC circulars (e.g., interest rate risk, outsourcing) and SFBC-endorsed Swiss Bankers Association guidelines generally address BCP essential criteria.
- Basel II implementation approach:
  - Switzerland incorporates all approaches in Basel II and the three pillars.
  - Advanced approaches (AMA, A-IRB, market risk advanced approaches) to be adopted in unmodified form by the two large Swiss banks and a few larger banks.
  - Effective date for advanced approaches: January 1, 2008.
  - Most other Swiss banks to apply simpler approaches with effective date January 1, 2007.
  - Simpler approaches choices:
    - SA-CH (Swiss approach): differs from Basel II in certain credit risk weights; operational risk calculation same as Basel II.
    - SA-BIS (international approach, “Basel II pure”): includes multipliers (greater than 1) for credit risk to ensure capital requirements do not fall below Basel I on average.
  - Rationale: QIS-CH 5 impact study showed Basel II pure resulted in less capital for banks active in traditional lending; multipliers chosen accordingly. The two large banks excluded from QIS-CH 5 (they participated in international QIS 5).
  - Impact on asset-management/trading-focused banks: Increase in required capital due to new operational risk charge.
- Capital buffer practice:
  - SFBC expects banks to hold 20 percent additional capital above the 8 percent requirement, implying total capital to risk weighted assets ratio of 9.6 percent.
  - If a bank falls below the 20 percent threshold, it is placed under closer supervision and required to raise its capital adequacy ratio back above the 20 percent threshold.
  - This buffer is applied to all banks under Basel I and will continue under Basel II above Pillar I requirements.
- Systemic risk and large banks:
  - Question raised whether an additional capital charge should apply to the two large banks after adoption of Basel II.
  - Recommendation: Pillar II capital requirements should be thoroughly evaluated and considered for large banks, re-assessed annually to reflect institution-specific risk profile and supervisory concerns; approach could require intensified oversight, particularly in market risk.
- Progress from 2001 recommendations:
  - Plans to abolish current 12.5 percent capital reduction for cantonal banks:
    - On November 3, 2005 the Association of Swiss Cantonal Banks announced the reduction will be phased out gradually after Basel II implementation in 2007 with full elimination by 2011.
  - Liquidity supervision:
    - Supervision of bank-specific liquidity remains an area needing attention; current approach in Banking Ordinance considered outdated for large banks’ operations.
    - SFBC does not rely solely on the liquidity statement in the Banking Ordinance: external auditors assess adequacy of liquidity management systems and SFBC staff monitors quantitative liquidity measures.
    - SFBC plans to address liquidity more fully but has not yet done so due to resource restrictions and other priorities (e.g., Basel II).
  - Early warning systems:
    - SFBC developed and recently implemented an early warning system for small- and medium-sized banks considering quantitative and qualitative factors.
    - Large Banking Groups Department developed an assessment tool as an early warning indicator based on eight criteria; ratings influence supervisory strategy.
    - Systems are new and effectiveness will be evaluated over time.
  - Data collection:
    - SFBC has improved data collection and is collecting additional data such as asset quality and gap reports.

H3: Methods of ongoing banking supervision (Principles 19–21)
- Two-tier supervision model:
  - SFBC-approved audit firms perform on-site reviews; SFBC retains responsibility for overall supervision and enforcement.
  - Small- and medium-sized banks: all on-site reviews performed by external auditors; annual regulatory audit report completed.
  - Auditor quality assurance unit (formed since prior FSAP) performs quality review of auditors’ working papers and audit quality review at the bank during the external audit; beneficial to SFBC.
- Supervision of the two large banks:
  - SFBC developed a formal on-site review program for the two large banks, though limited relative to their size.
  - Two on-site reviews per year are performed by SFBC staff in each large bank.
  - External auditors perform the bulk of on-site supervision work and must file an extensive annual regulatory audit report including qualitative assessments of risk management.
  - Two in-depth audits also performed on specific business activities or regulatory issues.
  - SFBC off-site activities include review of external auditor reports and bank-provided information, regular contact with external auditors and the bank, and regular contact with domestic nonbank and foreign banking supervisors.
  - Recommendation: For the two large banks, SFBC should continue to advance its expertise and engagement through performing more on-site work.
- Progress from 2001 recommendations:
  - Contact with senior management has improved and is focused on higher-risk banks.
  - SFBC Large Banking Groups Department staff meets at least quarterly with various management levels of the large banks.

### Supervision frequency and structure (Section 2)
- For small- and medium-sized banks, the SFBC meeting frequency depends on the bank’s risk profile.
- Major change since the 2001 FSAP: addition of the Audit Firms Department, which evaluates external auditors’ work performed in the small and medium sized banks.
- For large banks, the audit process is not under the quality assurance unit; the quality assurance unit assists the Large Banking Groups Department in conducting quality assurance on large banks’ auditors.
- The Audit Firms Department’s review process includes going onsite at the bank, reviewing working papers, and interviewing auditors.

### Accounting and disclosure (Principle 22)
- External auditors audit financial statements and check bank compliance with legal and regulatory requirements.
- The SFBC approves audit companies and lead auditors.
- Auditors in charge are rotated every seven years, but there is no requirement to rotate the audit company.
- The SFBC has full access to external auditors’ working papers and has the power to require additional audits.
- Annual financial statements must be fully audited every year, and the SFBC is to be immediately informed of any serious issues.
- External auditors work closely with internal auditors on scope of reviews and the SFBC can comment on the audit scope.
- Recommendations:
  - The SFBC should involve different international experts and audit firms for special audits.
  - The SFBC should consider the periodic rotation of audit firms.

### Corrective and remedial powers of supervisors (Principle 23)
- Amendments to the Banking Act in 2004 specified the grounds for action by which the SFBC could issue “protective measures” against a bank or individual.
- Grounds include a bank that has serious liquidity or capital adequacy issues.
- Protective measures include issuing instructions for the bank to do something (wide powers per the SFBC), appointing someone to perform an investigation, or appointing someone to run the institution.
- Progress on 2001 recommendations:
  - The SFBC continues not to have the direct authority to impose civil monetary penalties on banks or directors or managers.
  - This authority is not contemplated under the draft FINMA Act.
  - The draft FINMA Act introduces an explicit sanctioning regime for breaches of the law and regulations; in some cases, the maximum sanctions seem modest and unlikely to deter abuse.
  - The draft FINMA Act addressed the publication of an oversight decision: Article 34 states that in case of a strong violation of supervisory provisions, the FINMA can publish its final decision, and personal data may be given.
  - Under the 2004 amendments to the Banking Act, the SFBC can publish protective measures.

### Consolidated and cross-border banking supervision (Principles 24–25)
- Amendment to the Banking Act, effective January 1, 2006, established formal legal rules for financial groups, insurance groups, and financial conglomerates.
- The same rules apply to securities firms through another law.
- Since the last FSAP, on-site visits by host supervisors have been conducted in Switzerland by seven different regulators.
- Progress on 2001 recommendations:
  - The SFBC has formalized Memoranda of Understanding or exchange of letters with most banking supervisors in strategically significant countries.
  - Since the last FSAP, the SFBC concluded Memoranda of Understanding with: the French Commission Bancaire, the State of Connecticut Department of Banking, the UK FSA, the Hong Kong Monetary Authority, and the U.S. Federal Reserve Board, OCC, and FDIC.
  - Exchange of letters regarding information sharing occurred with the Belgian and the New York State Banking Department and with Banca d’Italia.
  - The SFBC’s tripartite arrangement with the U.S. and UK regulators on the supervision of the two large Swiss banking groups is considered effective and a model for supervisory cooperation. The regulators meet frequently among themselves and with the two banks. The SFBC visits other foreign regulators and the two large banks in other strategically significant countries.

### Key recommendations (from Table 1 ― Basel Core Principles)
- BCP 1 (Objectives, independence, powers, transparency, and cooperation):
  - Revise provisions in Article 7 of the draft FINMA Act, which presently could give industry representatives excessive leverage in opposing regulation.
  - Continue to advance the depth of staff expertise and skills.
- BCP 2–5 (Licensing and structure):
  - Recommendations listed in source (no additional detail in excerpt).
- BCP 6–18 (Prudential regulation and requirements):
  - As part of Basel II implementation, review in depth the capital adequacy of the two large banks.
  - Develop an advanced supervisory framework for bank-specific liquidity risks.
- BCP 9–21 (Methods of ongoing banking supervision):
  - Consider advancing engagement with banks, through performing more on-site discovery work.
- BCP 22 (Accounting and disclosure):
  - Consider using a range of international experts and audit firms for the special audits.
  - Consider the periodic rotation of audit firms.
- BCP 23 (Corrective and remedial powers of supervisors):
  - The SFBC should have the authority to impose direct civil monetary penalties on banks, directors, or managers.
- BCP 24–25 (Consolidated and cross-border banking supervision):
  - Recommendations listed in source (no additional detail in excerpt).

### Authorities’ response
- Under Basel II, Pillar II capital needs will be evaluated for the two large banks; this is expected to be implemented over the next 2-3 years.
- According to the New Basel Capital Accord, the Pillar 2 capital charges will be evaluated on a regular basis for each bank to reflect the institutions' specific risk profiles and supervisory concerns of the SFBC.
- The SFBC undertakes a great deal of effort to understand and evaluate the two large banks' complex risk profiles and models.
- The SFBC’s internal rating system for the two large banks is the main tool to structure the Supervisory Review and Evaluation Process of the banks' risk and capital situation.
- This instrument undergoes a periodic validation and improvement process.
- Current improvements to the tool include a more detailed inclusion of information from the banks' internal capital models and stress testing among other things.
- The additional Pillar 2 capital requirements will be based on the findings of this institute-specific Supervisory Review and Evaluation Process.
- The SFBC agrees that the supervisory approach to assess liquidity risks needs improvement.
- Considering resources and other priorities, the liquidity supervision approach for the two large banks was reviewed in the second half of 2006.
- A new assessment method of bank-specific liquidity was introduced in December 2006 in the context of the internal rating system of the two large banks.
- The SFBC participates in the current efforts of the Basel Committee to review the international supervisory standards for assessing bank-specific liquidity risks and will consider the improvements in this area and examine their implementation in the Swiss banking regulation.

*IMF Country Report No. 07/198 — Switzerland: Financial Sector Assessment Program—Factual Update—Basel Core Principles for Effective Banking Supervision (May 2007), Section 1 and Section 2*

### Section 1

### _cr07198 - Section 1

### Introduction
- Purpose: Factual update of the 2001 assessment of Switzerland’s compliance with the 1997 Basel Core Principles for Effective Banking Supervision (BCP), incorporating follow-up on the 2001 FSAP recommendations.
- Based on: factual update prepared by the Swiss Federal Banking Commission (SFBC); interviews with SFBC staff, external auditors, industry and professional associations; legal and background documents.
- Timing: completed in May 2007; follows the revised BCP that came into effect October 2006.
- Note: update is based solely on laws, supervisory requirements, and practices in place at the time of assessment. Draft initiatives not yet final (e.g., draft FINMA Act) were noted but not treated as implemented.

### Overview: Supervisory Scope
- SFBC responsibilities:
  - Supervises all banks in Switzerland, securities firms, exchanges, and investment funds.
  - Headed by a commission whose members are appointed by the Swiss Federal Council.
- Organizational structure highlights:
  - Large Banking Groups Department dedicated to supervision of the two large banks; includes a risk management unit, on-site reviews unit, and units for continuous off-site supervision.
  - Banks/Securities Firms Department supervises small and midsized banks.
  - Additional units for licensing and problem banks.
- Cross-border and cooperative engagement:
  - Improved outreach to foreign supervisors and collaboration with external auditors and industry.
  - Relationship with host supervisors of the two large banks (Federal Reserve Bank of New York and the Financial Services Authority (FSA)) cited as a model for cross-border cooperation.
  - Regular consultation with industry and participation in Basel and international working groups.
- Capacity concern:
  - SFBC needs to continue advancing staff expertise and advanced skills to supervise complex, globally active banks.

### BCP Factual Update — Summary Findings and Progress
- Overall assessment:
  - SFBC has addressed most areas in the “Recommended Action Plan—Basel Core Principles” from the 2001 FSAP.
  - Two noteworthy remaining concerns: SFBC’s budgetary independence and liquidity monitoring.
- Organization of update:
  - Discussion organized into the seven broad categories of the 2006 Revised BCP.

#### Objectives, independence, powers, transparency and cooperation (Principle 1)
- FINMA integration:
  - Supervision to be integrated under a new supervisory body, FINMA; draft FINMA Act under Parliamentary discussion.
  - Authorities anticipate statute adoption in 2007.
  - FINMA expected to become operational mid to late 2008 (originally envisaged January 1, 2008).
- Concerns regarding draft FINMA Act:
  - Some provisions in Article 7 could give industry excessive leverage and provide cover for forbearance.
  - Budgetary independence not yet achieved: SFBC is still part of central government expense calculation; expected to change when draft FINMA Act is adopted.
  - Provisions that could affect operational and budgetary independence include:
    - Federal oversight of strategy and policy issues applicable to the financial center (Article 21).
    - Remuneration scale of FINMA employees (Article 13).
    - Approval of the oversight tax to fund FINMA (Article 15).
  - Authorities’ clarification: Article 21 intended as exchange channel; Federal Council not competent to overrule FINMA single case decisions and regulations; powers over oversight tax and remuneration intended as checks and balances.

#### Licensing and structure (Principles 2–5)
- Licensing practice:
  - SFBC grants roughly 8–10 licenses a year.
  - In reviewing applications SFBC evaluates corporate governance, risk management, internal controls (including detection and prevention of criminal activities), and ultimate shareholders when evaluating ownership changes.
  - SFBC publishes a list of licensed banks and branches of foreign banks in three languages on its website.
- Exception remaining:
  - Banking Ordinance permits nonbank employer-sponsored deposit-taking entities (Betriebssparkassen) that are not licensed or regulated as financial institutions.
  - Federal Council and Parliament determined in 2005 that systemic risk from the few remaining Betriebssparkassen was negligible; exception remains.
  - Federal Council decided to enhance depositor protection via active information about Betriebssparkassen risks.
  - Basel Core Principles Methodology allows such exceptions if nonbank deposit-taking entities do not hold a significant proportion of deposits in the financial system.

#### Prudential regulation and requirements (Principles 6–18)
- Regulatory guidance issued:
  - SFBC issued circulars addressing corporate governance, internal controls, large bank supervision, supervisory reporting, audit, audit companies, anti-money laundering and self-regulation.
  - Five circulars relating to Basel II entered into force January 1, 2007 covering credit, market, operational, capital adequacy disclosure and large exposures.
  - Capital Adequacy Ordinance entered into force January 1, 2007.
  - Earlier SFBC circulars (e.g., interest rate risk, outsourcing) and SFBC-endorsed Swiss Bankers Association guidelines generally address BCP essential criteria.
- Basel II implementation approach:
  - Switzerland incorporates all approaches in Basel II and the three pillars.
  - Advanced approaches (AMA, A-IRB, market risk advanced approaches) to be adopted in unmodified form by the two large Swiss banks and a few larger banks.
  - Effective date for advanced approaches: January 1, 2008.
  - Most other Swiss banks to apply simpler approaches with effective date January 1, 2007.
  - Simpler approaches choices:
    - SA-CH (Swiss approach): differs from Basel II in certain credit risk weights; operational risk calculation same as Basel II.
    - SA-BIS (international approach, “Basel II pure”): includes multipliers (greater than 1) for credit risk to ensure capital requirements do not fall below Basel I on average.
  - Rationale: QIS-CH 5 impact study showed Basel II pure resulted in less capital for banks active in traditional lending; multipliers chosen accordingly. The two large banks excluded from QIS-CH 5 (they participated in international QIS 5).
  - Impact on asset-management/trading-focused banks: Increase in required capital due to new operational risk charge.
- Capital buffer practice:
  - SFBC expects banks to hold 20 percent additional capital above the 8 percent requirement, implying total capital to risk weighted assets ratio of 9.6 percent.
  - If a bank falls below the 20 percent threshold, it is placed under closer supervision and required to raise its capital adequacy ratio back above the 20 percent threshold.
  - This buffer is applied to all banks under Basel I and will continue under Basel II above Pillar I requirements.
- Systemic risk consideration for large banks:
  - Question raised whether an additional capital charge should apply to the two large banks after adoption of Basel II.
  - Recommendation: Pillar II capital requirements should be thoroughly evaluated and considered for large banks, re-assessed annually to reflect institution-specific risk profile and supervisory concerns; approach could require intensified oversight, particularly in market risk.
- Progress from 2001 recommendations:
  - Plans to abolish current 12.5 percent capital reduction for cantonal banks:
    - On November 3, 2005 the Association of Swiss Cantonal Banks announced the reduction will be phased out gradually after Basel II implementation in 2007 with full elimination by 2011.
  - Liquidity supervision:
    - Supervision of bank-specific liquidity remains an area needing attention; current approach in Banking Ordinance considered outdated for large banks’ operations.
    - SFBC does not rely solely on the liquidity statement in the Banking Ordinance: external auditors assess adequacy of liquidity management systems and SFBC staff monitors quantitative liquidity measures.
    - SFBC plans to address liquidity more fully but has not yet done so due to resource restrictions and other priorities (e.g., Basel II).
  - Early warning systems:
    - SFBC developed and recently implemented an early warning system for small- and medium-sized banks considering quantitative and qualitative factors.
    - Large Banking Groups Department developed an assessment tool as an early warning indicator based on eight criteria; ratings influence supervisory strategy.
    - Systems are new and effectiveness will be evaluated over time.
  - Data collection:
    - SFBC has improved data collection and is collecting additional data such as asset quality and gap reports.

#### Methods of ongoing banking supervision (Principles 19–21)
- Two-tier supervision model:
  - SFBC-approved audit firms perform on-site reviews; SFBC retains responsibility for overall supervision and enforcement.
  - Small- and medium-sized banks: all on-site reviews performed by external auditors; annual regulatory audit report completed.
  - Auditor quality assurance unit (formed since prior FSAP) performs quality review of auditors’ working papers and audit quality review at the bank during the external audit; beneficial to SFBC.
- Supervision of the two large banks:
  - SFBC developed a formal on-site review program for the two large banks, though limited relative to their size.
  - Two on-site reviews per year are performed by SFBC staff in each large bank.
  - External auditors perform the bulk of on-site supervision work and must file an extensive annual regulatory audit report including qualitative assessments of risk management.
  - Two in-depth audits also performed on specific business activities or regulatory issues.
  - SFBC off-site activities include review of external auditor reports and bank-provided information, regular contact with external auditors and the bank, and regular contact with domestic nonbank and foreign banking supervisors.
  - Recommendation: For the two large banks, SFBC should continue to advance its expertise and engagement through performing more on-site work.
- Progress from 2001 recommendations:
  - Contact with senior management has improved and is focused on higher-risk banks.
  - SFBC Large Banking Groups Department staff meets at least quarterly with various management levels of the large banks.

*IMF Country Report No. 07/198 — Switzerland: Financial Sector Assessment Program—Factual Update—Basel Core Principles for Effective Banking Supervision (May 2007), Section 1*

### Section 2

### _cr07198 - Section 2

### Supervision frequency and structure
- For small- and medium-sized banks, the SFBC meeting frequency depends on the bank’s risk profile.
- One major change since the 2001 FSAP: addition of the Audit Firms Department, which evaluates external auditors’ work performed in the small and medium sized banks.
- For large banks, the audit process is not under the quality assurance unit; the quality assurance unit assists the Large Banking Groups Department in conducting quality assurance on large banks’ auditors.
- The Audit Firms Department’s review process includes going onsite at the bank, reviewing working papers, and interviewing auditors.

### Accounting and disclosure (Principle 22)
- External auditors audit financial statements and check bank compliance with legal and regulatory requirements.
- The SFBC approves audit companies and lead auditors.
- Auditors in charge are rotated every seven years, but there is no requirement to rotate the audit company.
- The SFBC has full access to external auditors’ working papers and has the power to require additional audits.
- Annual financial statements must be fully audited every year, and the SFBC is to be immediately informed of any serious issues.
- External auditors work closely with internal auditors on scope of reviews and the SFBC can comment on the audit scope.
- Recommendations:
  - The SFBC should involve different international experts and audit firms for special audits.
  - The SFBC should consider the periodic rotation of audit firms.

### Corrective and remedial powers of supervisors (Principle 23)
- Amendments to the Banking Act in 2004 specified the grounds for action by which the SFBC could issue “protective measures” against a bank or individual.
- Grounds include a bank that has serious liquidity or capital adequacy issues.
- Protective measures include issuing instructions for the bank to do something (wide powers per the SFBC), appointing someone to perform an investigation, or appointing someone to run the institution.
- Progress on recommended actions from 2001 Assessment:
  - The SFBC continues not to have the direct authority to impose civil monetary penalties on banks or directors or managers.
  - This authority is not contemplated under the draft FINMA Act.
  - The draft FINMA Act introduces an explicit sanctioning regime for breaches of the law and regulations; in some cases, the maximum sanctions seem modest and unlikely to deter abuse.
  - The draft FINMA Act addressed the publication of an oversight decision: Article 34 states that in case of a strong violation of supervisory provisions, the FINMA can publish its final decision, and personal data may be given.
  - Under the 2004 amendments to the Banking Act, the SFBC can publish protective measures.

### Consolidated and cross-border banking supervision (Principles 24–25)
- Amendment to the Banking Act, effective January 1, 2006, established formal legal rules for financial groups, insurance groups, and financial conglomerates.
- The same rules apply to securities firms through another law.
- Since the last FSAP, on-site visits by host supervisors have been conducted in Switzerland by seven different regulators.
- Progress on recommended actions from 2001 Assessment:
  - The SFBC has formalized Memoranda of Understanding or exchange of letters with most banking supervisors in strategically significant countries.
  - Since the last FSAP, the SFBC concluded Memoranda of Understanding with: the French Commission Bancaire, the State of Connecticut Department of Banking, the UK FSA, the Hong Kong Monetary Authority, and the U.S. Federal Reserve Board, OCC, and FDIC.
  - Exchange of letters regarding information sharing occurred with the Belgian and the New York State Banking Department and with Banca d’Italia.
  - The SFBC’s tripartite arrangement with the U.S. and UK regulators on the supervision of the two large Swiss banking groups is considered effective and a model for supervisory cooperation. The regulators meet frequently among themselves and with the two banks. The SFBC visits other foreign regulators and the two large banks in other strategically significant countries.

### Key recommendations (from Table 1 ― Basel Core Principles)
- BCP 1 (Objectives, independence, powers, transparency, and cooperation):
  - Revise provisions in Article 7 of the draft FINMA Act, which presently could give industry representatives excessive leverage in opposing regulation.
  - Continue to advance the depth of staff expertise and skills.
- BCP 2–5 (Licensing and structure): recommendations listed (no additional detail in source excerpt).
- BCP 6–18 (Prudential regulation and requirements):
  - As part of Basel II implementation, review in depth the capital adequacy of the two large banks.
  - Develop an advanced supervisory framework for bank-specific liquidity risks.
- BCP 9–21 (Methods of ongoing banking supervision):
  - Consider advancing engagement with banks, through performing more on-site discovery work.
- BCP 22 (Accounting and disclosure):
  - Consider using a renge of international experts and audit firms for the special audits.
  - Consider the periodic rotation of audit firms.
- BCP 23 (Corrective and remedial powers of supervisors):
  - The SFBC should have the authority to impose direct civil monetary penalties on banks, directors, or managers.
- BCP 24–25 (Consolidated and cross-border banking supervision): recommendations listed (no additional detail in source excerpt).

### Authorities’ response
- Under Basel II, Pillar II capital needs will be evaluated for the two large banks; this is expected to be implemented over the next 2-3 years.
- According to the New Basel Capital Accord, the Pillar 2 capital charges will be evaluated on a regular basis for each bank to reflect the institutions' specific risk profiles and supervisory concerns of the SFBC.
- The SFBC undertakes a great deal of effort to understand and evaluate the two large banks' complex risk profiles and models.
- The SFBC’s internal rating system for the two large banks is the main tool to structure the Supervisory Review and Evaluation Process of the banks' risk and capital situation.
- This instrument undergoes a periodic validation and improvement process.
- Current improvements to the tool include a more detailed inclusion of information from the banks' internal capital models and stress testing among other things.
- The additional Pillar 2 capital requirements will be based on the findings of this institute-specific Supervisory Review and Evaluation Process.
- The SFBC agrees that the supervisory approach to assess liquidity risks needs improvement.
- Considering resources and other priorities, the liquidity supervision approach for the two large banks was reviewed in the second half of 2006.
- A new assessment method of bank-specific liquidity was introduced in December 2006 in the context of the internal rating system of the two large banks.
- The SFBC participates in the current efforts of the Basel Committee to review the international supervisory standards for assessing bank-specific liquidity risks and will consider the improvements in this area and examine their implementation in the Swiss banking regulation.

*IMF Staff Report excerpt: _cr07198 - Section 2*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07198.pdf_