## 1. Detailed Assessment of Compliance with the Basel Core Principles ## Source details **Canonical URL:** [1. Detailed Assessment of Compliance with the Basel Core Principles](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09243.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09243.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09243.pdf.json) --- ### Information and methodology used for assessment - Swiss authorities completed a self-assessment questionnaire; responses were clarified and verified through discussions with authorities and market participants. - Assessors reviewed SFBC documents, met with host country supervisors in the United States and the United Kingdom for the two largest Swiss banks (Credit Suisse Group and UBS), and interviewed SFBC representatives, bankers, bankers association representatives, and accountants. - Sources included: the Federal Law on Banks and Savings Banks (Banking Act), Ordinance of the Swiss Federal Council on Banks and Savings Banks (Banking Ordinance), SFBC Circulars and Guidelines, SFBC Guidelines on Financial Statement Reporting Requirements, and materials from KPMG Switzerland, the Swiss Bankers' Association (SBA), and the Federal Department of Finance (FDF). - IMF FSAP mission timing: based on information available during the FSAP mission in October 2001. ### Institutional and macroprudential setting; market structure overview - Banking contributes 11 percent to GDP. - There are 375 banks licensed in Switzerland. - Bank types and counts: - 24 cantonal banks - 103 regional banks - one cooperative bank (with 537 independent members) - 17 private banks - 23 subsidiaries of major international financial conglomerates - 204 institutions categorized as "other banks" - The two largest banking groups represent about 60 percent of total Swiss banks’ assets and deposits. - Recent supervisory response: - SFBC established a separate Large Bank Supervision unit and a unit for assessment/validation of bank models. - Supervisory practices include quarterly management meetings with the two main banks, semi-annual trilateral meetings with U.K. and U.S. supervisors, and annual trilateral meetings with the bank, its external auditor and the SFBC. ### General preconditions for effective banking supervision - Switzerland has largely implemented Basel Committee recommendations and incorporated many EU Directives into ordinances, guidelines and supervisory practices. - SFBC relies heavily on a dualistic supervision system outsourcing on-site examinations to approved external auditors. - Identified needs: - formalize a quality assurance program for external auditors; - increase joint on-site inspections. - SFBC staffing and resources: - Present supervisory strength: around 105 staff, with a core of about 75 persons having supervisory functions. - Staff turnover: 18 percent in the year 2000. - SFBC travel/on-site budget adequate; training improvements needed. - SFBC has no budgetary independence; SFBC expenses are covered by fees charged to supervised institutions and are part of the central government’s budget (2002: SwF 25,7 million). ### Key reform initiatives and expert reviews under way - Zufferey Report (December 1998): 42 general recommendations for reform of financial sector supervision. - Expert commission (May 1999) on bank reorganization, liquidation law and deposit insurance; proposed amendment to the Banking Act (report October 2000). - SFBC working group (February 2000, chaired by Prof. Nobel) issued 17 recommendations (December 2000) on the dualistic supervisory system; follow-up “Auditing and Supervision of Banks” working group established March 2001. - Federal Council instituted an Expert Commission (November 2001, chaired by Prof. Zimmerli) to propose a legislative framework for a unified financial supervisory authority. - Pending legislative revisions leave potential vulnerabilities: nonbank industrial deposit-taking entities and certain nonbank asset management/investment advisors are not under SFBC supervision and thus not covered by the Basel Core Principles. ### Overall Basel Core Principles assessment (high-level) - Overall assessment: Switzerland is generally in compliance with the Basel Core Principles with two exceptions where SFBC is deemed largely compliant: - Budgetary independence (SFBC lacks budgetary independence). - Banking activities not subject to SFBC supervision (existence of nonbank deposit-taking entities and certain nonbank asset managers). - The assessment was tailored to the Swiss market, noting high market concentration by the two largest domestic banks and lower complexity in most other banks. ### Principle highlights and specific findings (Principles 1–8) - Principle 1 (Objectives, Autonomy, Powers, and Resources) - SFBC statutory independence: Art. 23 Banking Act; reports to the Federal Council and is independent of other governmental agencies. - SFBC has no budgetary independence; budgetary improvements include: - Freedom to fix number of staff within budget limits. - Budget item “enlarged supervision” presently amounting to 15 percent of the budget of the SFBC, usable for salaries and indirect costs. - SFBC excluded from IT centralization exercise; may grant a “labor market allowance” up to 20 percent on top of normal salary bands (requires approval). - Assessment: Compliant for objectives and legal framework; Largely compliant on resources due to lack of budgetary independence. - Principle 2 (Permissible Activities) - Definition of “bank” under Art. 1 Banking Act and credit institution under Art. 2a Banking Ordinance. - Exception: nonbank employer-sponsored deposit-taking entities permitted (Art. 1 par. 2), not supervised by SFBC (example: Swissair deposit-taking entity required rescuing for SwF 110 million). - Assessment: Largely compliant; exception poses systemic vulnerability. - Principle 3 (Licensing Criteria) - SFBC sole licensing authority (Art. 3 Banking Act); Swiss banking license is universal. - Minimum paid-in capital for new bank: SwF 10 million (Art. 4 par. 1 Banking Ordinance); initial capital can be SwF 20 million or more where required by business plan. - SFBC Guideline for License Applications dated 21.9.1999 (not legally binding). - From 1996 to 2000: SFBC granted 70 banking licenses (branches included): - 45 licenses concerned entities under foreign ownership (including 23 branches of foreign banks) - 25 entities were in Swiss hands - 1991–2000: total of 243 banking institutions ceased activity: - three faced withdrawal of license - 182 surrendered licenses in mergers - 58 went into liquidation - total assets of the 243 entities amount to SwF 140 billion - Assessment: Compliant. - Principle 4 (Ownership) - Qualifying holding defined as 10 percent or more of share capital or votes (Art. 3 par. 2c of the Banking Act). - Prior authorization required for acquisition of qualifying holdings and for increases crossing thresholds (20, 33, 50 percent or control thresholds). - SFBC can suspend voting rights or revoke licenses for non-compliant shareholders. - Assessment: Compliant. - Principle 5 (Investment Criteria) - Qualifying holding in other company by a credit institution shall not exceed 15 percent of net own funds (Art. 4 par. 2bis). - Total investments in financial fixed assets shall not exceed 60 percent of net own funds. - Investments in industrial equity must be covered by capital equal to 40 percent (500 percent risk weight for capital adequacy). - Assessment: Compliant. - Principle 6 (Capital Adequacy) - Swiss capital rules aligned with the 1988 Basel Capital Accord; SFBC requires higher capital: - Minimum capital adequacy ratio: 8 percent per Art. 12 of the Banking Ordinance (reduced by existing value adjustments and provisions) - SFBC requires a minimum capital adequacy ratio of 10 per cent - Specific risk weighting differences: - foreign exchange risk and gold positions: capital charge 10 percent (instead of 8 percent) - commodity risk: capital charge 20 percent - receivables secured by mortgages: risk weight 75 percent (Basel: 100 percent) - Cantonal banks: capital discount of 12.5 percent of required equity due to cantonal guarantees; recommendation to eliminate this discount to level the playing field. - Capital adequacy reporting: solo quarterly and consolidated half-yearly (Art. 13b Banking Ordinance). - Assessment: Compliant; recommendation for frequent close monitoring of large systemically important institutions. - Principle 7 (Credit Policies) - Licensing requires internal control frameworks and separation of management and supervisory functions (Art. 3 and Art. 8 par. 2 BO). - Large exposures reporting required when exposures attain or exceed 10 percent of eligible equity resources; external auditors verify once every three months; ten largest debtors included once a year in long-form report. - SFBC does not collect data on renegotiated, past due and internally classified credits; recommendation to collect such data for improved monitoring. - Assessment: Compliant. - Principle 8 (Loan Evaluation and Loan-Loss Provisioning) - Banks must maintain risk management programs and credit policies approved at licensing and reviewed annually by external auditors (Art. 9 par. 2 Banking Ordinance). - Identified risks must be fully provisioned; incomplete documentation requires designation as totally impaired (valued at “0”) and full provisioning. - Impairment presumption is 90 days overdue; placing a loan on non-accrual is a management decision. - No minimal provisioning requirements for standard loans; banks must transfer at least 5 percent of yearly net profits into the general reserve until it reaches 20 percent of paid-in capital (Art. 5 par. 1 and 1bis Banking Act). - Reporting and disclosure: annual financial statements; interim accounts for institutions with balance sheet total over SwF100 million (Art. 23b par. 1); reporting guidelines require segmentation and disclosure of provisioning movements. - SFBC remedial powers include requesting additional information, extraordinary independent audits, requiring draft financial statements before publication, demanding corrections and increased provisions, and reinforcing capital requirements. - Assessment: Compliant; recommendation for more frequent asset quality data (e.g., quarterly). ### Prudential reporting and credit risk supervision (CPs 16, 21 related) - Prudential reporting covers reporting large risk exposures per Art. 21 ss of the Banking Ordinance. - Credit risk supervision (SFBC-Circular 96/3 Cm 16) requires at least annual external auditor assessment of bank internal control systems regarding credit risk; included in the Long Form report and must address: - credit granting and monitoring process; - treatment of loans to bank management and Board Members and important shareholders (Art. 4ter Banking Act); - appropriateness of risk measurement methodologies; - appropriateness of value adjustments and provisions; and - internal reporting to management and board of directors. - Prudential reporting must address tax impact of loan loss provisions (Art. 57, Art. 63 par. 1 LIFD, Art. 24 par. 1 and 4, Art. 10 par. 1 LHID). - Provisions that ceased to be economically justified are part of taxable income (Art. 63 par. 2 LIFD, Art. 24 (1) LHID). - SFBC reporting frequency: - Generally annual or semi-annual for classification and provision amounts; problem banks or one of the two large banks report monthly or quarterly. - Assessment: Compliant. ### Principle 9 — Large Exposure Limits (findings) - Swiss rules modelled on BIS and EC Directive 92/121/EEC; risk diversification rules in Art. 21 and 22 Banking Ordinance. - Applicability: All banks (except Swiss branches of foreign banks) must comply individually and consolidated if equity capital requirements are on a consolidated basis. - Three-level limitation structure: - First limit: 10 percent of the institution’s eligible capital defines a risk concentration (Art. 21 par. 1). Reported to board and external auditors quarterly and to SFBC at least annually. - Upper limit: 25 percent of the institution’s eligible capital for a counterparty (Art. 21a par. 1). - Aggregate limit: sum of all large exposures must not exceed 800 percent of the bank’s eligible capital (Art. 21b par. 1). - Excesses may be covered by freely eligible capital (Art. 21a par. 5); allocation must be disclosed in quarterly computation submitted to SNB. - Scope includes outstanding positions, off-balance sheet transactions and net long positions in securities risk weighted pursuant to Art. 21d par. 1. - Reporting: - Annually, all banks must report their 10 largest borrowers to the SFBC. - Since June 2000, banks must report 10 largest claims on Swiss and foreign banks quarterly to the SNB; data transmitted to the SFBC. - Risk-weighting flexibilities and examples: - Short-term claims on banks weighted at 25 percent (Art. 12a par. 1 point 2.4). - SFBC risk-weighting of 8 percent for short-term claims on large banks, cantonal banks with cantonal guarantee, and claims on RBA Central Bank (SFBC-Circular 00/1). - Risk-weighting of 12 percent for short-term claims on foreign banks with short-term rating “Prime 1” and long-term rating “AA” or higher and BIS capital of at least SwF 5 billion (SFBC-Circular 00/1). - Lombard facilities secured by diversified marketable assets: risk weighting factor of 50 percent instead of 75 percent (Art. 12a par 1 point 4.3). - Assessment: Compliant. ### Principle 10 — Connected Lending (findings and supervisory expectations) - Legal and disclosure framework: - Loans to shareholders, officers and "other related parties" in Art. 4ter Banking Act; credits may be granted "only in conformance with generally accepted principles of the banking profession." - Disclosure obligations in Article 25c par. 1 item 3.13 and SFBC Guidelines (paras. 67, 92, 182-184). - Limits and practice: - No explicit statutory quantitative limits beyond general caveat; SFBC indicated insider loans shall not exceed 25 percent of eligible equity on an individual basis. - Aggregate insider lending follows the general concentration cap and shall not exceed 800 percent of eligible equity. - Monitoring and controls: - Quarterly “notification of risk concentration” report to external auditor; insiders identified under “Transactions with Governing Bodies.” - Directors expected to abstain from voting on own or related party loans. - External auditors review related party loans and report preferential treatment to SFBC. - Assessment: Compliant. ### Principle 11 — Country Risk (findings and historical provisioning rules) - Legal basis: Art. 9 par. 2 Banking Ordinance requires internal regulations addressing country and transfer risk. - SBA Guidelines for the Management of Country Risk dated September 4, 1997; SFBC-concurred Practices in Foreign Exchange Trading dated December 5, 1996. - Historical provisioning chronology: - 1983: 20 percent allocation of general loan loss reserves to country risk. - End 1988: rate raised to 35 percent. - Beginning December 31, 1989: short-term trades (maturity ≤ one year) required 10 percent; other trades 50 percent. - End 1991: general loan loss reserves for other loans raised to 65 percent; later dropped. - From 1992 onward: SFBC published annual country lists with minimal rates between 5 percent and 100 percent and exemptions. - SFBC repealed SFBC-Circular 92/4 as of January 1, 1999; moved to SBA self-regulation. - Tax treatment: general reserves allowed up to 5 percent for Swiss clients and up to 7 percent for non-Swiss clients on remaining receivables, subject to annual review and adoption. - Reporting: SFBC receives aggregate country numbers quarterly; largest banks report quarterly breakdowns for emerging market exposures. - Assessment: Compliant. ### Principle 12 — Market Risks (systems, models, and supervisory approach) - Regulatory framework: SFBC-Circular 97/1 and SFBC-Circular 99/1 govern market risk capital adequacy (Art. 12a–12o Banking Ordinance). - Approaches: standard approach or model-based approach with SFBC consent. - “De minimis” rule: simplified rules if trading book never exceeds 6 percent of all on- and off-balance-sheet positions and absolute level of SwF 30 million. - SFBC risk management unit: reviews internal models, stress-testing, back-testing, scenario analysis and contingency planning; unit plans to add five additional staff in the next few years. - Reporting: SFBC collects monthly Prudential Return details from large banks with models. - Industry practice: most market-active banks use internal VaR models; UBS and Credit Suisse obtained formal SFBC review/approval of models. - Assessment: Compliant. ### Principle 13 — Other Risks (liquidity, interest-rate, FX, operational, large exposures) - Governance and self-regulation: SBA guidelines on trading/derivatives (January 1996) and country risk (November 1997). - Liquidity framework and ratios: - Liquidity requirements set out in Art. 4 Banking Act and Art. 15–20 Banking Ordinance. - Federal Finance Department fixes cash-liquidity ratio; may not exceed 4 percent of defined average liabilities. - Current first grade liquidity ratio fixed at 2.5 percent (Ordinance of the Department of Finance of November 26, 1987). - Required liquid assets must be held on average for the entire 30-day period; ratio recalculated monthly. - General liquidity: 33 percent of the total of defined components must be covered by liquid and easily realizable assets (Art. 15 and Art. 16). - Monthly returns for cash liquidity and quarterly returns for general liquidity prepared and submitted to the SNB. - GAP reports are not filed as part of prudential reporting; SFBC mandated a working group to develop a framework aligned with Basel Committee “Sound Practices for Managing Liquidity in Banking Organizations” with target: develop framework in the next year with implementation two to three years from now. - Large exposure funding concentration: banks must notify external auditors when sight and other liabilities due within one month to a single customer or bank exceed 10 percent of total such liabilities. - Interest-rate and FX risk: - SFBC-Circular 99/1 sets minimum standards for interest-rate risk measurement and reporting. - SFBC-Circular 97/1 (as amended October 1, 1999) provides FX guidance. - Operational risk and internal audit: - Internal audit mandated; SFBC-Circular 95/1 details organization; lead external auditor rotation required every seven years. - Supervisory process: monthly prudential data; immediate notification for capital shortfalls; on-site frequency depends on institution profile; annual on-site audit by SFBC-approved audit firm for Swiss-owned banks. - Assessment: Compliant. - Comment: GAP reports not filed; SFBC should continue investigating ways to improve liquidity monitoring. ### Principle 14 — Internal Control and Audit - Legal requirement: Art. 9 par. 4 Banking Ordinance mandates effective internal control including segregation between trading, asset management and back office. - Internal audit: - SBA Guidelines on internal audit (1978, amended 1987); SFBC-Circular 95/1 provides guidance. - Internal auditor must be appointed by the board, report directly to it; may be outsourced but must be independent of external auditors. - External audit: - SFBC-Circular 96/3 requires external auditors to assess internal control and internal audit in the annual audit report; global controls for foreign operations must be assessed. - Lead external auditor rotation every seven years. - Corporate governance: Board and management responsible for risk appetite; SFBC can require changes in board, management, or external audit firm composition. - Assessment: Compliant. ### Principle 15 — Money Laundering (legal framework and supervisory guidance) - Legal framework: - Money laundering criminalized by Art. 305bis Criminal Code; Money Laundering Act (MLL) passed October 10, 1997, effective April 1, 1998. - Art. 305ter Criminal Code imposes obligation to ascertain identity of customers and beneficial owners; violation punishable with imprisonment of up to one year. - SFBC role: - SFBC is supervisory authority for anti-money laundering implementation for banks, securities dealers, stock exchanges and investment funds; can impose administrative sanctions and must inform criminal enforcement authorities when criminal violations are found. - SFBC may order a “special audit” and require examinations with a special anti-money laundering focus. - Due diligence and industry standards: - Due Diligence Agreement since 1977, revised every five years; duties include customer identity verification, beneficial owner ascertainment, record retention, and organizational measures. - In 2000, UBS and Credit Suisse Group joined "Wolfsberg Anti-Money Laundering Principles." - Switzerland member of FATF and Egmont Group (accepted 1998); ratified Council of Europe Convention (1990) and signed UN Convention Against Transnational Organized Crime (December 2000). - Bank obligations: - Identification documents and transaction documents retained for minimum of 10 years after account closure (Art. 7 MLL). - Investigate unusual transactions or relationships unless legality is clear (Art. 6 lit. a MLL). - Thresholds triggering further investigations: - deposits at account opening in value equal to more than SwF 100,000 - during relationship, individual transactions or number of transactions unusually high relative to known business activity/financial circumstances - Reporting and freezing: - Reporting obligation to Money Laundering Reporting Office (MROS) immediately upon knowledge or justified suspicion. - Year 2000 reporting statistics: 311 reports filed in total of which 234 (75 percent) were filed by banks. - Banks must block funds without delay after notification and maintain freeze until ruling by criminal authorities but for no longer than five working days. - Banks must not inform customer or third parties about notification/freezing if not permitted by criminal authorities. - Internal controls, audit and external auditor role: - Banks must have internal operating procedures and designated compliance personnel; internal auditors review AML measures; external auditors check procedures annually. - External auditors: licensed and supervised by SFBC; eleven audit firms approved by end-2000. - External auditor duties include annual Long Form report and unannounced interim examinations (Art. 40 Banking Act) and must report certain violations immediately to SFBC (Art. 21 Banking Act). - In 1999 external auditors charged 228,441 hours for audits of large financial intermediaries and 360,714 hours for all other financial intermediaries. - Assessment of AML framework: Compliant. - Mission comment: mission was not in a position to assess effectiveness of measures introduced outside the financial sector. ### SFBC supervisory processes, staffing, and tools; identified gaps - SFBC supervision is a “dualistic system” with three pillars: indirect SFBC supervision, direct external auditor supervision, ongoing internal auditor on-site supervision; SBA self-regulation is a fourth pillar. - SFBC staff: about 100 in supervision, of which approximately 13 are in the large bank program. - Banks / Securities Firms Supervision Department employs 23 people to analyze Long Form reports, process notifications and inquiries, and conduct continuous supervision of non-large-group banks. - Supervisory tools: - regular collection and analysis of prudential data (monthly, quarterly, semi-annual, annual returns); - annual Long Form report prepared by external auditors (generally received within four months; Art. 47 Banking Ordinance requires remittance within one year after financial statements); - regular meetings with bank management and external auditors (quarterly for large banks; others about once every three years unless problems surface); - regulatory attendance at on-site inspections conducted by external auditors. - Identified supervisory gaps/recommendations: - formalize a quality assurance process for supervision of external auditors; - obtain additional detailed data (e.g., asset quality) and develop an early warning system; - consider more detailed large bank risk profile using off-site data and trilateral meetings with foreign supervisors, insurance supervisors, management and external auditors; - step up on-site supervision. ### Consolidated supervision and group oversight - Large Bank Supervision unit created in 1998. - In 2001, SFBC supervised 84 groups of banks on a consolidated basis. - Consolidated supervision practice exists though legal provisions could be more clearly codified; draft proposal for amendment of the Banking Act and the SESTA is before the Federal Council. - Gaps and recommendations: - no legal definition of a banking group in the Banking Act or Banking Ordinance creates ambiguity. - potential supervisory gap for Credit Suisse Group regarding insurance activities (insurance activities account for almost 25 percent of group earnings); recommendation for SFBC large bank staff to detail group risk profile and coordinate with insurance supervisors. - Consolidation and risk-weighting rules: - investment in non-financial participations risk weighted at 500 percent. - banks must consolidate foreign offices line-by-line and majority-owned banking, finance or real estate subsidiaries on a pro-rata basis for accounting. - SFBC can require reporting from host-country regulators if foreign regulations do not allow direct reporting by affiliate/branch (Art. 23 sexies Banking Act). ### Accounting, disclosure, and external audit standards (Principle 21) - Accounting governed by Swiss Code of Obligations, Banking Act, Banking Ordinance and SFBC guidelines (RRV-SFBC dated December 14, 1994 and amended October 28, 1999). - Three accounting frameworks in use: Swiss GAAP, IAS, U.S.-GAAP; SFBC may allow deviation where conformity with recognized international standards. - Reporting and disclosure requirements: - annual financial statements and business report; banks with total assets of at least SwF 100 million and significant off-balance sheet operations must prepare a cash flow statement; - semi-annual interim financial statements required; - annual financial statements disclosed in printed form within four months of year-end; interim statements published within two months of reporting period end. - Loan classification and provisioning: - loans with interest more than 90 days overdue are considered at risk/non-performing per SFBC guidelines; - interest past due more than 90 days may not be included in interest income; previous unearned interest income must be reversed. - External audit: - External audit of banks' annual financial statements is mandatory. - Auditing firm and lead auditor must be authorized and licensed by the SFBC. - External auditor prepares the "Long Form" as required by SFBC Circular 96/3 (amendments of August 26, 1999 and October 28, 1999); Long Form contains certification of financial statements and detailed information on compliance and is submitted to SFBC. - External auditor responsibilities include unannounced interim examinations annually (Art. 40 Banking Act) and at least one in-depth examination area per year. - Assessment: Compliant. ### Remedial measures and enforcement powers (Principle 22) - Art. 23ter par. 1 Banking Act provides powers for remedial actions ranging from informal communications to revocation of banking license (Art. 23quinquies par. 1). - Additional powers include suspending voting rights, issuing instruction to suspend dividend payments, freezing activities, withholding approval of new activities or acquisitions. - SFBC required to ensure remedial actions are timely (Art. 23ter par. 2). - SFBC cannot publish enforcement activities it imposes. - No mechanism for automatic imposition of administrative or penal sanctions; legal proceedings required. - Art. 23quater empowers SFBC to delegate an expert to act as observer in a bank if creditors’ claims appear seriously jeopardized. - Proposed amendment to the Banking Act will: - streamline existing regulation and codify SFBC’s current practices; - explicitly empower SFBC to bar, suspend or dismiss managers or directors, alter, reduce or terminate risky activities, restrict an institution’s business activities, or impose temporary management and reorganization measures; - explicitly provide that reorganization measures may be imposed on unwilling shareholders without shareholder approval. - Assessment: Compliant. - Comments: - SFBC should have authority to impose direct civil monetary penalties and to publish enforcement activities. - SFBC would benefit from clear legal enforcement authority to publish identities of banks and individuals involved in money laundering and to impose monetary penalties for non-compliance with MLL. ### Globally consolidated supervision and host country cooperation (Principles 23–25) - Notification: Banks organized under Swiss law shall notify SFBC before establishing subsidiary, branch, agency or representation abroad (Art. 3 par. 7 Banking Act). - Art. 23septies grants SFBC authority to supervise overseas activities of locally incorporated banks. - Consolidated supervision process for internationally active banks: - large banking group department visits local bank management (U.K., U.S., occasionally other jurisdictions) to maintain contact and assess major businesses abroad. - On-site reviews are audit-like visits coordinated with internal and external audit. - Meetings with foreign regulators to share information and coordinate supervisory action plans occur approximately three times a year in Zurich, New York, and London, and (beginning fall 2001) less frequently in Singapore, Hong Kong, and Tokyo. - MoUs and information exchange: - SFBC has not signed any MoUs; letters of exchange signed with Denmark, the Netherlands, Sweden, and the United Kingdom. - Informal arrangements have not impaired consolidated supervision to date, but higher frequency of on-site inspections would benefit from formalized MoUs. - Host country outcomes: - SFBC deals with FRB NY as umbrella supervisor for CSFB U.S. operations rather than directly with U.S. SEC. - Neither the Fed nor SFBC closely monitoring Credit Suisse Group insurance activities (24 percent of its income from insurance); FSA re-examining insurance supervision of Credit Suisse Group. - Art. 23sexies empowers SFBC to provide information to host-country supervisors subject to confidentiality and usage limits. - Assessment: Compliant. ### Summary compliance indications and mission recommendations (selected) - Overall: Generally compliant with Basel Core Principles; notable areas for improvement include budgetary independence (CP 1.2) and closing coverage gaps for nonbank deposit-taking entities (CP 2). - Selected recommended actions (Basel): - CP 1.2 Independence: SFBC should have full budgetary independence, based on the law. - CP 1.6 Information sharing: Consider formalizing exchange of information and on-site visits via MoUs or letters. - CP 2 Permissible Activities: Eliminate Art. 1 par. 2 exception permitting nonbank employer-sponsored deposit-taking entities not licensed/supervised by SFBC. - CP 6 Capital Adequacy: Eliminate 12.5 percent capital reduction for cantonal banks. - CP 7 Credit Policies: Collect more detailed data on renegotiated, past due, and internally classified credits and on provisions, charge-offs, and recoveries. - CP 13 Other Risks: Develop improved liquidity monitoring aligned with Basel guidance; consider GAP reporting. - CP 16 On-Site and Off-Site Supervision: Obtain additional detailed data (e.g., asset quality), develop early warning system, and set up more detailed large bank risk profiling. - CP 17 Bank Management Contact: Consider annual meetings with management of all Swiss banks, possibly tied to Long Form report receipt. - CP 19 Validation of Supervisory Information: Develop and implement formal quality assurance program for external auditors. - CP 20 Consolidated Supervision: Adopt proposed legal amendments to Banking Act, SESTA, and Insurance Supervision Act; develop strategy for supervision of insurance activities of Swiss conglomerates in major markets. - CP 22 Remedial Measures: Empower SFBC to impose direct civil monetary penalties and to publish enforcement activities; clarify legal authority to publish identities related to money laundering and impose monetary penalties for MLL noncompliance. - CP 24 Host Country Supervision: Consider formalizing cooperative arrangements (MoUs) to facilitate higher-frequency on-site inspections. - Authorities’ response: General agreement with main findings and recommendations, particularly CP 1.2 (budgetary independence) and CP 2 (deposit taking entities). SFBC notes formal cooperation arrangements are not legally required under Swiss law but can be concluded if a foreign regulator wishes. *Italic: IMF — _cr09243 - 1. Detailed Assessment of Compliance with the Basel Core Principles (page 8) and related FSAP mission materials contained in the source content.* ### 1. Detailed Assessment of Compliance with the Basel Core Principles....................................8 ### 1. Detailed Assessment of Compliance with the Basel Core Principles....................................8 ### Scope - This content unit is titled "1. Detailed Assessment of Compliance with the Basel Core Principles" and is located on page 8 of the source document. ### Purpose (as implied by title) - Presents a detailed assessment of compliance with the Basel Core Principles. *Source: _cr09243 - 1. Detailed Assessment of Compliance with the Basel Core Principles....................................8* ### 26. Summary ### 26. Summary ### Information and methodology used for assessment - Swiss authorities completed a self-assessment questionnaire in advance of the mission; responses were clarified and verified through discussions with authorities and market participants. - Assessors reviewed SFBC documents, met with host country supervisors in the United States and the United Kingdom for the two largest Swiss banks (Credit Suisse Group and UBS), and interviewed SFBC representatives, bankers, bankers association representatives, and accountants. - Sources used included: the Federal Law on Banks and Savings Banks (Banking Act), Ordinance of the Swiss Federal Council on Banks and Savings Banks (Banking Ordinance), SFBC Circulars and Guidelines, SFBC Guidelines on Financial Statement Reporting Requirements, and materials from KPMG Switzerland, the Swiss Bankers' Association (SBA), and the Federal Department of Finance (FDF). ### Institutional and macroprudential setting; market structure overview - Banking contributes 11 percent to GDP. - There are 375 banks licensed in Switzerland. - Bank types and counts: - 24 cantonal banks - 103 regional banks - one cooperative bank (with 537 independent members) - 17 private banks - 23 subsidiaries of major international financial conglomerates - 204 institutions categorized as "other banks" - The two largest banking groups represent about 60 percent of total Swiss banks’ assets and deposits. - Recent supervisory response: SFBC established a separate Large Bank Supervision unit and a unit for assessment/validation of bank models; supervisory practices now include quarterly management meetings with the two main banks, semi-annual trilateral meetings with U.K. and U.S. supervisors, and annual trilateral meetings with the bank, its external auditor and the SFBC. ### General preconditions for effective banking supervision - Switzerland has largely implemented Basel Committee recommendations and has incorporated many EU Directives into ordinances, guidelines and supervisory practices. - SFBC relies heavily on a dualistic supervision system outsourcing on-site examinations to approved external auditors; the system would benefit from a formalized quality assurance program for external auditors and increased joint on-site inspections. - SFBC supervisory resources and staffing considerations: - Present supervisory strength: around 105 staff, with a core of about 75 persons having supervisory functions. - Staff turnover: 18 percent in the year 2000. - SFBC travel/on-site budget adequate; training improvements needed. - SFBC has no budgetary independence; SFBC expenses are covered by fees charged to supervised institutions and are part of the central government’s budget (2002: SwF 25,7 million). ### Key reform initiatives and expert reviews under way - Zufferey Report (December 1998): 42 general recommendations for reform of financial sector supervision. - Expert commission (May 1999) on bank reorganization, liquidation law and deposit insurance; proposed amendment to the Banking Act (report October 2000). - SFBC working group (February 2000, chaired by Prof. Nobel) issued 17 recommendations (December 2000) on the dualistic supervisory system; follow-up “Auditing and Supervision of Banks” working group established March 2001. - Federal Council instituted an Expert Commission (November 2001, chaired by Prof. Zimmerli) to propose a legislative framework for a unified financial supervisory authority. - Pending legislative revisions leave potential vulnerabilities: nonbank industrial deposit-taking entities and certain nonbank asset management/investment advisors are not under SFBC supervision and thus not covered by the Basel Core Principles. ### Overall Basel Core Principles assessment (high-level) - Overall assessment: Switzerland is generally in compliance with the Basel Core Principles with two exceptions where SFBC is deemed largely compliant: - Budgetary independence (SFBC lacks budgetary independence). - Banking activities not subject to SFBC supervision (existence of nonbank deposit-taking entities and certain nonbank asset managers). - The assessment tailored the principles to the Swiss market, noting high market concentration by the two largest domestic banks and lower complexity in most other banks. ### Principle highlights and specific findings (Principles 1–8) - Principle 1 (Objectives, Autonomy, Powers, and Resources) - SFBC statutory independence: Art. 23 Banking Act; reports to the Federal Council and is independent of other governmental agencies. - SFBC has no budgetary independence; budgetary improvements achieved include: - Freedom to fix number of staff within budget limits. - Budget item “enlarged supervision” presently amounting to 15 percent of the budget of the SFBC, usable for salaries and indirect costs. - SFBC excluded from IT centralization exercise; may grant a “labor market allowance” up to 20 percent on top of normal salary bands (requires approval). - Assessment: Compliant for objectives and legal framework; Largely compliant on resources due to lack of budgetary independence. - Principle 2 (Permissible Activities) - Definition of “bank” under Art. 1 Banking Act and credit institution under Art. 2a Banking Ordinance. - Exception: nonbank employer-sponsored deposit-taking entities are permitted (Art. 1 par. 2), not subject to SFBC licensing/supervision (example: Swissair deposit-taking entity required rescuing for SwF 110 million). - Assessment: Largely compliant; exception poses systemic vulnerability. - Principle 3 (Licensing Criteria) - SFBC sole licensing authority (Art. 3 Banking Act); Swiss banking license is universal. - Minimum paid-in capital for new bank: SwF 10 million (Art. 4 par. 1 Banking Ordinance); initial capital can be SwF 20 million or more where required by business plan. - SFBC published a Guideline for License Applications for Banks and Securities Dealers (21.9.1999) (not legally binding). - From 1996 to 2000: SFBC granted 70 banking licenses (branches included): - 45 licenses concerned entities under foreign ownership (including 23 branches of foreign banks) - 25 entities were in Swiss hands - 1991–2000: a total of 243 banking institutions ceased activity: - three faced withdrawal of license - 182 surrendered licenses in mergers - 58 went into liquidation - total assets of the 243 entities amount to SwF 140 billion - Assessment: Compliant. - Principle 4 (Ownership) - Qualifying holding defined as 10 percent or more of share capital or votes (Art. 3 par. 2c of the Banking Act). - Prior authorization required for acquisition of qualifying holdings and for increases crossing thresholds (20, 33, 50 percent or control thresholds). - SFBC can suspend voting rights or revoke licenses for non-compliant shareholders. - Assessment: Compliant. - Principle 5 (Investment Criteria) - Qualifying holding in other company by a credit institution shall not exceed 15 percent of net own funds (Art. 4 par. 2bis). - Total investments in financial fixed assets shall not exceed 60 percent of net own funds. - Investments in industrial equity must be covered by capital equal to 40 percent (500 percent risk weight for capital adequacy). - Assessment: Compliant. - Principle 6 (Capital Adequacy) - Swiss capital rules aligned with the 1988 Basel Capital Accord; SFBC requires higher capital: - Minimum capital adequacy ratio: 8 percent per Art. 12 of the Banking Ordinance (reduced by existing value adjustments and provisions) - SFBC requires a minimum capital adequacy ratio of 10 per cent - Specific risk weightings differences: - foreign exchange risk and gold positions: capital charge 10 percent (instead of 8 percent) - commodity risk: capital charge 20 percent - receivables secured by mortgages: risk weight 75 percent (Basel: 100 percent) - Cantonal banks: capital discount of 12.5 percent of required equity due to cantonal guarantees; recommendation to eliminate this discount to level the playing field. - Capital adequacy reporting: solo quarterly and consolidated half-yearly (Art. 13b Banking Ordinance). - Assessment: Compliant; recommendation for frequent close monitoring of large systemically important institutions. - Principle 7 (Credit Policies) - Licensing requires internal control frameworks and separation of management and supervisory functions (Art. 3 and Art. 8 par. 2 BO). - Large exposures reporting required when exposures attain or exceed 10 percent of eligible equity resources; external auditors verify once every three months; ten largest debtors included once a year in long-form report. - External auditors play an important role in assessing credit policies, loan sampling, and special audit focuses; SFBC identifies annually one specialized supervisory area for external auditors. - SFBC does not collect data on renegotiated, past due and internally classified credits; recommendation to collect such data for improved monitoring. - Assessment: Compliant. - Principle 8 (Loan Evaluation and Loan-Loss Provisioning) - Banks must maintain risk management programs and credit policies approved at licensing and reviewed annually by external auditors (Art. 9 par. 2 Banking Ordinance). - Identified risks must be fully provisioned; incomplete documentation requires designation as totally impaired (valued at “0”) and full provisioning. - No legal requirement for a single credit classification system; impairment presumption is 90 days overdue; placing a loan on non-accrual is a management decision. - No minimal provisioning requirements for standard loans; banks must transfer at least 5 percent of yearly net profits into the general reserve until it reaches 20 percent of paid-in capital (Art. 5 par. 1 and 1bis Banking Act). - Reporting and disclosure requirements: annual financial statements; interim accounts for institutions with balance sheet total over SwF100 million (Art. 23b par. 1); reporting guidelines require segmentation and disclosure of provisioning movements. - SFBC remedial powers include requesting additional information, extraordinary independent audits, requiring draft financial statements to be presented before publication, demanding corrections and increased provisions, and reinforcing capital requirements. - Assessment: Compliant; recommendation for more frequent asset quality data (e.g., quarterly). *IMF Financial Sector Assessment Program mission materials (Basel Core Principles assessment), based on information available during the FSAP mission in October 2001.* ### 3.16 of the Banking Ordinance, Reporting Guidelines No. 177 to 190). ### _cr09243 - 3.16 of the Banking Ordinance, Reporting Guidelines No. 177 to 190) ### Prudential reporting and credit risk supervision - Prudential reporting covers reporting large risk exposures (per Art. 21 ss of the Banking Ordinance). - Credit risk supervision (per SFBC-Circular 96/3 Cm 16) requires at least annual external auditor assessment of the bank's internal control system regarding credit risk; assessment included in the Long Form report (see CP 21) and must include, at a minimum: - the credit granting and monitoring process; - the treatment of loans to bank management and Board Members and important shareholders (per Art. 4ter of the Banking Act); - the appropriateness of risk measurement methodologies; - the appropriateness of value adjustments and provisions; and - internal reporting to the management and the board of directors. - Prudential reporting in the credit area must address the tax impact of loan loss provisions (per Art. 57, Art. 63 par. 1 of the Federal Income Tax Act (LIFD, RS 642.11), Art. 24 par. 1 and 4, Art. 10 par. 1 of the Federal Income Tax Harmonization Act (LHID, RS 642.14)). - Provisions that have ceased to be economically justified are part of the taxable income (Art. 63 par. 2 LIFD, Art. 24 (1) LHID), whether or not they were actually released to the income statement. - The SFBC is generally informed annually or semi-annually in reports filed by the banks concerning the classification of credits and assets and provision amounts; if a bank is a problem bank or one of the two large banks, more frequent reporting is received (i.e., monthly or quarterly). - Assessment: Compliant. ### Principle 9 — Large Exposure Limits (findings) - Swiss rules modelled on BIS and EC Directive 92/121/EEC; risk diversification rules in Art. 21 and 22 of the Banking Ordinance. - Applicability: - All banks (except Swiss branches of foreign banks) must comply on an individual company and consolidated basis if equity capital requirements are to be complied with on a consolidated basis. - Three-level limitation structure: - First limit: 10 percent of the institution’s eligible capital defines a risk concentration (Art. 21 par. 1 of the Banking Ordinance). Such concentrations must be reported to the board and external auditors quarterly and to the SFBC at least annually. - Upper limit: 25 percent of the institution’s eligible capital for a counterparty (Art. 21a par. 1 of the Banking Ordinance). - Aggregate limit: the sum of all large exposures must not exceed 800 percent of the bank’s eligible capital (Art. 21b par. 1 of the Banking Ordinance). - A risk position may exceed these limits if the excess is covered by freely eligible capital (Art. 21a par. 5 of the Banking Ordinance); such allocation must be disclosed in the quarterly computation of required equity submitted to the Swiss National Bank (SNB). - Scope of risk position: includes all outstanding positions, off-balance sheet transactions and net long positions in securities risk weighted pursuant to Art. 21d par. 1; off-balance sheet transactions converted to credit equivalent before addition. - Intra-group treatment: exceptions possible if group supervised on consolidated and individual basis (Art. 21a par. 2). - No regulatory sectoral or geographic lending limits; internal limits commonly used and SFBC receives quarterly industry breakdowns from the two largest banks (NOGA-code). - Reporting requirements: - Annually, all banks must report their 10 largest borrowers to the SFBC. - Since June 2000, banks must report the 10 largest claims on Swiss and foreign banks quarterly to the SNB; data transmitted to the SFBC. - Risk weighting flexibilities: - Short-term claims weighting examples: claims on banks weighted at 25 percent (Art. 12a par. 1 point 2.4). - SFBC risk-weighting of 8 percent for short-term claims on large banks, cantonal banks with cantonal guarantee, and claims on the RBA Central Bank (per SFBC-Circular 00/1). - Risk-weighting of 12 percent for short-term claims on foreign banks with short-term rating “Prime 1” and long-term rating “AA” or higher and BIS capital of at least SwF 5 billion (per SFBC-Circular 00/1). - Lombard facilities secured by diversified marketable assets: risk weighting factor of 50 percent instead of 75 percent (Art. 12a par 1 point 4.3). - Supervisory oversight: external auditors verify MIS to identify concentrations; SFBC and external auditors regularly obtain concentration information and can determine breaches. - Assessment: Compliant. ### Principle 10 — Connected Lending (findings and supervisory expectations) - Legal and disclosure framework: - Loans to shareholders, officers and "other related parties" detailed in Art. 4ter of the Banking Act: credits may be granted "only in conformance with generally accepted principles of the banking profession." - Art. 21 par. 3 addresses concentrations involving governing bodies, qualified participations, or closely related persons. - Article 25c par. 1 item 3.13 and SFBC Guidelines on Financial Statement Reporting Requirements (paras. 67, 92, 182-184) require insider lending disclosure. - Limits and supervisory practice: - No explicit statutory quantitative limits in the Act or Ordinance beyond the general caveat; SFBC indicated insider loans shall not exceed 25 percent of eligible equity on an individual basis. - Aggregate limits for insider lending follow the general concentration cap and shall not exceed 800 percent of eligible equity. - Monitoring and controls: - Quarterly “notification of risk concentration” report prepared and submitted to the external bank auditor; insider exposures designated under “Transactions with Governing Bodies.” - SFBC-Circ. 96/3 Appendix III requires banks detail their 10 largest borrowers annually; insiders with large exposures will be identified. - Terms for insider loans expected to be arm's-length and no more favorable than loans to non-related parties. - Directors expected to abstain from voting on their own or related party loans. - External auditors select and review related party loans during annual audit; any preferential treatment reported to the SFBC. - SFBC expects information systems to identify individual and aggregate connected-party loans; these are reviewed by external auditors and included in Long Form reports. - Assessment: Compliant. ### Principle 11 — Country Risk (findings and historical provisioning rules) - Legal and guidelines framework: - Art. 9 par. 2 of the Banking Ordinance requires internal regulations addressing management of risks (market, credit, default, settlement, liquidity, image, operational, legal); country and transfer risk captured under these categories. - SBA Guidelines for the Management of Country Risk dated September 4, 1997, and SFBC-concurred Practices in Foreign Exchange Trading dated December 5, 1996 are germane. - Historical SFBC provisioning requirements and changes: - 1983: internationally active banks required to allocate 20 percent of general loan loss reserves to loans with a country risk. - End of 1988: rate raised to 35 percent. - Beginning December 31, 1989: distinction — short-term trades (maturity ≤ one year) required 10 percent; other trades 50 percent. - End of 1991: required general loan loss reserves for other loans raised to 65 percent; general loan loss reserve requirements later dropped. - 1992 onward: SFBC published annual country lists with minimal rates for general loan loss reserves (between 5 percent and 100 percent) and exemptions. - SFBC repealed SFBC-Circular 92/4 as of January 1, 1999; moved to self-regulating SBA guidelines. - SBA Guidelines scope: risk policy, recordation, risk limitation and provisions, reporting and disclosure and audit. Banks expected to review provisioning for country risks at least semi-annually. - Tax treatment under Swiss tax code: - individual risks can be adjusted at bank discretion; adjustments can be challenged by tax authorities; provisions can be made before debtor declared bankrupt; write-offs when debtor adjudged bankrupt or highly unlikely to pay; - general reserve allowed on remaining receivables if debtors are not banks in an OECD country: in general, 5 percent of outstanding receivables from Swiss clients and up to 7 percent on outstanding receivables from non-Swiss clients are allowed. - All provisions must be reviewed annually and adopted; failure leads to disallowance. - Reporting and supervisory monitoring: - SFBC receives aggregate country numbers quarterly and detailed information in the annual external audit report; largest banks report quarterly breakdowns for emerging market exposures. - SFBC relies on external auditors' annual audit and Long Form report for assessment of provisioning adequacy; largest banks' monthly prudential reports provide details of provisions and arrears. - Assessment: Compliant. ### Principle 12 — Market Risks (systems, models, and supervisory approach) - Regulatory framework: - SFBC-Circular 97/1 “Guidelines governing capital adequacy requirements to support market risks”; computation of required equity per Art. 12a–12o of the Banking Ordinance. - Guidelines issued in SFBC-Circular 99/1 further regulate market risk support. - Approaches to capital charge: - Market risks may be computed using the standard approach or, with SFBC consent, a model-based approach subject to SFBC requirements. - “De minimis” rule: simplified rules if a bank's trading book never exceeds 6 percent of all on- and off-balance-sheet positions and the absolute level of SwF 30 million. - Model validation and supervisory resources: - SFBC has a separate risk management unit to review bank models and on-site inspections; unit plans to add five additional staff in the next few years. - SFBC reviews internal models, stress-testing, back-testing, scenario analysis and contingency planning; SFBC does not approve models subject to conditions but discusses representative model features with banks. - SFBC collects monthly Prudential Return details from large banks with models (interest rate, equity, foreign exchange, settlement/counterparty and large exposure risks from trading activity). - Limits and oversight: - SFBC does not prescribe specific market risk limits; capital requirements determined in line with the Basel Accord and Swiss standards. - SFBC has power to impose specific capital charges and/or specific limits on market risk exposures. - External auditors perform annual on-site audits of Treasury/Market activities and review policies and MIS. - Industry practice: - Most market-active banks use internal VaR models; UBS and Credit Suisse obtained SFBC formal review and approval of their models (required under the EU Capital Adequacy Directive). - Banks conduct stress testing and contingency planning; SFBC reviews management's stress test assumptions and contingency plans. - Assessment: Compliant. ### Principle 13 — Other Risks (coverage of liquidity, interest-rate, FX, operational, large exposures) - Governance and self-regulation: - SBA guidelines on trading/derivatives (January 1996) and country risk (November 1997) set professional rules on risk policy, identification, measurement, limitation, valuation, reporting and disclosure. - External auditors must assess risk management process integrity, measurement, monitoring, validation, and reporting (SFBC-Circulars 96/3). - Liquidity risk framework and ratios: - Liquidity requirements set out in Art. 4 of the Banking Act and Art. 15–20 of the Banking Ordinance. - Cash/first grade liquidity: based on defined Swiss franc short-term liabilities; base computed as average of outstanding balances at the end of the three months preceding computation. - Federal Finance Department fixes across-the-board cash-liquidity ratio; cash liquidity requirements may not exceed 4 percent of the defined average liabilities. - Current first grade liquidity ratio fixed at 2.5 percent (per the Ordinance of the Department of Finance of November 26, 1987). - Required liquid assets must be held on average for the entire 30-day period from the 20th of the month following the calculation period to the 19th of the following month; ratio recalculated monthly. - General/second grade liquidity: basis includes excess of off-settable short-term liabilities over easily realizable off-settable assets; 50 percent of short-term creditors without withdrawal restrictions; 15 percent of deposits in savings/accounts with withdrawal restrictions excluding amounts not available for distributions. - Based on calculation, 33 percent of the total of these three components must be covered by liquid assets (Art. 15) and easily realizable assets (Art. 16). Monthly returns for cash liquidity and quarterly returns for general liquidity prepared and submitted to the SNB. - SNB must immediately notify SFBC if a bank does not meet liquidity requirements; banks required to ensure liquidity at group-wide basis. - GAP reports are not filed as part of prudential reporting; SFBC has mandated a working group to develop a framework aligned with the Basel Committee’s "Sound Practices for Managing Liquidity in Banking Organizations" with a target: develop framework in the next year with implementation two to three years from now. - Large exposure funding concentration: - Banks required to notify external auditors whenever sight and other liabilities due within one month to a single customer or bank exceed 10 percent of their total (not netted) sight and other liabilities due within one month; auditors include this in annual audit report and recommend corrective action if funding concentrated. - Interest-rate and foreign exchange risk: - SFBC-Circular 99/1 (March 25, 1999) sets minimum standards for measurement, management and monitoring of interest-rate risks. - Banks must report risk exposure on a cash flow basis to SFBC; SFBC may levy additional capital charge if risk exposure deemed too high. - Guidance on FX in SFBC-Circular 97/1 (as amended October 1, 1999); external auditors verify appropriate limits by currency volatility and liquidity. - Operational risk and internal audit: - Internal audit function mandated; SFBC-Circular 95/1 (December 14, 1995) details internal audit organization, personnel and field of activity; internal auditor must be independent and report to the board. - External auditors assess internal audit appropriateness in annual audit report (SFBC-Circular 96/3). - Lead external auditor required to change every seven years. - Supervisory process and off-site monitoring: - SFBC collects monthly prudential data to verify liquidity compliance; immediate notification required for capital shortfalls. - On-site inspection frequency depends on institution profile; Swiss-owned banks required to receive annual on-site audit by an SFBC-approved audit firm. - Assessment: Compliant. - Comment: GAP reports are not filed as part of prudential reporting; SFBC should continue investigating ways to improve liquidity monitoring to align more closely with Basel guidance. ### Principle 14 — Internal Control and Audit (requirements and oversight) - Legal requirements: - Art. 9 par. 4 of the Banking Ordinance: banks must provide an effective system of internal control including segregation between trading, asset management and back office; SFBC may grant exemptions or require additional segregation. - Management must assemble all documents concerning risk transactions necessary for decision making and auditor review (Art. 9 par. 3). - Internal audit standards and supervision: - SBA Guidelines on internal audit (1978, amended 1987) under revision; SFBC-Circular 95/1 (December 14, 1995) provides guidance on Internal Audit. - Internal auditor must be appointed by the board, report directly to it, and execute supervisory tasks transferred to it; internal audit may be outsourced to parent company or recognized audit firm but must be independent of external auditors. - Internal auditor reports submitted to external auditor; largest banks' internal audit reports also reviewed by SFBC's large bank unit. - External audit responsibilities: - SFBC-Circular 96/3 requires external auditors to assess appropriateness of internal control and internal audit in annual audit report (par. 14, par. 16). - External auditor must assess global controls for foreign operations; lead external auditor rotation required every seven years. - Corporate governance: - Board and management responsible for risk appetite and prudent administration; SFBC can require changes in board, management, or external audit firm composition. - Banks must have internal controls appropriate to their nature and scale; audit function required to ensure compliance and adequacy of policies, practices and controls. - Assessment: Compliant. ### Principle 15 — Money Laundering (legal framework and supervisory guidance) - Legal framework: - Money laundering criminalized by Art. 305bis of the Swiss Penal Code; Money Laundering Act (MLL) passed October 10, 1997, effective April 1, 1998. - Art. 305ter of the Criminal Code imposes a general obligation to ascertain identity of customers and beneficial owners; violation punishable with imprisonment of up to one year. - Supervisory guidance: - SFBC issued first circular on money laundering in 1991; current version referenced is SFBC Circular 98/1 dated March 26, (text truncated in source). - Assessment: (text truncated in source at cutoff) - Comments: (text truncated in source at cutoff) *Italic: IMF — _cr09243 - 3.16 of the Banking Ordinance, Reporting Guidelines No. 177 to 190).* ### 1998. The SFBC's circular complements the Swiss Banks' Code of Conduct and the MLL in that it ### _cr09243 - 1998. The SFBC's circular complements the Swiss Banks' Code of Conduct and the MLL in that it ### SFBC role, purpose, and scope - The SFBC ensures banks have adequate policies, practices and internal operating procedures that promote high ethical and professional standards and prevent banks from being used, intentionally or unintentionally, by criminal elements. - Prevention and combating of money laundering is to be given due weight in the training of personnel, in particular of the employees having customer contacts. - The SFBC is the supervisory authority for banks, securities dealers, stock exchanges and investment funds and is responsible for supervision of anti-money laundering implementation with regard to these institutions. - The SFBC has adequate regulatory enforcement powers but has no criminal enforcement powers; it can impose administrative sanctions and must inform competent criminal enforcement authorities when criminal violations are found. - The SFBC may order a “special audit” and, within regular consolidated supervision activities, require examinations with a special focus on anti-money laundering procedures. ### Due diligence, self-regulation, and industry standards - The Due Diligence Agreement has been in place since 1977 and is revised every five years; it lists duties banks must comply with: - duty to ascertain the identity of customers - duty to ascertain the beneficial owner of assets - duty to verify specific aspects - duty to retain documentary records - duty to take appropriate organizational measures - In 2000, UBS and the Credit Suisse Group joined other banks in the "Wolfsberg Anti-Money Laundering Principles" based on the Due Diligence Agreement; adoption and compliance are voluntary and the principles do not set sanctions or penalties. - Switzerland is a member of the Financial Action Task Force (FATF) and was accepted into the Egmont Group in 1998; Switzerland has ratified the Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime of 1990 and signed the United Nations Convention Against Transnational Organized Crime in December 2000. - Mutual legal assistance and cooperation arrangements: Mutual Legal Assistance Treaty with the United States (narcotics investigations and proceedings); declaration of intent with Belgian reporting office in 1999; negotiations with France, Finland and the Czech Republic. ### Bank obligations on customer identification, recordkeeping and transaction monitoring - Documentation retention: identification documents and transaction documents must be retained for a minimum of 10 years after the account relationship is closed (Art. 7 MLL). - Banks must investigate the purpose and economic background of unusual transactions or business relationships unless legality is clear (Art. 6 lit. a MLL). - Thresholds triggering further investigations: - deposits at account opening in value equal to more than SwF 100,000 - during relationship, individual transactions or number of transactions that appear unusually high relative to known business activity/financial circumstances - Investigations must be framed in internal operating procedures; records of investigations must include either a written declaration of contracting party or a memorandum setting out investigation results. - Information potentially required depending on circumstances: - the purpose and nature of a particular transaction; - the financial circumstances of the contracting partner or the beneficial owner; - the professional or business activity of the contracting partner or the beneficial owner; - the origin of the funds deposited or invested. ### Reporting, freezing, and handling suspicious funds - Reporting obligation: If a bank knows or has a justified suspicion that funds are connected with money laundering, it must notify the Money Laundering Reporting Office (MROS) immediately. - Year 2000 reporting statistics: 311 reports filed in total of which 234 (75 percent) were filed by banks. - Notification to SFBC: SFBC should be notified when serious issues are evident or in case of noncompliance. - If a customer refuses to cooperate, obligation to notify is triggered. - If bank continues relationship without well-founded suspicion and without informing authorities, it must monitor the relationship. - If bank breaks off relationship without informing authorities, it must ensure assets withdrawn in a form that allows prosecution authorities to follow the “paper trail”; must not pay out large sums in cash or physically issue securities or precious metals. - Freezing procedures after notification: banks must block funds without delay and maintain the freeze until they receive a ruling from criminal authorities but for no longer than five working days. - Banks must neither inform the customer nor third parties about the notification and freezing of funds if not permitted by criminal authorities. ### Internal controls, audit, and external auditor role - Banks must provide internal operating procedures and control mechanisms, ensure adequate training (especially for employees with customer contact), and designate one or more persons or a specialized body (e.g., legal or compliance department) to advise management, train personnel, spot suspicious customers/transactions, and address all money-laundering related questions. - Internal auditors must review anti-money laundering measures; procedures are checked annually by external auditors and deficiencies require corrective action. - SFBC-licensed external auditors determine that banks have complied with law, SFBC guidance and the Due Diligence Agreement; annual audit attestations are part of Swiss anti-money laundering program. - External auditors are licensed and supervised by the SFBC; eleven audit firms were approved and licensed by end-2000. - External auditor duties include: - annual Long Form report on organization, management, capital adequacy, large exposures, liquidity, internal audit, internal controls, and financial and risk profiles (consolidated where applicable). - perform unannounced interim examinations annually (Art. 40 Banking Act) and at least one in-depth examination area per year. - report violations or irregularities to SFBC if corrections are not timely; must inform SFBC immediately if criminal offense, serious violations, losses reducing capital funds by 50 percent, or other irregularities jeopardizing creditors’ interests are discovered (Art. 21 Banking Act). - SFBC may require another properly qualified auditor to review an institution if doubts arise about audit performance; sanctions include withdrawal of license and replacement of external auditor. - In 1999 external auditors charged 228,441 hours for the audit of the large financial intermediaries and 360,714 hours for all other financial intermediaries. ### SFBC supervisory processes, staffing, and tools - SFBC supervision is a “dualistic system” with three pillars: indirect SFBC supervision, direct external auditor supervision, and ongoing internal auditor on-site supervision; a fourth pillar is the Swiss Bankers Association (SBA) self-regulation. - SFBC staff: about 100 in supervision, of which approximately 13 are in the large bank program. - The Banks / Securities Firms Supervision Department employs 23 people to analyze Long Form reports, process notifications and inquiries, and conduct continuous supervision of banks and securities firms not in the two large groups. - The SFBC performs primarily off-site assessments using quantitative and qualitative supervisory techniques, including external auditors; on-site SFBC supervision is limited to the market risk unit and the large bank unit. - Key supervisory tools: - regular collection and analysis of prudential data (including monthly, quarterly, semi-annual, and annual returns); - annual Long Form report prepared by external auditors (generally received within four months; Art. 47 Banking Ordinance requires remittance within one year after financial statements); - regular meetings with bank management and external auditors (quarterly meetings for large banks; others met with about once every three years unless problems surface); - regulatory attendance at on-site inspections conducted by external auditors. - Identified supervisory gaps/recommendations (Assessment: Compliant, with comments): - formalize a quality assurance process for supervision of external auditors; - obtain additional detailed data (e.g., asset quality) and develop an early warning system; - consider a more detailed large bank risk profile that uses off-site data and trilateral meetings with foreign supervisors, insurance supervisors, management and external auditors; - step up on-site supervision. ### Consolidated supervision and group oversight - Large Bank Supervision unit created in 1998 to strengthen supervision of the two large banking groups (UBS and Credit Suisse Group). - In 2001, the SFBC supervised 84 groups of banks on a consolidated basis. - Consolidated supervision practice exists though legal provisions could be more clearly codified; a draft proposal for amendment of the Banking Act and the SESTA is before the Federal Council to provide clearer legal rules for supervision of groups and financial conglomerates. - Gaps and recommendations: - no legal definition of a banking group in the Banking Act or Banking Ordinance creates ambiguity in some cases (especially where parent is not a licensed bank). - potential supervisory gap for Credit Suisse Group regarding insurance activities (insurance activities account for almost 25 percent of group earnings); recommendation for SFBC large bank staff to detail group risk profile and coordinate with insurance supervisors in major markets. - Consolidation and risk-weighting rules of note: - investment in insurance historically treated differently; investment in non-financial participations risk weighted at 500 percent. - banks must consolidate foreign offices line-by-line and majority-owned banking, finance or real estate subsidiaries on a pro-rata basis for accounting. - the SFBC can require reporting from host-country regulators if foreign regulations do not allow direct reporting by affiliate/branch (Art. 23 sexies Banking Act). ### Accounting, disclosure, and audit standards - Accounting governed by Swiss Code of Obligations, Banking Act, Banking Ordinance and SFBC guidelines (RRV-SFBC dated December 14, 1994 and amended October 28, 1999). - Three accounting frameworks in use: Swiss GAAP, IAS, U.S.-GAAP; SFBC may allow deviation where conformity with recognized international standards. - Reporting and disclosure requirements: - annual financial statements and business report; banks with total assets of at least SwF 100 million and significant off-balance sheet operations must prepare a cash flow statement; - semi-annual interim financial statements required; - annual financial statements disclosed in printed form within four months of year-end; interim statements published within two months of reporting period end. - Loan classification and provisioning rules: - loans with interest more than 90 days overdue are considered at risk/non-performing per SFBC guidelines; - interest past due more than 90 days may not be included in interest income; previous unearned interest income must be reversed; - banks may create specific and general reserves subject to legal limits and management discretion. - Raiffeisen banks exception: 537 Raiffeisen banks may use their own qualified audit department; they comprise 11 percent of Swiss banking market with total group assets of SwF77.2 billion and equity of SwF3.5 billion. ### Sanctions, confidentiality and legal interactions - SFBC sanction range: reprimand, special audit, dismissal of bank officials, revocation of bank's license; SFBC may bring criminal charges in case of violation of the Banking Act, the MLL or the Criminal Code. - SBA Supervisory Board enforces Code of Conduct and may impose fines up to SwF 10 million. - Banking secrecy does not bar disclosure to criminal or administrative authorities; banks must provide requested information and allow access to files for investigations (Art. 9 MLL; reference to Art. 305bis Criminal Code). - Criminal Code protects bank employees who report suspicious transactions from violating bank secrecy. - SFBC may share information with domestic and foreign financial sector supervisory authorities; a clear legal basis for publishing identities of banks/individuals involved in money laundering and imposing monetary penalties is desirable to strengthen SFBC enforcement. ### Planned guideline revisions and special topics - SFBC and SBA in process of updating Due Diligence guidelines to: - clarify foreign corruption and duty for top bank management to know big/high profile customers and frequently check such accounts; - revise SFBC money laundering circular involving Money Laundering Control Authority, Money Laundering Reporting Office, and cantonal enforcement agencies. - Revised SFBC guidelines will address: - Formulation of a more differentiated approach to customer identification; - Rules for non-face-to-face customer relationships, in particular internet-only banks; - Rules regarding identification of customers by third parties and independent asset managers; - More detailed rules on the verification of the beneficial owner; - Use of client profiles; - Heightened due diligence requirements in special cases, for example, Politically Exposed Persons (PEPs); - Adaptation of rules to criminal code provisions regarding foreign corruption and corporate criminal liability. - Interim action: On March 29, 2001 the SFBC addressed a letter to all banks stating minimum standards for account openings and monitoring of accounts with "Internet only" banks, imposing the same due diligence standards as “brick and mortar” banks until inclusion in revised SFBC Anti-Money Laundering Circular. ### Assessments and mission comments - Assessment of anti-money laundering framework: Compliant. - Mission comment: although banking sector is compliant and diligent in complying with MLL, the mission was not in a position to assess effectiveness of measures introduced outside the financial sector. - Principle 16–21 assessments: Compliant, with recommendations to formalize auditor quality assurance, obtain more detailed asset quality data and early warning indicators, enhance large bank risk profiling, increase on-site supervision, and clarify legal authority for consolidated and cross-sector information sharing. *Source: _cr09243 - 1998. The SFBC's circular complements the Swiss Banks' Code of Conduct and the MLL in that it* ### appendix as detailed in Art. 23ss of the Banking Ordinance. Banks must issue annual financial ### _cr09243 - appendix as detailed in Art. 23ss of the Banking Ordinance. Banks must issue annual financial ### Accounting standards, financial statements, and external audit (Principle 21) - Banks must issue annual financial statements and prudential reports on a stand alone and on a consolidated basis. - International Accounting Standards (IAS) and U.S. Generally Accepted Accounting Principles (US GAAP) are considered to be equivalent to Swiss Financial Statement Reporting Provisions for banks. - Banks organized in accordance with Swiss law which are under the controlling influence of persons with residence or registered office in an EEA member country may prepare their annual financial statements in accordance with the applicable provisions in their country of origin. - Material deviations from the provisions of the Banking Ordinance and SFBC Guidelines of the international standards of financial statement reporting must be mentioned and quantified in the Appendix to the financial statements (see SFBC Guidelines concerning the provisions governing the preparation of financial statements, 29a-c). - An external audit of banks' annual financial statements is mandatory. - External bank auditors in Switzerland must review a bank's compliance with all prudential requirements (compliance with licensing requirements, due diligence rules, etc.) in light of the Swiss dualistic bank supervision system. - An auditing firm and its lead auditor must be authorized and licensed by the SFBC to perform a bank audit. - A bank must obtain the approval of the SFBC prior to changing its auditing firm or appointing one for the first time. - The external auditor must prepare a report, commonly called the "Long Form," containing the details required by the SFBC pursuant to SFBC Circular 96/3 dated October 21, 1996 with Amendments of August 26, 1999 and of October 28, 1999: Audit Report: Form and Content ("Audit Report"). - The Long Form contains annual certification of a bank's financial statements and detailed information on a bank's compliance with all requirements of the Banking Act, the Banking Ordinance, SFBC Circulars and Guidelines of the SBA. - The Long Form is comprehensive and must be submitted to the SFBC. - The annual Long Form plus any special audit reports requested from special exams are important tools for supervision by the SFBC. - See CP 16 and 19 for further information regarding the role of the external auditor in the Swiss supervisory process, verification of records and on-site audits. - The SFBC may hold bank management and the external auditors responsible for ensuring the accuracy and adequacy of the financial record keeping systems and timely filing of required reports. - Annual reports likewise receive similar scrutiny for those banks required to file (non-deposit taking Private Banks, which are General Partnerships, are not required to produce or publish annual reports). - Assessment: Compliant. ### Remedial measures and enforcement powers (Principle 22) - Art. 23ter par. 1 of the Banking Act provides the required powers to the SFBC for taking an appropriate range of remedial actions against banks depending on the severity of a situation. - Remedial actions range from informal oral or written communication with bank management to actions that involve the revocation of the banking license (Art. 23quinquies par. 1 of the Banking Act). - Additional powers under the Banking Act include: - suspending voting rights (Art. 23ter par. 1 of the Banking Act) and issuing an instruction to suspend dividend payments, - freezing the current activities of the bank, and - withholding approval of new activities or acquisitions. - The SFBC is required to ensure that remedial actions are taken in a timely manner (Art. 23ter par. 2 of the Banking Act). - The SFBC does not have the authority to publish enforcement activities imposed by them. - The SFBC can order temporary measures, such as the suspension of bank directors and managers, which take effect immediately. - There is no mechanism for the automatic imposition of administrative or penal sanctions; under Swiss law, this requires the conduct of legal proceedings with full procedural guarantees. - Penalties and sanctions may be applied to the bank, and, when necessary, also to management and/or the supervisory board. - Art. 23quater of the Banking Act empowers the SFBC to delegate an expert to act as its observer in a bank if, because of misdemeanors, the claims of the creditors appear seriously jeopardized. - The draft proposal on the amendment to the Banking Act delegates to this expert limited supervisory functions to act in a flexible way. - The SFBC has no legal power to force a credit institution with material problems to merge with a healthier institution, though it supports solutions such as initiating an acquisition or a merger. - Proposed amendment to the Banking Act will: - streamline existing regulation and codify SFBC’s current practices, - explicitly empower the SFBC to bar, suspend or dismiss managers or directors, alter, reduce or terminate any activity that poses excessive risk, restrict an institution’s business activities, or impose temporary management along with reorganization measures, - explicitly provide that a reorganization measure, such as a purchase and assumption transaction, does not require the approval of the shareholders assembly and may be imposed on unwilling shareholders. - Assessment: Compliant. - Comments: - SFBC should have the authority to impose direct civil monetary penalties on banks or directors or managers on its own. - The SFBC does not have the authority to publish enforcement activities that have been imposed by them; the proposed amendment to the Banking Act should cover both. - SFBC would appreciate, and should have, clear legal enforcement authority to publish the identities of banks and individuals involved in money laundering activities and to impose monetary penalties for non-compliance with the money laundering law. - Assessment: Compliant. ### Globally consolidated supervision (Principle 23) - Banks organized under Swiss law shall notify the SFBC before they establish a subsidiary, branch, agency or representation abroad (Art. 3 par. 7 of the Banking Act). - Under Art. 23septies par. 1 of the Banking Act, the SFBC has the authority to supervise the overseas activities of locally incorporated banks. - Art. 7 par. 3: the scope of the bank’s operations and their geographic terms shall correspond to its financial resources and administrative organization. - Oversight of foreign entities and “fit and proper” bank management: same oversight requirements as applicable to the head office of credit institutions. - The SFBC has a policy for assessing whether it needs to conduct on-site examinations (through SFBC or external auditors) or require additional reporting, and has legal authority and resources to take such steps. - Under Art. 6b of the Banking Ordinance the SFBC can prohibit the foundation of new banking entities and can demand the closing of existing ones. - Consolidated supervision process for internationally active banks: - The large banking group department regularly visits local bank management (mainly in the United Kingdom and the United States, exceptionally in other jurisdictions). - Objectives: be in touch with local management, make them realize there is a home regulator/supervisor, and for the Secretariat’s staff to get to know the major businesses abroad. - On-site reviews consist of an audit-like visit in order to assess a previously well-defined area within one or both of the large banks; review team is a joint legal and large banking department team; such visits require close coordination with internal and external audit. - Staff of the large banking groups department attends audits of external auditors to improve information level and assess quality and procedure of the external audit firm; attendance is mainly passive. - Meetings with foreign regulators aim to share information, achieve a common risk assessment, and coordinate supervisory action plans; meetings have taken place three times a year in Zurich, New York, and London, and, beginning in fall of 2001, on a less frequent basis in Singapore, Hong Kong, and Tokyo. - Assessment: Compliant. ### Host country supervision and information exchange (Principle 24) - Proper supervision of foreign bank branches and subsidiaries in Switzerland and Swiss banks' overseas branches and subsidiaries requires close international cooperation, ideally based on MoUs or letters of exchange. - The SFBC has not signed any MoUs. - Letters of exchange have been signed with Denmark, the Netherlands, Sweden, and the United Kingdom. - Exchange of information, cooperation and on-site visits are generally based on informal arrangements. - This could cause problems conducting on-site visits in foreign countries with higher frequency, especially after implementation of the new Basel Capital Accord. - A higher frequency of on-site inspections by the SFBC would make it necessary to formalize this process through MoUs. - Informal arrangements have not impaired the SFBC's ability to practice consolidated supervision in the past, including on-site inspections if necessary. - Outcome of meetings with the Federal Reserve Bank of New York (FRB NY) and the Financial Services Authority (FSA) in the United Kingdom: - SFBC does not have direct contact with the U.S. SEC; instead they deal with the FRB NY as the so-called umbrella supervisor for CSFB's U.S. operations. - It is important that the SFBC establish a relationship with the primary supervisor of CSFB's U.S. operations. - Neither the Fed nor the SFBC are closely monitoring the insurance activities of the Credit Swiss Group (24 percent of its income is from insurance). - The FSA acknowledges they are re-examining their insurance supervision of Credit Suisse Group. - The FSA has recently started bilateral meetings with the Swiss insurance supervisor, but consolidated supervision is a relatively new concept for insurance supervisors. - Under Art. 23sexies of the Banking Act, the SFBC is empowered to provide information to host country supervisors, insofar as these authorities: - will use such information exclusively for direct supervision of banks; - are bound by official professional secrecy law; and - will not transmit this information to competent authorities or bodies which are entrusted with supervisory activities in the public interest without the prior consent of the SFBC or on the basis of a blanket permission contained in a treaty with a contracting state. - As the establishment of operation in foreign countries requires approval by the SFBC, the Banking Commission has the power to reject any application where consolidated supervision would be hindered. - Assessment: Compliant. - Comments: - Informal arrangements have not impaired the SFBC's ability to practice consolidated supervision in the past. - The expected higher frequency of on-site inspections would be facilitated if formalized through MoUs. ### Supervision over foreign banks’ establishments (Principle 25) - For branches and subsidiaries of foreign banks, the SFBC requires a license; these institutions are subject to similar regulatory requirements applicable to all other Swiss banks. - Under Art. 3bis par. 1bis, the SFBC requires that no objection or, preferably, the approval of the home country supervisor is received. - Special requirements for foreign-owned banks: - The country or countries where controlling shareholders are incorporated (or if the shareholders are individuals, the countries where they reside) must grant reciprocity to Swiss banks. - If the Swiss bank is controlled by a foreign bank or other foreign financial institution, the parent must be subject to adequate supervision; where no consolidated supervision exists by home-country authorities, the SFBC may impose specific reporting requirements for the Swiss entity to assure consolidated supervision. - The supervisory agencies of the parent’s home-country must not object to the establishment of the subsidiary in Switzerland. - The bank must select a name that does not imply Swiss control. - The SFBC requires all banks subject to its supervision as a lead home-country regulator to report on a group-wide consolidated basis. - Art. 4quiquies of the Banking Act authorizes Swiss-based affiliates (and branches) of foreign financial institutions to furnish information required for the parent institution’s internal control purposes or for consolidated supervision by their home-country regulator to their parent institution, subject to three conditions: - the information may only be used for group-internal control purposes or for the direct regulatory supervision of the financial institution; - the parent company and the supervisory authority must be bound by official or professional secrecy; and - the information so obtained must not be forwarded to third parties without prior authorization by the Swiss affiliate unless generally agreed upon in a treaty (Art. 4quinquies of the Banking Act). - That information may also include customer-related information provided it is used exclusively for internal control and consolidated supervision purposes. - Under Art. 23septies par. 2 of the Banking Act, the SFBC may permit foreign financial supervisory authorities to carry out direct inspections at Swiss establishments of foreign banks. - Since the law was amended, foreign supervisors have conducted on-site examinations of foreign banks' Swiss affiliates. - Art. 23sexies of the Banking Act give the SFBC the power to advise the home country supervisor on any material remedial action it takes. - Assessment: Compliant. ### Summary compliance table (Table 2) - Table 2: Summary Compliance with the Basel Core Principles (selected entries shown as in source) - Core Principle 1. Objectives, Autonomy, Powers, and Resources — X - 1.1 Objectives — X - 1.2 Independence — X - 1.3 Legal framework — X - 1.4 Enforcement powers — X - 1.5 Legal protection — X - 1.6 Information sharing — X - 2. Permissible Activities — X - 3. Licensing Criteria — X - 4. Ownership — X - 5. Investment Criteria — X - 6. Capital Adequacy — X - 7. Credit Policies — X - 8. Loan Evaluation and Loan-Loss Provisioning — X - 9. Large Exposure Limits — X - 10. Connected Lending — X - 11. Country Risk — X - 12. Market Risks — X - 13. Other Risks — X - 14. Internal Control and Audit — X - 15. Money Laundering — X - 16. On-Site and Off-Site Supervision — X - 17. Bank Management Contact — X - 18. Off-Site Supervision — X - 19. Validation of Supervisory Information — X - 20. Consolidated Supervision — X - 21. Accounting Standards — X - 22. Remedial Measures — X - 23. Globally Consolidated Supervision — X - 24. Host Country Supervision — X *Source: _cr09243 - appendix as detailed in Art. 23ss of the Banking Ordinance. Banks must issue annual financial* ### 25. Supervision Over Foreign Banks’ ### 25. Supervision Over Foreign Banks’ Establishments ### Basel Core Principles — Recommended Action Plan - CP 1.2 Independence: The SFBC should have full budgetary independence, based on the law. - CP 1.6 Information sharing: The SFBC should consider formalizing the exchange of information and on-site visits, for example through the conclusion of MOUs or the exchange of letters. - CP 2 Permissible Activities: An exception in the Banking Act (Art. 1 par. 2) permits nonbank employer-sponsored deposit-taking entities that are not licensed or regulated as financial institutions. This poses a risk to the system and should be eliminated. - CP 6 Capital Adequacy: The 12.5 percent capital reduction for cantonal banks should be eliminated on competition grounds. - CP 7 Credit Policies: Insufficient data is collected by the SFBC regarding renegotiated, past due, and internally classified credits. Such information, along with provisions, charge-offs, and recoveries, would be useful in monitoring asset quality trends in the banking system. - CP 13 Other Risks: Gap reports are not filed as part of the prudential reporting process and the current supervisory system for monitoring liquidity as part of off-site supervision is under review. The SFBC should continue investigating ways to improve its liquidity monitoring to align it with the Basel Committee's paper on managing liquidity in banking organizations. - CP 16 On-Site and Off-Site Supervision: Additional detailed data should be obtained (e.g., on asset quality), and an early warning system should be developed. Consider setting up a more detailed large bank risk profile using off-site data and information from trilateral meetings with foreign supervisors, insurance supervisors, management and external auditors. - CP 17 Bank Management Contact: Consider implementing a process with all Swiss banks whereby SFBC staff meets with management annually, possibly in conjunction with completion of the annual external audit and receipt of the Long Form report. - CP 19 Validation of Supervisory Information: A formal quality assurance program for supervising and verifying the work of the external auditors has to be developed and implemented. - CP 20 Consolidated Supervision: Proposed amendments to the Banking Act, SESTA, and the Insurance Supervision Act provide for a more comprehensive set of legal rules for supervision of groups and financial conglomerates. Further development of a strategy for supervision of insurance activities of Swiss conglomerates in major markets is recommended. - CP 22 Remedial Measures: The SFBC should have authority to impose direct civil monetary penalties on banks or directors or managers and to publish enforcement activities. The proposed amendment to the Banking Act should cover both. The SFBC should have clear legal enforcement authority to publish identities of banks and individuals involved in money laundering and to impose monetary penalties for noncompliance with the MLL. - CP 24 Host Country Supervision: Informal arrangements have not impaired the SFBC's ability to practice consolidated supervision in the past. Higher frequency of on-site inspections would be facilitated if formalized through MOUs. ### Authorities’ response (Basel) - General agreement with main findings and recommendations, particularly CP 1.2 (budgetary independence) and CP 2 (deposit taking entities). - SFBC view on CP 1.6/24: Formal co-operation arrangements are not a prerequisite for exchange of information under Swiss law; cooperation can be as efficient and often more flexible in absence of MOUs. There are no legal obstacles to entering formal arrangements if a foreign regulator wishes to formalize cooperation. --- ### IOSCO Objectives and Principles — Key Findings and Recommendations - Institutional setting and market structure: - The SFBC is responsible for licensing and supervising securities dealers and stock exchanges; supervisory functions are also delegated to exchanges as SROs. - In 2000, the SWX ranked 10th in the world by turnover in equities, with turnover of SwF1.0 trillion, more than double the turnover in 1996. - Market capitalization of the Swiss Performance Index (SPI) was SwF 1.3 trillion at the end of 2000 (equivalent to three times annual GDP). - Total assets of investment funds were SwF 468 billion (115 percent of GDP) at end-2000. - Since June 2001, SMI stocks traded exclusively on Virt-x (joint venture between SWX and Tradepoint). - Assessment methodology: Four-part assessment system—implemented; partially implemented; non-implemented; not applicable. - Selected practice assessments and observations: - Principle 1 (responsibilities of regulator): Partially implemented. Scope of securities legislation does not include all types of securities transactions or intermediaries (primary markets, some asset managers, closed-end funds). - Principle 2 (operational independence): Partially implemented. SFBC has no budgetary independence; budget is part of central government budget though expenses are covered by fees. - Principle 3 (powers, resources, capacity): Partially implemented. SFBC staff 115 (about 80 supervisory); staff turnover 18 percent in 2000; reliance on external auditors for front-line supervision. - Principles assessed as Implemented include 4, 5, 6, 7, 8, 17, 18, 19, 20, 22, 24, 25, 26, 27, 28, 29, 30 (total 17). - Principles assessed as Partially Implemented include 1, 2, 3, 9, 10, 11, 12, 13, 14, 15, 16, 21, 23 (total 13). - Notable numeric and regulatory specifics: - Securities dealers categories include own-account traders with gross turnover that exceeds SwF 5 billion per year as a threshold for classification. - SWX may impose fines up to SwF10 million. - IOSCO Recommended Action Plan (summary): - Principles 1-5: Update securities regulation to include all securities transactions and intermediaries, including primary markets and all asset managers. Clarify removal procedures for board members. Grant full budgetary independence to SFBC and increase staff resources. - Principles 6-7: SFBC to take a more proactive role in supervising SROs; formalize trade association roles. - Principles 8-10: Strengthen SFBC enforcement powers, increase direct supervision, formalize examination process and quality assurance for external auditors, broaden sanctions. - Principles 11-13: Strengthen cooperation with foreign regulators. - Principles 14-16: Improve protection for minority shareholders; strengthen accounting and auditing regulation; introduce supervision and sanctioning of auditors of listed companies. - Principles 17-20: Improve regulator involvement in asset valuation. - Principles 21-24: Strengthen supervision of dealers trading own account below threshold and those serving qualified investors only; require pre-transaction disclosure of conflicts of interest. - Principles 25-30: Strengthen SFBC supervisory role for secondary markets and international exchanges; ensure ability to provide full information and cooperation. - Authorities’ response (IOSCO): - Agreed with key findings and most recommendations. Viewed full prudential regulation of asset managers and small own-account traders as unnecessary. Supported additional sanction powers as useful but not strictly necessary. SFBC considers prudential supervision of dealers below SwF 5 billion threshold not required for investor protection or stability. --- ### IAIS Insurance Core Principles — Findings and Recommendations - Market concentration and size: - Insurance premiums per capita (2000, U.S. dollars): Switzerland total 4,154; Non-life 1,571; Life 2,583. - Premiums-to-GDP (2000): Switzerland total 12.42 percent; Non-life 4.70 percent; Life 7.72 percent. - Number of companies: Life domestic 28, non-life domestic 73, reinsurance domestic 35; total licensed companies 173. - Of 30 life companies, 5 received over 75 percent of total life premiums in 2000. In non-life, 10 companies collected over 75 percent of premiums. - Supervisory structure and resources: - FOPI total staff 55; professional members dedicated to supervision number about 35. - FOPI budget is part of Ministry of Justice and Police process; costs recovered from insurance companies the following year. - Principal supervisory shortcomings identified: - Fit and proper assessments and approvals for changes in control: FOPI does not currently have authority to approve changes in ownership or perform fit and proper assessments of major owners/management—assessed as Non-observed for Principle 3. - Corporate governance and internal controls: Legislation does not provide specific directions; assessed as Partly observed (Principles 4 and 5). - On-site inspections: Conducted infrequently (recent experience suggested once in five years); assessed as Broadly observed for on-site inspection capability but resource-constrained. - Prudential standards: - Assets and liabilities: Observed (Principles 6 and 7). Ordinances 961.611 and 961.711 specify portfolio composition and limits (examples: 30 percent of technical reserves may be invested in receivables towards counterparts in other countries; 20 percent may be invested in receivables in foreign currencies; 30 percent in Swiss securities; 25 percent in foreign securities; 5 percent in foreign real estate; investments with related parties must not exceed 5 percent). - Capital adequacy: Observed. Minimum capital: - Non-life classes 1-8 and 10-15: SwF 8-10 million. - Non-life classes 9 and 16: SwF 3-7 million. - Non-life classes 17 and 18: SwF 0.6-2 million. - Life insurance minimum capital: SwF 5-10 million. - Solvency margin computed using EU formula. - Derivatives: Observed. Decree 961.015 requires strategy, limits, risk analysis, and internal controls for derivatives. - Reinsurance: Broadly observed; no systematic procedure for evaluating reinsurance credit; FOPI requires annual list of important reinsurers and volumes. - IAIS assessment summary (Table 8): - Observed (6): 6, 7, 8, 9, 12, 17 - Broadly observed (6): 1, 2, 10, 13, 14, 15 - Partly observed (4): 4, 5, 11, 16 - Non-observed (1): 3 - Recommended action plan (summary): - Complete preparation and rapid adoption of new insurance legislation (Draft Bill expected, recommended rapid adoption). - Review FOPI compensation system to improve recruitment and retention; consider separation from general public service scales; hire additional staff to increase frequency of on-site inspections and expand off-site monitoring. - Provide FOPI broader authority to exchange confidential information with other financial supervisors; expand MoUs with foreign supervisors (e.g., Liechtenstein) and supervisors in other sectors. - Introduce explicit powers and procedures for fit and proper assessments and approval of changes in control (addressed in Draft Bill). - Issue formal guidance on corporate governance and internal controls; establish standards for Boards of Directors, investment and risk management policies. - Authorities’ response (IAIS): - FOPI broadly agreed with the assessment; indicated most recommendations are being addressed in proposed new legislation. --- ### CPSS Core Principles for Systemically Important Payment Systems — SIC Assessment - Systemic importance and usage: - SIC processes on an average day electronic funds transfers amounting to some SwF180 billion. - For comparison, annual value of Swiss GDP is SwF 407 billion. - Participation (end-2000): 302 participating members, of which 55 functioned on a remote basis. - Key system features: - SIC is a real-time gross settlement (RTGS) system; each settled transfer is immediately final; daylight overdrafts are automatically and legally prohibited. - SIC handles large- and small-value transactions and is used for cash settlement of SIS (central securities depository), Eurex (derivatives), and retail settlement mechanisms (DTA). - Back-up offline gross settlement system: MINI SIC (tested annually with compulsory involvement of all domestic participants). - Liquidity and credit arrangements: - Three liquidity tools: queuing; intra-day credit facility (available from start of day until 14:45; repayment may be initiated from 15:00; if not repaid by 16:15 an interest charge applies that exceeds the overnight rate by twice the Lombard surcharge (i.e., by 400 basis points)); overnight Lombard facility available with rate 200 basis points over the overnight rate. - Security, contingency, and governance: - Security package IBASEC implemented 1999 (authentication and encryption). - Annual operations and security audits arranged by Telekurs Holding AG; gaps in key management procedures noted. - Governance: SNB contracts with Swiss Interbank Clearing AG (SIC AG) which operates SIC on behalf of SNB; SNB has oversight powers under contract, including approval of rule changes and access criteria, receipt of audits, on-site inspection rights, and ability to require staff replacements. - CPSS assessment summary (Table 11): - Observed: Core Principles I, II, III, IV, VI, VII, VIII, IX, X; Central Bank Responsibilities A, C, and D (total 9). - Not applicable: CP V (multilateral netting) and Responsibility B (systems operated by central bank). - Recommended action plan (Table 12): - Principle 7: SNB should analyze anticipated developments (2002) and examine contingency procedures of the SIC and extraordinary liquidity sources for relevant currencies in plausible interruption scenarios; prepare for operational problems related to violent acts; consider hiring an accounting firm of SNB’s own choice to conduct occasional operations and security audits of SIC. - Central bank responsibilities A-D: Continue interaction with Deutsche Bundesbank on evolution of euroSIC consistent with Lamfalussy Principles of cooperative oversight of cross-border netting and settlement systems. - Authorities’ response (CPSS): - SNB staff began the recommended examination of structural developments anticipated in 2002 and investigated steps to establish an inter-central bank swap arrangement to provide U.S. dollar liquidity if needed. Suggestions on operational reliability and additional security audits viewed positively. --- ### IMF Code of Good Practices on Transparency in Monetary and Financial Policies — Monetary Policy (start) - SNB monetary policy framework (as of 2000): - Switched from monetary targeting to a framework based on an inflation forecast over a three-year horizon with an explicit objective of keeping medium-term inflation below 2 percent. - Introduced a publicly announced range for the three-month Swiss franc rate as an operational target. - Adopted repos as the main instrument for controlling liquidity. - Assessment basis: - Assessment based on discussions with SNB staff, responses to questionnaires, National Bank Law (NBL) and proposed revisions (revNBL), other laws, administrative policies, and information available during the October 2001 FSAP mission. - Note on ongoing legal reform: - revNBL is in consultation; a draft bill incorporating consultation comments was expected to be submitted to Parliament in mid-2002 with anticipated effect in 2004 at the earliest. *Source: IMF FSAP assessment materials contained in _cr09243 - 25. Supervision Over Foreign Banks’ Establishments_* ### 1.1 The ultimate objective(s) and institutional framework of monetary policy should be ### _cr09243 - 1.1 The ultimate objective(s) and institutional framework of monetary policy should be ### Ultimate objective and institutional framework - Description: - The ultimate objective and institutional framework of monetary policy are defined in the Federal Constitution (Constitution) and the National Bank Law (NBL). - The Swiss National Bank (SNB) is an independent central bank charged with monetary policy and shall pursue a monetary policy serving the interests of the country as a whole (art. 99 Constitution and art. 5 NBL). - Neither the Constitution nor the NBL explicitly address maintaining price stability as the ultimate objective; the SNB regards maintaining price stability as the ultimate objective and this interpretation has not been challenged. - The NBL specifies: (i) the SNB’s corporate structure (arts. 1-13, 25-27 NBL); (ii) monetary and foreign exchange policy, scope of business, central bank instruments and note-issuing privilege (arts. 1, 14-16k, 66-68); (iii) organization and cooperation with the federal administration (arts. 28-63); and (iv) procedural provisions and criminal sanctions (arts. 65a-65d, 68a, 69). - Responsibility for determining and implementing monetary policy is vested in the SNB’s Governing Board. The Governing Board is the supreme managing and executive body and is responsible for conceptional and operational monetary policy decisions, determining the level of monetary reserves, the investment of assets, and exercising competencies relating to monetary and foreign exchange policy (art. 16j NBL). - Assessment: Observed. - Comments: - The proposed revised NBL will more precisely establish maintaining price stability as the ultimate objective and state that the SNB shall pursue a monetary policy serving the overall interests of the country; it shall ensure price stability and shall duly take into account the development of the business cycle (art. 5 revNBL). - The proposed provision should not be interpreted that the SNB guarantees price stability. ### Specification and public disclosure of objectives - 1.1.1 Description: - The objective of monetary policy is specified in the Constitution and the NBL. Both documents are publicly disclosed and available, including on SNB and federal websites (http://www.snb.ch). - The SNB consistently disseminates its interpretation that maintaining price stability is the ultimate objective in official bulletins, reviews, speeches, and annual reports. - Assessment: Observed. ### Legal specification of central bank responsibilities - 1.1.2 Description: - The responsibilities of the SNB are specified in the NBL: conduct monetary policy (art. 2, para. 1 NBL); facilitate and ensure safety of the interbank payment system (art. 2, para. 1 NBL); ensure money supply (art. 2, para. 1 NBL); invest monetary reserves (art. 14 NBL); advise federal authorities on economic policy (art. 2, para. 1 NBL); act as banker to the government (art. 15 NBL); promote financial system stability (arts. 98, 99 Constitution, art. 2 NBL); compile statistics (arts. 7, 9 Banking Law). - The SNB may act as a lender of last resort in case of liquidity crisis, but there is no specific provision on emergency lending in the NBL. - Assessment: Observed. - Comments: - Proposed revNBL will establish tasks: supply Swiss franc money market with liquidity, ensure provision and distribution of cash money, facilitate and secure cashless payment systems, and manage monetary reserves (art. 5, para. 2 revNBL). - Proposed revNBL will also provide basis for collection of statistical data from banks, exchanges, securities dealers and fund managers and possibly extended entities (arts. 14, 15 revNBL). - Lender-of-last-resort function is understood to be captured in article 5, para. 2(a) revNBL (though not expressly stated). ### Authority to utilize monetary policy instruments - 1.1.3 Description: - The NBL details instruments to implement monetary policy (arts. 14-16k NBL). The law lists extensive eligible operations and instruments, including: - discounting of bills, cheques and treasury bills issued by the Confederation, cantons or municipalities; - buying/selling and repurchase agreements in treasury bills and debt certificates of the Confederation; - issuing and repurchasing own interest-bearing debt certificates with a period to maturity not exceeding two years for open-market policy purposes; - buying/selling (cash or forward) and repurchase agreements in bills/cheques drawn on payees abroad, debt certificates of foreign states, international organizations and foreign banks, derivatives (options, futures, forward rate agreements) when designed to regulate market risks; - granting interest-bearing current-account advances at up to ten days' notice against eligible collateral; - time-limited discount and Lombard commitments for eligible claims and securities; - accepting deposits on non-interest-bearing accounts; carrying out giro, clearing and collection transactions; opening correspondent accounts; buying/selling cheques; buying/selling and repurchase agreements in gold; issuing gold certificates; custody and management of securities and valuables; acting as subscription agent for certain bond issues (excluding firm underwriting); buying/selling international payment instruments. - Assessment: Observed. - Comments: - Proposed revNBL will describe instruments more generally to enhance flexibility, including opening interest bearing and non-interest bearing accounts for banks and other financial market participants; taking into custody assets; buying/selling Swiss franc or foreign currency denominated receivables and securities and precious metals (spot or forward); issuing/repurchasing own interest-bearing bonds (spot and forward); creating derivatives on receivables, securities and precious metals; entering into credit transactions with banks and other financial market participants conditional on sufficient collateral; holding and managing assets; and dealing with foreign central banks and international organizations (arts. 9, 10 revNBL). ### Institutional responsibility for foreign exchange policy - 1.1.4 Description: - Under flexible exchange rates, responsibility for the external value of the Swiss franc is attributed to the SNB. The SNB is independent in conducting monetary policy (art. 99, para. 2 Constitution; art. 2, para. 1 NBL). The exchange rate reflects independent monetary policy decisions. - The German version of the NBL refers to “Kredit- und Währungspolitik.” In the French version, monetary policy is understood to include foreign exchange policy. - Institutional responsibility for changing the exchange rate regime is not in a single legal provision; explanatory notes accompanying Federal Council bills (Botschaften) explicitly explain responsibility (example cited). - Two cases: - A decision to permanently peg the Swiss franc under international law requires action by Parliament (art. 166, para. 2 Constitution). The Federal Council negotiates and ratifies treaties and submits them to Parliament for approval (art. 184 Constitution). - A decision to unilaterally peg the Swiss franc to another currency or basket would be a monetary policy decision of major importance and requires consultations between the SNB and the Federal Council (art. 2, para. 2 NBL). - Assessment: Observed. - Comments: - It is desirable to specify in law the allocation of institutional responsibility for determining the exchange rate regime. ### Accountability modalities - 1.1.5 Description: - The SNB is accountable to the Federal Council; the Federal Council must approve the annual report and annual accounts (art. 63, para. 2(i) NBL). - The law requires preparation of an annual report, approval by the shareholders’ meeting (art. 37, para. 1 NBL) and publication (art. 25, para. 3 NBL). - Assessment: Observed. - Comments: - Proposed revNBL will more fully set out SNB’s accountability, distinguishing accountability to the Federal Council and sharing information with the competent parliamentary committee and the public (art. 7 revNBL). - The SNB will explain to Parliament the economic situation and its monetary policy and provide information to the public at least once a year. - The SNB will produce and publish quarterly reports on economic and monetary developments and publish weekly data of importance to monetary policy. - It is recommended that the revised NBL explicitly require publication of the annual report despite stock exchange regulations covering listed firms. ### Government override authority - 1.1.6 Description: - The government has no authority to override the SNB’s policy decisions. SNB independence is clearly set out in the Constitution (art. 99 Constitution). - Assessment: Not applicable. - Comments: - Proposed revNBL will mirror the Constitution and explicitly state SNB independence (art. 6 revNBL). ### Appointment, term, and removal procedures for governing body - 1.1.7 Description: - The three members of the Governing Board are elected by the Federal Council on the recommendation of the Bank Council for a period of six years (art. 53 NBL). Reelection is possible. - Members of the Governing Board and other SNB organs and staff must be Swiss citizens (art. 55 NBL). - They may not be members of the federal parliament, a cantonal government or the Bank Council at the same time (art. 56 NBL). - The federal government has power to dismiss members of the Governing Board; the NBL does not identify specific grounds for removal but requires that reasons be explained (art. 60 NBL). - Assessment: Partly observed. - Comments: - Proposed revNBL requires Governing Board members to have knowledge in banking and financial issues but does not require a “fit and proper” individual standard comparable to art. 3, para. 2(c) Banking Law. - Proposed revNBL will specify grounds for removal: a member or deputy may be removed during tenure by the Federal Council on request of the Bank Council if the person no longer fulfills the conditions for exercising the position or committed a grave offense (art. 42, para. 1 revNBL). - It is advisable to be more specific regarding criteria used to determine that a person no longer fulfills conditions for office; references to “preconditions” may be limited to requirements set out in article 41 revNBL and may not capture the most relevant factors for removal. ### Institutional relationship between monetary and fiscal operations - Description: - No institutional relationship specifically defined for conduct of monetary and fiscal operations since the SNB is independent. - General institutional relations: (i) SNB is administered with participation and under supervision of the Confederation (art. 1, para. 2 NBL); (ii) before important decisions regarding the business cycle and monetary policies, the Federal Council and the SNB inform each other and exchange views (art. 2, para. 2 NBL); (iii) federal authorities exercise oversight mostly through specific competencies granted to the Federal Council (art. 63 NBL). - Assessment: Observed. ### Central bank credits, advances, overdrafts to government - 1.2.1 Description: - The NBL does not explicitly prohibit credit to the government. The NBL limits any overdrafts to the amounts kept by the government in accounts with the SNB (art. 15, para. 1 NBL). - Assessment: Observed. - Comments: - Proposed revNBL will explicitly state that the SNB may not extend any credit to the government (other than intraday overdrafts against sufficient collateral) and prohibit acquisition of new issues of government securities in the primary market (art. 11, para. 2 revNBL). - The proposed revised NBL does not set an upper limit for such intraday overdrafts. ### Public disclosure of amounts and terms of credits and deposits - 1.2.2 Description: - Information on amounts and terms is provided only in the “notes to the accounts” section of the SNB’s annual report. - SNB’s periodic statements (every 10 days) provide information on deposit liabilities to, but not on claims (credits, securities) on the Confederation. - Assessment: Observed. - Comments: - The SNB does not grant credit to the Confederation. In liquidity bottlenecks, the SNB assists the Confederation to borrow from banks or debits the time deposits the Confederation holds with the SNB. - It is desirable to disclose in the 10-day statements any credits to the general government (see 3.2.1). ### Procedures for central bank participation in government securities markets - 1.2.3 Description: - The NBL does not explicitly prohibit credit to the government. The SNB does not participate in the primary markets other than as agent in issuing government securities. The SNB may purchase government securities on the secondary market; there is no legal provision limiting such purchases. - The Annual Report explains guidelines for secondary market participation. Internal operational procedures are not disclosed to the public. - Assessment: Observed. - Comments: - Proposed revNBL will explicitly prohibit acquisition of new issues in the primary market (art. 11, para. 2 revNBL) and explicitly provide for buying and selling of securities in the secondary market (art. 9, para. 1(c) revNBL). - It is desirable to disclose in the 10-day statements the holdings of general government securities (see 3.2.1). ### Central bank involvement in rest of the economy - 1.2.4 Description: - The scope of SNB activities is exhaustively listed in art. 14 NBL and do not include purchase of securities other than government securities. - The SNB is not actively involved in the rest of the economy beyond activities related to its primary task. - Current holdings and participations: shares in the BIS; shareholder in a company engaged in printing banknotes; involvement in a center for economic and monetary research at Gerzensee; representation on management board of Swiss Interbank Clearing. - Assessment: Observed. - Comments: - In the late 1970s, the SNB ceased providing preferential financing to the private sector and private banking facilities (other than for employees). ### Allocation of central bank profits and capital maintenance - 1.2.5 Description: - Distribution rules based on art. 99 Constitution and art. 27 NBL: - From net profit as shown in the income statement, an amount which may not exceed 2 percent of the share capital is appropriated to a reserve fund. - A dividend not exceeding 6 percent of the paid-up capital is paid to shareholders. - Thereafter, the cantons receive an amount of 80 centimes per capita. - Of the remainder, two-thirds and one-third, respectively, are allotted to the cantons and the Confederation. - No regulations exist for calculation of net profit and the level of reserves required from an operational and economic point of view. - Historical arrangements: - Annual payments were limited to a maximum of SwF 600 million in past decades; higher earnings led to higher growth in reserves. - April 1998 agreement: constant annual distribution of SwF 1,500 million to cantons and Confederation over 1998-2002; if reserves fall below 60 percent of targeted reserves, distributions must be reduced or eliminated. Agreement not publicly disclosed but procedure described in annual reports and quarterly bulletin 1998. - March 2002 agreement for 2003-12: extraordinary transfer of SwF 1 billion in business year 2002 and constant annual distribution of SwF 2.5 billion to cantons and Confederation over next 10 business years. Increase linked to gradual reduction of excess provisions (SNB determined end-2001 provisions exceeded optimal level by SwF 11 billion). Distribution linked to pace of nominal GDP over past five years; if targeted reserves missed by SwF 10 billion or more, distribution reduced or eliminated; if reserves exceed targeted level by SwF 10 billion or more, distribution could be raised. Amount for distribution in period 2007-12 will be reviewed in 2007. Agreement not publicly disclosed but described in joint press communiqué and SNB Annual Report. - Assessment: Observed. - Comments: - Proposed revNBL will simplify profit distribution procedure: SNB shall determine amount of currency reserves necessary for conducting monetary policy taking into account development of the Swiss economy (art. 27 revNBL). - A dividend not exceeding 6 percent of the paid-up capital is then paid to shareholders and, thereafter, two-thirds and one-third, respectively, of any remaining net profits are allotted to the cantons and the Confederation (art. 28 revNBL). *Source: _cr09243 - 1.1 The ultimate objective(s) and institutional framework of monetary policy should be* ### 1.3 Agency roles performed by the central bank on behalf of the government should be ### 1.3 Agency roles performed by the central bank on behalf of the government should be clearly defined. ### 1.3 Overview - Description: The responsibilities of the SNB as a government agent are defined in the NBL and detailed in subsections below. - Assessment: Observed. ### 1.3.1 Disclosure of specific agency responsibilities - Description: - The responsibilities of the SNB as a government agent are set out in the NBL (art. 2, para. 3 NBL). - The SNB is not involved in the management of the domestic or external public debt other than maintaining the federal register (art. 15, para. 1 NBL). - Switzerland’s foreign exchange reserves under the relevant laws are part of SNB’s balance sheets and are understood to be managed by the SNB itself. - The SNB acts as banker to the government, in particular keeps its accounts and executes payments (art. 15 NBL). There is no obligation for the government to maintain all accounts with the SNB. - The SNB places short term money of the government in the market and advises the federal government in banking activities. - The SNB acts as an agent in the issuance of government bills and bonds (art. 14, para. 13 NBL). - The SNB advises the federal authorities in monetary matters (art. 2, para. 1 NBL), understood comprehensively to include economic policy and financial regulation. - The SNB cooperates with the Federal Council in international monetary cooperation, such as representation at the International Monetary Fund, and serves as advisor in this regard. - Assessment: Observed. - Comments on proposed revisions: - The proposed revised NBL will explicitly provide for the management of the foreign exchange reserves (art. 5, para. 2(d) revNBL). - The proposed revised NBL will explicitly provide for the cooperation of the SNB with the Federal Council in international monetary cooperation (art. 5, para. 3 revNBL). - The proposed revised NBL will allow for reasonable remuneration for services performed by the SNB as banker to the government (art. 11, par. 1 revNBL). ### 1.3.2 Allocation of responsibilities for government debt markets - Description: - As banker to the government, the SNB acts as agent for the issuance of government bills and bonds (art. 14, para. 13 NBL). - The SNB maintains the federal debt register (art. 15, para. 1 NBL) for recording bond issues by the federal government. - The SNB acts as the main paying agent for government bills and bonds. - The SNB does not perform other functions in the issue, deposition or clearing and settlement of government debt instruments. - Assessment: Observed. - Comments: The federal debt register will be abolished in the proposed revised NBL. --- ### II. OPEN PROCESS FOR FORMULATING AND REPORTING MONETARY POLICY DECISIONS ### 2.1 Monetary policy framework, instruments, and targets disclosure - Description: - Switzerland operates under a floating exchange rate regime since 1973, with an independent monetary policy geared towards price stability; SNB retains the option to offset undesirable exchange rate developments. - Historical frameworks: - Past quarter century: monetary targeting framework based initially on annual target growth rates of M1, subsequently base money. - Since 1990: medium-term (five-year) growth target on base money. - Since 2000: monetary policy set on the strength of the inflation forecast over a three-year horizon with an explicit objective of keeping medium-term inflation below 2 percent, but not negative. - The SNB tolerates brief periods when headline inflation is outside the target range due to temporary factors and reacts only if they threaten medium-term price stability. - The inflation forecast is a consensus forecast blending qualitative assessment and model-based forecasts under the assumption of unchanged interest rates; it is the official forecast of the SNB and links directly to instruments. - Operationally, the framework entails a switch from internal targets on bank reserves to a publicly announced interest rate target in the form of a range for the three–month Swiss franc LIBOR. - Monetary policy decisions by the Governing Board at regular quarterly meetings are communicated in the “Monetary Policy Assessment,” complemented by a formal update of the inflation forecast; Governing Board meets every week and can change stance at any meeting; press communiqué issued if policy is changed outside the regular quarterly cycle. - Assessment: Observed. - Comments: - The new framework does not specify how the SNB is supposed to operate when medium-term inflation is in the range of price stability; generally understood that policy depends on prevailing economic conditions. - The inflation forecast presumes unchanged future interest rates; in volatile circumstances this may not be sustainable. An unchanged interest-rate forecast that breaches the price stability range would signal an adjustment in monetary policy stance. - The SNB revises its published inflation forecast only in December and June; mid-semester reviews and out-of-cycle changes receive qualitative updates. - Implementation would benefit from greater transparency regarding analytical underpinnings; SNB has published more detailed information and emphasized that decisions are based on models and qualitative assessment. ### 2.1.1 Procedures and practices governing instruments and operations - Description: - In 1998, SNB switched from foreign exchange swaps to short-term repos as the main instrument of steering liquidity; the 1997 partial NBL revision allowed repo agreements. - Since 2000, SNB has been announcing an operational target range of 100 basis points for the three–month Swiss franc LIBOR. - Repo auctions are held on a daily basis. Information on procedures and practices is available on the SNB and EurexRepo websites. - Assessment: Observed. - Comments: - The switch in June 1999 from telephone to electronic trading increased market transparency and reduced spreads. - Repos make SNB liquidity directly accessible to smaller or foreign banks; big banks ceased to act as liquidity distributors. - The SNB may conclude repo agreements outside daily auctions. ### 2.1.2 Rules and procedures for relationships with counterparties - Description: - All Swiss-based banks are eligible to participate in SNB’s monetary policy repo operations. - Banks domiciled abroad may participate provided they fulfill certain criteria (essentially a minimum rating). - Participating institutions must sign an agreement and have access to EurexRepo, SIS (SegaInterSettle), and SIC (Swiss Interbank Clearing). - Information about contracts and terms is available upon request. - The Lombard facility (advances against securities) is available to all Switzerland-based banks that have signed an agreement and deposited collateral; Lombard limits based on collateral; basket of eligible securities available on SNB’s website. - Counterparts for foreign exchange and reserve management transactions are chosen according to quality of services; the procedure is not publicly disclosed. - Assessment: The practice is broadly observed. - Comments: Principles for selecting counterparties in foreign exchange transactions should be disclosed. ### 2.2 Disclosure of the monetary policy decision-making body - Description: - Monetary policy decisions are taken by the Governing Board; composition, structure, and functions are defined in the NBL. - Decisions are consensus based. - Assessment: Observed. - Comments: Daily management of monetary policy is entrusted to SNB’s Monetary Operations Division. ### 2.2.1 Advance disclosure of meeting schedule - Description: - Generally, the Governing Board meets every Thursday. - The dates for the four meetings at which the Governing Board takes a broad view of monetary policy are pre-announced. - The Governing Board may meet on an ad hoc basis if needed. - Assessment: Observed. - Comments: Minutes of the Governing Board’s meetings are not published. Meetings are immediately followed by a press release whenever there is a change in policy. ### 2.3 Public announcement and explanation of policy instrument setting changes - Description: - All changes in the setting of monetary policy instruments are explained and disclosed through a press release, which is also posted on SNB’s website. - Assessment: Observed. - Comments: - The wide range (100 basis points) for the operational interest rate target allows flexibility to accommodate liquidity or exchange rate shocks without signaling a change in stance. - To reduce ambiguity, the SNB generally announces a zone within the target range in which it expects the three-month Swiss franc LIBOR to fluctuate. ### 2.3.1 Disclosure of main considerations underlying policy decisions - Description: See 2.3 above. - Assessment: Observed. ### 2.4 Periodic public statements on progress toward objectives - Description: - The main vehicle is the quarterly “Monetary Policy Assessment,” posted on SNB’s website and published in its quarterly bulletin; includes overview of macro developments and an informal update of the medium-term inflation forecast. - Formal update of the inflation forecast is provided in the December and June issues of the “Monetary Policy Assessment.” - Outside the quarterly cycle, senior SNB management provide updated assessments through speeches and statements. - Assessment: Observed. - Comments: Publication of a quarterly report will be institutionalized in the revised NBL (art. 7.4 revNBL). ### 2.4.1 Presentation of objectives, rationale, quantitative targets, instruments, and assumptions - Description: See 2.4 above. - Assessment: Observed. - Comments: - The SNB gives no quantitative indication about the uncertainty surrounding its inflation forecast; it provides a discussion of risks in the “Monetary Policy Assessment.” - Main reason for not providing a quantitative indication is that the inflation forecast, as a consensus forecast, is not obtained by a single econometric model. ### 2.4.2 Scheduled reporting on evolving macroeconomic situation - Description: See 2.4 above. - Assessment: Observed. - Comments: Since 2001 the SNB started publishing ad hoc studies explaining analytical underpinnings of its inflation forecast. ### 2.5 Public consultations for technical changes to monetary regulations - Description: - Technical changes (reserve requirements, eligibility of collateral for discount, auction procedures, qualifications and rules for counterparties) do not require a public consultation process, though the tendency is to hold such a process in practice. - Changes requiring legal modification require a formal consultation procedure (art. 147 Constitution). Interested parties are normally invited; consultations are open to the public as a matter of principle; written comments are filed; the bill with explanatory notes (Botschaft) submitted by the Federal Council to Parliament is accompanied by a report summarizing suggestions and proposals. - Assessment: Observed. ### 2.6 Disclosure of regulations on data reporting by financial institutions - Description: - SNB is empowered to ask private and public bodies for information needed to monitor monetary conditions. - Legal basis: article 16k, para. 1 NBL; article 7 Banking Law; article 64 Law on Investment Funds. - Forms and instructions on data reporting to the SNB are available upon request. - In case of noncompliance, SNB may not impose fines but may mandate a special audit by auditors; if infringements ascertained, auditors must notify the Federal Banking Commission (art. 16k, para. 2 NBL). - SNB may publish data in aggregate form provided individual institutions cannot be inferred. There is an implicit agreement that sensitive data may only be published with prior explicit consent of banks; written regulations do not exist. - Assessment: Observed. - Comments: Proposed revised NBL will broaden SNB powers regarding data provision and contains a penal provision (art. 21 revNBL). See also 1.1.2. --- ### III. PUBLIC AVAILABILITY OF INFORMATION ON MONETARY POLICY ### 3.1 Standards for presentations and releases of central bank data - Description: - Since May 18, 2001, Switzerland meets the specifications for coverage, periodicity, and timeliness of the SDDS data, and for dissemination of advance release calendars. - The advance release schedule is posted on the SNB website. - Assessment: Observed. - Comments: Switzerland subscribed to the SDDS in 1996 and its country data page can be accessed through the IMF website. ### 3.2 Disclosure of central bank balance sheet and market transactions - Description: - Summary balance sheet statement (Ausweis) as of the 10th, 20th and the last day of the month is issued on the following business day and posted on SNB’s website; these 10-day statements are very similar to the audited year-end balance sheet and do not provide information on SNB’s claims on general government. - The Annual Report contains the audited year-end balance sheet and notes and is made available in April. - The Monthly Statistical Bulletin provides monthly aggregated information on selected transactions. - Assessment: Observed. - Comments: (none) ### 3.2.1 Frequency and standards for balance sheet disclosure - Description: See 3.2 above. - Assessment: Observed. - Comments: - SNB’s financial statements are drawn up according to the Swiss Accounting and Reporting Recommendations. - SNB partially follows IAS and US-GAAP. - It is desirable that the 10-day statements include information on claims on the general government. ### 3.2.2 Disclosure of information on monetary operations - Description: - Terms of regular repo auctions (maturity and interest rate) are published daily at 9 a.m. on Reuters, Bloomberg, Telerate. - The aggregate amount allocated is not published; Eurex access allows inference from daily list of transactions. - Outstanding balance of repos is published in the periodic summary statement. - Foreign exchange swaps have not been used since 2000; if resumed, reporting procedure would be similar to repos. - Terms of the Lombard facility are published daily on main electronic services; outstanding balance of Lombard loans appears in periodic summary statement. - Assessment: Observed. - Comments: - Disclosure of monetary operations is on a case-by-case basis. - As a rule, SNB does not release information on the volume of foreign exchange interventions. - SNB pre-announces a schedule with gold sales from its excess reserves. ### 3.2.3 Disclosure of emergency financial support - Description: - There are no lender-of-last-resort provisions in the NBL and no specific rules for disclosure of emergency financial support. - Emergency support is provided through the Lombard or repo facility; the aggregate is disclosed in the periodic statement. - Assessment: The practice is broadly observed. - Comments: - As a matter of principle, the SNB avoids commitment for liquidity support to prevent moral hazard. - It would be advisable to establish internal rules on disclosure. ### 3.2.4 Disclosure of foreign exchange reserve assets, liabilities and commitments - Description: The data meet SDDS specifications for coverage, periodicity, and timeliness (see 3.1 above). - Assessment: Observed. - Comments: (none) *Source: IMF staff assessment and descriptions as provided in the content unit.* ### 3.3 The central bank should establish and maintain public information services. ### _cr09243 - 3.3 The central bank should establish and maintain public information services. ### 3.3 Public information services and publications - Description: SNB’s publications program includesan annual report (which is issued by April) and a quarterly and monthly bulletin. These are also posted at the SNB’s website. - Assessment: Observed. - 3.3.1 The central bank should have a publications program, including an Annual Report. - Description: See 3.3.1 above. - Assessment: Observed. - 3.3.2 Senior central bank officials should be ready to explain their institution’s objective(s) and performance to the public, and have a presumption in favor of releasing the text of their statements to the public. - Description: Senior officials of the SNB are ready to explain the SNB’s objectives to the public and texts are available to the public. - Description (continued): SNB senior officials may also appear before the Federal Government and selected parliamentary committees to explain the conduct of monetary policy and describe performance in achieving the objective of price stability. Views on macroeconomic developments and the financial system are also exchanged periodically with the Federal Finance Administration, the Federal Banking Commission, the State Secretariat for Economic Affairs, and commercial banks. There is a regular schedule for such appearances. For these meetings no written materials are circulated to the public. - Assessment: Observed. ### 3.4 Availability of texts of regulations - Description: The NBL empowers the SNB to issue ordinances (Verordnungen) only in connection with the measures mentioned in Article 16i, para 2 (ordinances have to be published in the Federal Gazette in order to become legally effective). However, it is generally recognized in legal doctrine that the SNB has the power, like the other federal agencies, to issue rules and regulations in discharging its statutory responsibilities, and thus it can issue ordinances even without a specific reference in its statute. The SNB has used this power several times in the past (e.g., Ordinance of 11th July 1979 on foreign bank deposits and foreign exchange future trades with foreigners). However, no such ordinances are currently in effect. - Description (continued): Specific instructions to individual financial institutions are not published. Internal regulations are normally not published. - Assessment: Not applicable. - Comments: In the past twenty years, no specific instructions to financial institutions have been issued. Regarding the SNB’s power to issue ordinances, the revised NBL will provide a more explicit basis (arts. 15, para. 3; 17 para. 5; 18 para.3 revNBL). ### IV. Accountability and assurances of integrity by the central bank (selected practices) - 4.1 Officials available to appear before designated public authority - Description: SNB’s senior officials regularly appear before the federal government and selected parliamentary committees to explain the conduct of monetary policy, the policy objective of the SNB and to describe the performance in achieving the objective of price stability. The NBL provides for an exchange of views between the SNB and the federal government on economic and monetary policy decisions of major importance (art. 2, para. 5 NBL). The discussions focus on the state of the economy and the financial system. The SNB also exchanges views with the Federal Department of Finance, the State Secretariat for Economic Affairs, the Federal Banking Commission, the Swiss Banking Association, and large commercial banks. In order to inform the general public the SNB holds press conferences twice a year, which are well received. - Assessment: Observed. - Comments: The proposed revised NBL will provide for more specific rules on reporting. The SNB will discuss with the Federal Council the state of the economy, monetary and exchange rate policy and current issues on economic policy (art. 7, para. 1 revNBL). Both entities will inform each other before taking economic and monetary policy discussions of major importance (art. 7, para. 2 revNBL). The SNB will also inform the public on monetary and exchange rate policy and monetary intentions at least once a year (art. 7, para. 3 revNBL). In this context, it should be clarified that this information requirement foremost applies to reporting on past conduct. Policy intentions should be discussed in the context of the inflation forecast and not be specific regarding future actions. - 4.2 Public disclosure of audited financial statements - Description: The law requires the publication of the annual accounts (art. 25, para. 3 NBL). The annual accounts must be approved by the Federal Council before publication and submission to the shareholders’ meeting. The shareholders’ meeting must approve the annual accounts by April of the following year at the latest (art. 37, para. 1 NBL). The audited financial statements of the SNB are included in the annual report, which is available to the public in April each year. - Assessment: Observed. - 4.2.1 Independent audit and accounting policies - Description: As a public-law entity established in the legal form of a joint stock corporation, the SNB is mandated by law to have an independent audit. Each year the annual shareholders’ meeting elects an auditing committee for this function (art. 51 NBL). The auditing committee comprises six persons, three certified accountants and three banking specialists. The auditing committee audits the annual accounts and balance sheet and reports to the shareholders’ meeting. The auditing committee considers the work performed by an external audit firm (big five audit firm) and the internal auditors. - Description (continued): In its accounting framework, the SNB applies the Swiss Accounting and Reporting Recommendations, but does not provide a cash flow statement or publish a mid-year statement. Balance sheet items are evaluated on a quarterly basis. There are some differing accounting methods used to reflect special features as Swiss central bank and note-issuing institution, which are explained in the notes to the accounts in the annual report. - Assessment: Observed. - Comments: Regarding auditing, the proposed revised NBL will clearly stipulate that the audit be carried out by an independent external auditor (arts. 44, 45 revNBL). - 4.2.2 Internal governance procedures disclosure - Description: The SNB has well-established internal governance procedures to control activities in the institution, such as on internal organization, governance, accounting and internal audit, computer usage, and avoidance of conflicts of interest. The documents are compiled in a staff handbook for internal use and are not publicly disclosed. - Assessment: Not observed. - Comments: It would be advisable to publish information on the integrity of operations, such as measures to address internal audit procedures. - 4.3 Disclosure of expenses and revenues - Description: Expenses and revenues are publicly disclosed in detail once a year in the annual report available to the public in April. Further details on the items in the income statement are provided in the notes to the income statement. - Assessment: Observed. - 4.4 Standards for conduct of personal financial affairs and conflicts of interest - Description: Standards for the conduct of personal financial affairs for staff and officials (including members of the Governing Board) are set out in the general employment terms. Staff may carry out financial transactions for their own account at the premises of the SNB as long as they do not take up a lot of time and involve a reasonable proportion of assets. The use of confidential information and certain transactions such as day-trading, foreign exchange transactions or derivatives on foreign exchange rates or Swiss franc money-market rates are explicitly prohibited. Insider trading is an offense under article 161 of the Penal Code. Staff and officials must be prepared to disclose their financial transactions. For those individuals engaged in monetary operations, disclosure may be required to other banks upon request. Special permission by the Governing Board is required for officials or staff to engage in any other professional activity in order to limit potential conflicts of interest. Compliance with these rules is monitored by the internal audit, but the rules and regulations are not publicly disclosed. - Assessment: Not observed. - Comments: It would be advisable to publish information on standards for the conduct of personal financial affairs, such as measures to address conflicts of interest. - 4.4.1 Legal protections for officials and staff - Description: The officials and staff of the SNB are covered by federal legislation on civil or criminal liability (art. 59 NBL). Regarding civil liability, this provision is understood to refer to the Federal Law on the Liability of the Confederation, its Authorities and Officers. This statute governs the liability of an officer vis-à-vis the Confederation and vis-à-vis third party claimants. It provides protection to officers and staff and sets out clearly that third party claimants may only have a claim against the Confederation and not the individual officer or staff member (art. 3, para. 3 Liability Law). The Confederation may, however, take recourse against the officer or staff member in case of intentional or grossly negligent conduct. Criminal prosecution of federal officers is permitted only with the agreement of the Federal Department of Justice and Police (art. 15 Liability Law). - Assessment: Observed. ### Summary observance statistics (Table 14) - Assessment Grade counts and lists: - Observed 39 - List: 1.1, 1.1.1, 1.1.2, 1.1.3, 1.1.4, 1.1.5, 1.2, 1.2.1, 1.2.2, 1.2.3, 1.2.4, 1.2.5, 1.3, 1.3.1, 1.3.2 2.1, 2.1.1, 2.2, 2.2.1, 2.3, 2.3.1, 2.4, 2.4.1, 2.4.2, 2.5, 2.6 3.1, 3.2, 3.2.1, 3.2.2, 3.2.4, 3.3, 3.3.1, 3.3.2 4.1, 4.2, 4.2.1, 4.3, 4.4.1 - Broadly observed 2 - List: 2.1.2, 3.2.3 - Partly observed 1 - List: 1.1.7 - Not observed 2 - List: 4.2.2, 4.4 - Not applicable 2 - List: 1.1.6, 3.4 ### Recommended action plan (selected recommendations) - I. Clarity of Roles, Responsibilities and Objectives of Central Banks for Monetary Policy - It is recommended that the revised SNB law contain a provision explicitly requiring the publication of the annual report. - It would be advisable to be more specific regarding the criteria to be applied to determine that a person no longer fulfills the conditions for exercising the duties as SNB’s Governing Board member. - II. Open Process for Formulating and Reporting Monetary Policy Decisions - It is recommended that principles for selecting counterparties in foreign exchange transactions with the SNB be disclosed. - III. Public Availability of Information on Monetary Policy - It is desirable that the SNB discloses in its 10-day statements information on claims on general government. - It would be advisable to establish internal rules for disclosing emergency liquidity support to banks. - IV. Accountability and Assurances of Integrity by the Central Bank - In the context of corporate governance, it would be advisable to publish information on the integrity of operations, such as measures to address conflicts of interest, and internal audit procedures. ### Authorities’ response (summary of SNB responses to recommended actions) - General remarks: - The IMF’s report ... is of high quality. The analysis was conducted in a careful manner and contains some constructive criticism. - The SNB recognizes that the vast majority of practices are considered "observed,” that is, they satisfy all essential criteria without significant deficiencies. From the report, it is also apparent that the new National Bank Law will strengthen the legal support of the transparency and the accountability efforts already undertaken by the SNB. - The report mentions two practices, which do not satisfy the essential criteria according to the IMF. The first practice refers to the prerequisites for board members and the criteria for the removal of board members. The IMF suggests setting clearer rules in this respect. Regarding this issue, the SNB intends to propose a corresponding clarification to be integrated in the new National Bank Law. The second point refers to the rules of internal governance and the conduct of personal financial affairs. With respect to this point, the SNB will review its standards to comply with the code. - Remarks on individual recommended actions: - Practice 1.1.5 - IMF recommendation: It is recommended that the proposed revised NBL should contain a provision explicitly requiring the publication of the annual report. - SNB response: The recommendation has been taken up. The draft of the revised NBL, which the Federal Council intends to submit to the Federal Assembly as a bill before the summer of 2002, will include an explicit provision requiring the publication of the annual report by the SNB (article 7, paragraph 4, rev. draft NBL). - Practice 1.1.7 - IMF recommendation: It is recommended that the proposed revised NBL requires that SNB Board members be "fit and proper" individuals. Also, it would be advisable to be more specific regarding the criteria to be applied to determine that a person no longer fulfills the conditions for exercising the duties as SNB's Governing Board member. - SNB response: The suggestion to introduce a "fit and proper" requirement as a prerequisite for the election of members of the Governing Board or of the Bank Council was taken up; it will presumably be included in the bill to be submitted to the Federal Assembly. While the provision on the removal of members of the Governing Board will not be amended, the explicit reference to the prerequisites for election makes it clear that these are also relevant for a removal decision. - Practice 2.1.2 - IMF recommendation: It is recommended to disclose principles for selecting counterparties in foreign exchange transactions with the SNB. - SNB response: As mentioned in the report, counterparties are chosen according to the quality of their services. This is the information the Swiss National Bank gives any potential counterparty requesting to do business with the SNB. The Swiss National Bank does not deem it necessary to publish additional details of the selection procedure. - Practice 3.2.1 - IMF recommendation: It is desirable that the SNB discloses in its 10-day statements information on claims on general government. - SNB response: The SNB will examine the appropriateness of publishing information on holdings of government securities in the 10-day-statement. - Practice 3.2.3 - IMF recommendation: It would be advisable to establish internal rules on disclosure. - SNB response: The SNB currently undertakes a review of its lender-of-last-resort function and will also address the question of establishing internal rules on disclosure regarding emergency financial support. - Practice 4.2.2 and practice 4.4 - IMF recommendation: In the context of corporate governance, it would be advisable to publish information on the integrity of operations, such as measures to address conflicts of interest, and internal audit procedures. - SNB response: The rules on internal governance procedures and on the conduct of personal financial affairs will be subject to a comprehensive review in the course of the revision of the NBL. In this process, the SNB plans to carefully review its policy for the publication of internal rules and standards. *Source: _cr09243 - 3.3 The central bank should establish and maintain public information services.* ### 5.1 The broad objective(s) and institutional framework of financial agencies should be clearly ### 5.1 The broad objective(s) and institutional framework of financial agencies should be clearly defined, preferably in relevant legislation or regulation. ### Institutional framework and legal basis - The Federal Banking Commission (SFBC) was established as banking regulator by the Federal Law on Banks and Saving banks (November 8, 1934 as subsequently amended). - The Federal Act on Stock Exchanges and Securities Trading (March, 24, 1995 effective from 1997) regulates the jurisdiction of the SFBC in the securities field. - According to these laws, the SFBC is responsible for licensing and supervision of banks, securities dealers and stock exchanges; disclosure of shareholdings in listed companies and take-over bids. - Competences are shared with the SWX and the Takeover Board. - Assessment: Broadly observed. - Comments: The law is written in very broad terms leaving considerable flexibility to the SFBC, which, however, is careful to use it in a consistent and transparent fashion. ### Disclosure of objectives and public explanation - The functions and organization of the SFBC are set out in Article 23 of the BA. - The SFBC’s objectives are explained in the annual report and other documents. The SFBC reports once a year to the Federal Council. The Federal Council and the Federal Department of Finance may require special reports. The SFBC communicates with the Federal Council via the Federal Department of Finance. - The SFBC publishes bulletins on a periodic basis and maintains a website (http://www.ebk.admin.ch). - Assessment: Broadly observed. - Comments: While the task is clearly described in the law, neither the SFBC nor the legislature have set out the purpose of supervision nor the objectives of the agency. The Zufferey report on financial sector supervision in Switzerland recommended that the Banking Act should contain a statement of the principle objectives of supervision as a signal both to banks and to their customers as to the purposes of supervision. The report noted that the laws relating to securities and insurance supervision do that. ### Responsibilities and legal authority - Description: Clearly described in Article 23 of the Banking Act. - Assessment: Observed. - Comments: The responsibility of the SFBC is clearly stated although there may be room for some clarification of the role of the Swiss Bankers’ Association and that of banks’ external auditors in the law. ### Accountability modalities and appointment/removal procedures - The Director and his deputy are appointed by the Federal Council. The SFBC appoint the staff of the secretariat. - The Banking Act requires the SFBC to furnish an annual report to the Federal Council and to the legislature. The Chairman and senior officials of the Commission are required to appear before Parliamentary committees when they discuss the report, although in plenary sessions, the Minster represents the Commission. - Such accountability takes place on a strict post hoc basis. - The Commission has sole authority in current cases before it, subject to appeal only to the Federal Supreme Court. - Assessment: Observed. - Appointment/removal: The Chairman and members of the commission as well as its Director and his deputy are appointed by the Federal Council for four year terms. The Federal Council has the power to remove these persons only in case of misdemeanors or serious abuse of their functions. This has happened only once during the SFBC’s 65-year history. - Assessment: Observed. ### Relationships between financial agencies - The SFBC is required to make its annual report to the Federal Finance Department. The Minister responsible for the department also introduces legislation and the Federal Council makes implementing ordinances. - The Banking Act describes the relationship between the SFBC and the SNB. There are provisions for the exchange of information between them. The SNB collects the bulk of the banking statistics provided by supervised institutions and passes them to the SFBC for analysis. - The relationship between the SFBC and the SWX or the Takeover Board is regulated by the Stock Exchange law and the relevant implementing legislation. - Assessment: Broadly observed. - Comments: The SFBC, a relatively small organization, contracts to the SNB its data processing requirements. There is scope for formalizing the relationships between the SFBC, the FOPI, the SNB and the Federal Finance Administration by means of a memorandum of understanding. Arrangements between the SFBC and the FOPI for the supervision of conglomerates are not formally provided for in legislation but the informal arrangements have been made public. ### Oversight of payment systems - The SFBC does not supervise payment systems. This is done by the SNB. - Assessment: Not applicable. ### Oversight responsibilities for self-regulatory organizations (SROs) - The SFBC has a close relationship with the Swiss Bankers’ Association (SBA) and the Swiss Funds Association (SFA). The Associations’ guidelines once approved by the SFBC are considered as a licensing requirement. External auditors are obliged to ensure compliance with the SBA and SFA guidelines and the SFBC can enforce them in the courts. - The SBA and SFA publish their guidelines and they are given publicity in the SFBC’s publications. - Assessment: Observed. - Comments: The relationship with the SBA and SFA is stronger than in many other countries. The SBA’s guidelines are enforced even on those few banks that are not members of the SBA. ### SROs performing regulatory/supervisory functions and transparency - The SBA and SFA guidelines are normally enforced by the SFBC and are effectively therefore public law obligations. - Example: the “due diligence” agreement of 1977 requires members to observe “know your customer” rules; members can be fined by the association for non-compliance. - The SWX publishes its decisions and an annual report, and maintains a website where information is provided to the public. The Takeover Board maintains a website. - Assessment: Observed. ### Open process for formulating and reporting financial policies - The Banking Act and Ordinance contain the main supervisory requirements, supplemented by circulars. The SFBC’s annual report and quarterly bulletins describe actions and decisions and give statistics on the issue and withdrawal of licenses and other pertinent information. - Decisions affecting individual institutions are not normally published. - Assessment: Observed. - Regulatory framework disclosure: Observed. - Financial reporting regulations to agencies: The law, ordinances, circulars, and decisions are all publicly available. Assessment: Observed. - Regulations for organized financial markets: Relevant rules are published by the SFBC, in the bulletin of the SWX and on its website. Assessment: Observed. - Fee structure: The SFBC’s fee structure is set out in regulations that is available, inter alia on the SFBC’s website. Assessment: Observed. - Information sharing: Exchange of information is regulated by law domestically and internationally. Restrictions apply for client information; the Federal Act on Administrative Procedure applies when client consent is absent. - The SFBC lists cooperation arrangements with foreign banking supervisory agencies in its annual report and publishes texts where foreign agencies consent. Assessment: Broadly observed. - Comments: Given that the two major banking groups have foreign business in excess of domestic business this aspect is particularly important. ### Policy change announcements, consultations, and reporting - Changes of policy are announced by means of press notices that are also made available on the SFBC’s website. Assessment: Observed. - The SFBC issues an annual report and quarterly bulletins in French and German; SWX and Takeover Board also publish annual reports. Assessment: Observed. - Consultation process: Broad consultation with affected parties is undertaken for all significant legislative and other policy changes where time permits; working groups are sometimes set up. Normally, the SFBC endorses rules suggested by relevant Trade Associations. The consultation process is not formalized in the legislation. - Assessment: Observed. - Comments: It is unclear to what extent end-investors and other market users participate in the consultation process or are heard before the formal adoption of new rules. ### Public availability of information on financial policies and statistics - The SFBC publishes an annual report and quarterly bulletins in French and German, available on the SFBC’s website, as are press releases and other material. The SWX and Takeover Board also publish annual reports. Assessment: Observed. - Financial statistics are published by the SNB. Data on the SFBC’s activities (e.g., licenses issued) is published in the SFBC’s annual report. Assessment: Broadly observed. - Comments: The annual report does not contain statistics on the activities, for example, balance sheet developments and profitability, of the institutions it supervises. These are however, available elsewhere. - SFBC annual report contains an account of the SFBC’s income and expenditure, but not its balance sheet, for the year. Assessment: Broadly observed. - Emergency financial support disclosure: The SFBC is not a financial institution and does not possess resources to provide any financial assistance nor does it have powers to do so. Assessment: Not applicable. Comment: The SNB would be the appropriate agency for any such assistance. - Public information services: The SFBC, the SWX and the Takeover Board maintain websites. Information is also available on request in paper form. The SFBC now has a full time press officer. Assessment: Observed. - Publications program: SFBC, SWX and Takeover Board publish annual reports; SFBC issues quarterly bulletins and periodic press releases. Assessment: Observed. - Senior officials and public statements: Senior officials of the SFBC make periodic presentations to the Parliament and are available to the press as a matter of policy. Assessment: Observed. - Texts of regulations and directives: All generally applicable directives and guidelines are published and made available on the websites of the SFBC, SWX, and Takeover Board. Assessment: Observed. - Deposit protection scheme: The Swiss deposit protection scheme is voluntary and managed by the Swiss Bankers’ Association. The agreement among the members of the SBA is a public document available on the SBA’s website. The scheme is an ex-post scheme and hence there is no fund and no accounts to be prepared. The scheme has only been activated once (in 1991) and no problem arose with its operation. Assessment: Observed. - Comments: It is intended that the present scheme be replaced by a compulsory scheme based on a statutory provision but still managed by the SBA. - Consumer protection and dispute processes: Disputes between banks and their customers are subject to the ombudsman scheme. The ombudsman issues an annual report that gives details of complaints made and their treatment. Where complaints are made to the SFBC, the Commission will examine the complaint with a view to determining whether they reflect any violation of the banking act or possible organizational shortcomings. Individual cases will be referred to the ombudsman. Assessment: Observed. ### Accountability and assurances of integrity - The Chairman and the Director of the SFBC appear regularly before Parliamentary Committees to explain the operations of the SFBC following publication of the annual report. - Accountability before the plenary Parliament is normally by the Minister of Finance who is answerable to Parliament and is responsible for presenting legislation on banking supervision. - Assessment: Observed. *Source: IMF staff assessment text from the provided content unit.* ### 8.2 Where applicable, financial agencies should publicly disclose audited financial statements ### 8.2 Where applicable, financial agencies should publicly disclose audited financial statements ### 8.2 — General description, assessment, and comments - Description: A simple income and expenditure statement is included in the SFBC’s annual report. The SFBC is considered a part of the government for financial purposes. It has no independent financial existence and therefore is not responsible for accounting. This is the responsibility of the FFA. The financing of the SFBC is subject to the same auditing arrangements as apply to the FFA. - Assessment: Not applicable. - Comments: As noted above, the SFBC is not a financial institution and its efficacy and the transparency of its activities are not dependent on the publication of audited financial statements. ### 8.2.1 — Audited financial statements and accounting policy disclosure - Description: The SFBC is subject to the normal audit arrangements of government agencies. As noted above, the SFBC is not a financial institution that holds assets and has liabilities to the public. - Assessment: Not applicable. - Comments: (no additional comments provided) ### 8.2.2 — Internal governance and internal audit arrangements - Description: As stated above, the SFBC is subject to central government financial controls. - Assessment: Broadly observed. - Comments: (no additional comments provided) ### 8.3 — Public disclosure of operating expenses and revenues - Description: The expenses and revenues of the SFBC are disclosed in its annual report. - Assessment: Observed. - Comments: (no additional comments provided) ### 8.4 — Standards for conduct of personal financial affairs and conflict-of-interest rules - Description: The SFBC has adopted an internal code of conduct concerning staff fiduciary obligations and personal transactions, which is published. Staff of the SFBC are subject to published guidelines which forbid the holding of securities issued by supervised institutions and carrying out any transactions based on information obtained in the course of their duties. - Assessment: Observed. - Comments: (no additional comments provided) ### 8.4.1 — Legal protections for officials and staff - Description: Rules on the legal protection for SFBC officials are publicly disclosed. SFBC staff may only be subject to criminal prosecution with the approval of the Federal Department of Justice and Police in order to ensure that civil servants are protected from unsubstantiated claims of alleged criminal behavior. A civil suit may not be brought against a member of the SFBC or its staff. Instead suit has to be brought against the confederation. Recourse can only be brought against the staff member if he or she has caused damage intentionally or by gross negligence. - Assessment: Observed. - Comments: (no additional comments provided) ### Summary observance (Table 17 excerpts) - Assessment grade counts and listings: - Observed: 24 — 5.1.2, 5.1.3, 5.1.4, 5.4, 5.5, 6.1, 6.1.1, 6.1.2, 6.1.3, 6.1.4, 6.2, 6.3, 6.4, 7.1, 7.4, 7.4.1, 7.4.2, 7.5, 7.6, 7.7, 8.1, 8.3, 8.4, 8.4.1 - Broadly observed: 7 — 5.1, 5.1.1, 5.2, 6.1.5, 7.2, 7.3, 8.2.2 - Not applicable: 5 — 5.3, 5.3.1, 7.3.1, 8.2, 8.2.1 ### Recommended action plan and authorities’ response (excerpt) - Recommended action (V. Clarity of Roles, Responsibilities, and Objectives of Financial Agencies Responsible for Financial Policies): - As noted in the Zufferey report, it would be helpful if the SFBC’s objectives could be enshrined in the Banking Act when it is next revised. - There may be scope for formalizing the relationships between the SFBC, the FOPI, the SNB and the Federal Finance Administration. - Authorities’ response: - The authorities were in agreement with the assessments. *Source: _cr09243 - 8.2 Where applicable, financial agencies should publicly disclose audited financial statements* ### 7.4 Financial agencies should establish and maintain public information services. ### _cr09243 - 7.4 Financial agencies should establish and maintain public information services. ### Public information services and publications (Section 7.4–7.7) - The FOPI has appointed an Information Officer who manages the information function for the authority within and in collaboration with other officers in the Central Services section of the FOPI. - Assessment: Observed. - 7.4.1 Publications program / periodic public report - Description: The annual report has been described previously. - Assessment: Broadly observed. - Comment: The report does not describe all the activities performed by the FOPI although it does provide information concerning new licenses granted. - 7.4.2 Senior officials and public communications - Description: Appearances and other information instruments are used by senior staff as required. The head of the FOPI is called to testify before a parliamentary committee at least once per year to discuss the program. Head and other members of senior staff represent the FOPI at industry and public conferences. - Assessment: Observed. - 7.5 Availability of texts of regulations and directives - Description: All texts are made available in print form to the affected companies and through the Receuil Officiel. Documents are also made generally available through the Internet. - Assessment: Observed. - 7.6 Deposit insurance / policyholder guarantees - Description: There are no deposit insurance-type schemes provided for insurance policyholders in Switzerland. - Assessment: Not applicable. - 7.7 Consumer protection arrangements and complaints handling - Description: The FOPI will respond to complaints and inquiries to the extent possible. However the insurance industry has an ombudsman who is better positioned to respond to such inquiries. - Assessment: Broadly observed. - Comment: The FOPI should perhaps establish an identified section of its website for the receipt of consumer complaints. ### Accountability and assurances of integrity by financial agencies (Section VIII: 8.1–8.4.1) - 8.1 Availability to report to public authority - Description: See response to question 7.4.2. - Assessment: Observed. - 8.2 Audited financial statements and disclosure - Description: The FOPI does not produce audited financial statements. However it is subject to audit of its activities by the government auditors. Its results appear in the National Accounts once a year. - Assessment: Not applicable. - 8.2.1 Financial statement audit (if any) - Description: (No additional description provided.) - Assessment: Not applicable. - 8.2.2 Internal governance procedures and internal audit arrangements - Description: Internal governance procedures are based on the organizational Ordinance. - Assessment: Broadly observed. - Comment: The “Ordonnance sur l’Organisation du Departement Fédéral de Justice et Police” is a public document. It describes the functions and responsibilities of each unit within the Department. The main Department has a General Secretariat responsible for planning, coordination and control and supervisory responsibility in respect of the activities of each “office” within the Department. - 8.3 Disclosure of operating expenses and revenues - Description: Swiss national accounts disclose this information. Expenditures are also disclosed in the notices sent to each company along with the request for annual fees. - Assessment: Observed. - 8.4 Standards for conduct and conflict-of-interest rules - Description: Standards applied are those specified for all public servants by the General Public Service rules. These are explained to each employee at the time of hiring. The standards are publicly disclosed with other documents relating to public service employment. - Assessment: Observed. - 8.4.1 Legal protection for officials and staff - Description: There are no specific legal protections. However, under prevailing law, no action can be brought against a public servant in his personal capacity for actions performed in the course of the individual’s regular duties. Any such action must be launched against the government. Disclosure with other government documents. - Assessment: Observed. ### Summary observance of the Transparency Code—Insurance (Table 20) - Observed: 22 — 5.1, 5.1.1, 5.1.2, 5.1.3, 5.1.4, 5.4, 5.5, 6.1, 6.1.1, 6.1.2, 6.1.4, 6.1.5, 6.2, 6.4, 7.2, 7.4, 7.4.2, 7.5, 8.1, 8.3, 8.4, 8.4.1 - Broadly observed: 6 — 5.2, 7.1, 7.3, 7.4.1, 7.7, 8.2.2 - Partly observed: (none listed) - Non-observed: 1 — 6.3 - Not applicable: 7 — 5.3, 5.3.1, 6.1.3, 7.3.1, 7.6, 8.2, 8.2.1 ### Recommended action plan (Table 21) — Insurance Policies Transparency - Recommended actions: - The FOPI should consider including in its published annual report a discussion of its policy objectives and its achievements in meeting those objectives. - The FOPI’s annual report could also include a discussion concerning emerging risks, as well as a summary of FOPI’s principal activities. - Authorities’ response: The authorities were in agreement with the assessments. ### Key points from Pensions transparency (Section D, selected) - Supervisory roles and responsibilities: - Cantonal Offices for Occupational Benefits Plans supervise funds within cantonal borders. - The Federal Office of Social Insurance (FOSI) supervises pension funds and social security institutions operating at the national or international level and has a “high surveillance” oversight role of Cantonal Offices (LPP, Article 64). - Practice highlights (selected assessments and descriptions): - 5.1 Institutional framework: Observed. Institutional framework defined in LPP (1982), BBV1 (1983), BBV2 (1984), SFV1 (1998), SFV2 (1985), VGBV (1984). These are published in the official bulletin and disseminated via FOSI, Cantonal Offices, and Confederation websites. - 5.1.1 Disclosure of objectives: Broadly observed. Objectives are discussed in publications of the FOSI and Cantonal Offices. - 5.1.3 Publication of annual report: Observed. The FOSI annual report contains regulatory discussion, financial statistics, and supervisory overview; it is published every year with a two-year delay. Comment: It would be advisable that the FOSI annual report be published in a more timely fashion. - 5.1.4 Appointment and terms: Observed. Director and Deputy Director appointed by the Federal Council; contracts provide a four-year term (to be changed shortly to an indefinite period). - 5.2 Relationship between agencies: Observed. Coordination via FOSI “high surveillance,” advisory Federal Commission on Occupational Benefits Plans, and a “Conference” of Cantonal Offices. - 6.1 Conduct of policies: Observed. Regulatory framework and operating procedures publicly disclosed in law. - 6.1.2 Financial reporting regulations: Observed. LLP (Article 62) and BVV2 (Articles 47-48) specify reporting. - 6.1.4 Fee structures: Observed. FOSI and Cantonal Offices charge fees disclosed in regulations (VGBV). - 6.2 Announcement of significant changes: Observed. Changes announced immediately after decision via media, official bulletin, publications, and website posting. - 6.3 Periodic public reports on objectives: Observed. Public Organizations Law prescribes annual reports; FOSI annual report contains regulatory changes, financial statistics, supervisory and legal actions. - 6.4 Presumption in favor of public consultations: Observed. Public consultation process is extensive (> three months) and new regulations take effect several months after consultations end. - 7.1 Periodic reporting on sector developments: Broadly observed. FOSI and Federal Office of Statistics publish pension statistics every two years, with a two-year delay. Comment: More frequent and timely disclosure would be advisable. *Source: _cr09243 - 7.4 Financial agencies should establish and maintain public information services (IMF assessment document).* ### 7.2 Financial agencies should seek to ensure that, consistent with confidentiality ### _cr09243 - 7.2 Financial agencies should seek to ensure that, consistent with confidentiality ### Public reporting of aggregate data (Practice 7.2) - Description: Financial agencies should, consistent with confidentiality requirements, have public reporting of aggregate data related to their jurisdictional responsibilities on a timely and regular basis. - Assessment: Broadly observed. - Comment: Bi-annual disclosure with a two-year delay does not fully address the timeliness requirement set out in this practice. ### Disclosure of balance sheets and aggregate market transactions (Practice 7.3 and 7.3.1) - 7.3 Description: The FOSI prepares a report on its receipts and expenditures and this appears as a section in the government accounts. There is no balance sheet as all revenues are remitted to the Treasury. The FOSI does not engage in market transactions. - Assessment: Broadly observed. - Comment: (no additional comment provided) - 7.3.1 Description: The Guarantee Fund’s annual report contains a detailed description of emergency financial support granted to pension funds in the second pillar. A description of the objectives and roles of the Guarantee Fund is also contained in the FOSI annual report. - Assessment: Observed. - Comment: The Guarantee Fund is a foundation under public law, and is submitted to the supervision of the FOSI. The law (SFV1 Article 8) requires the Guarantee Fund to submit its accounts to the FOSI. - Payment systems counterpart (SNB) — 7.3 Description: The balance sheet of the SNB is published in the bank’s Annual Report; a summary balance sheet is published on the 10th, 20th and last day of each month, this information becoming available on the next business day in each case. - Assessment: Observed. - Comments: For emergency lending, the total amount would appear on these balance sheets combined with Lombard advances and repurchase transactions; there has been no emergency support in many years. ### Public information services and publications (Practices 7.4, 7.4.1, 7.4.2) - 7.4 Description: The FOSI and the Cantonal Offices maintain public information services through their websites and various publications. - Assessment: Observed. - 7.4.1 Description: Pension supervisory authorities have a publication program, including annual reports and a variety of publications posted on their websites. - Assessment: Observed. - Comment: It would be advisable that annual reports be also posted on the agencies’ websites. - 7.4.2 Description: At their discretion, senior officers from the pension supervisory agencies provide interviews and participate in different public fora dealing with pension issues, in which case the text of their speeches may be released on their websites. - Assessment: Observed. ### Availability of regulations, guarantees, and consumer protection (Practices 7.5–7.7) - 7.5 Description: The texts of pension regulations are disclosed through the official bulletin, publications, and on the websites of the FOSI, the Cantonal Offices, and the Confederation. Some regulations are available to the public at a (minimal) cost. - Assessment: Observed. - 7.6 Description: The nature and form of the Guarantee Fund is contained in the law (SFV1). - Assessment: Observed. - 7.7 Description: Under the law (LPP, Articles 73-74), consumers of pension services under the second pillar can appeal to the courts under a simplified procedure, which is cost-free to consumers. The FOSI and the Cantonal Offices do not otherwise oversee consumer protection arrangements. - Assessment: Observed. - Comment: Discussions are underway at the FOSI to set up an office of the ombudsman with responsibility for consumer protection related to private pension funds. Workers’ unions and a number of nonprofit associations provide pension-related consumer protection services. The private insurance ombudsman can be involved in cases that include services provided by insurance companies. ### Accountability, audits, and financial disclosures by agencies (Practices 8.1–8.3, 8.2.1–8.2.2) - 8.1 Description: Officials of pension supervisory agencies are available to appear before Cantonal Parliaments or the Federal Council. - Assessment: Observed. - Comment: Accountability before the plenary Parliament is normally by the Minister of Home Affairs (Interior) who is answerable to Parliament and is responsible for presenting legislation on the pension system. - 8.2 Description: The FOSI and Cantonal Offices are considered a part of the federal and cantonal government, respectively, for financial purposes. They are subject to audit by the government auditor. - Assessment: Not applicable. - 8.2.1 Description: See above, 8.2. - Assessment: Not applicable. - 8.2.2 Description: The FOSI and Cantonal Offices are considered a part of the federal and cantonal government, respectively, for financial purposes, including internal audit arrangements. - Assessment: Not applicable. - 8.3 Description: The FOSI and Cantonal Offices are considered a part of the federal and cantonal government, respectively, for financial purposes. - Assessment: Not applicable. ### Standards of conduct and legal protections for staff (Practices 8.4 and 8.4.1) - 8.4 Description: Rules for all civil servants apply to the staff of the FOSI and the Cantonal Offices, and are publicly disclosed. - Assessment: Observed. - 8.4.1 Description: Rules applicable to all civil servants, which are published, provide legal protection for officials and staff of the pension regulatory authorities in the conduct of their official duties. All charges are brought against the institution and not against the individual. - Assessment: Observed. ### Summary observance and recommended actions - Table 23. Summary Observance of Transparency Code⎯Pensions - Observed 23: 5.1, 5.1.2, 5.1.3, 5.1.4, 5.2, 6.1, 6.1.1, 6.1.2, 6.1.4, 6.1.5, 6.2, 6.3, 6.4, 7.3.1, 7.4, 7.4.1, 7.4.2, 7.5, 7.6, 7.7, 8.1, 8.4, 8.4.1 - Broadly observed 4: 5.1.1, 7.1, 7.2, 7.3 - Not applicable 8: 5.3, 5.4, 5.5, 6.1.3, 8.2, 8.2.1, 8.2.2, 8.3 - Table 24. Recommended Action Plan⎯Pension Policies Transparency - V. Clarity of Roles, Responsibilities, and Objectives: It would be advisable that the FOSI annual report be published in a more timely fashion. - VI. Public Availability of Information on Financial Policies: More frequent and timely disclosure of statistics of the pension system would be advisable. It would also be recommendable that annual reports be posted on the agency’s website. - Authorities’ response: The authorities were in agreement with the assessments. *Source: IMF staff assessment in the provided chapter content.* ### 7.4 Financial agencies should establish and maintain public information services. ### _cr09243 - 7.4 Financial agencies should establish and maintain public information services. ### 7.4 Public information services - Description: The SNB publishes a quarterly bulletin (in French and German) and an annual report (in French, German and English). There is a public information unit in Department I that is called “Communications.” - Assessment: Observed. - Comments: (none) ### 7.4.1 Publications program and periodic public report - Description: Reports on specific developments, press releases, and speeches of members of the Governing Council are made public via the SNB website which is updated daily. - Assessment: Observed. - Comments: (none) ### 7.4.2 Senior officials’ communication and presumption of release - Description: Senior officials of the SNB are ready to explain the central bank’s objectives as required. These explanations often involve making speeches, participating in conferences, and in some cases teaching university courses. - Assessment: Observed. - Comments: (none) ### 7.5 Availability of texts of regulations and directives - Description: The SNB has the legal authority under the LNB to issue ordinances; currently there are none in effect. - Assessment: Not applicable. - Comments: The future LNB is expected to lead to three ordinances: (i) detailed regulations on the oversight of the payment system; (ii) the collection of statistics; and (iii) the modalities of the reserve regime. ### 7.6 Deposit insurance and client asset protection schemes - Description: (no description provided) - Assessment: Not applicable. - Comments: (none) ### 7.7 Consumer protection arrangements overseen by financial agencies - Description: The SNB does not oversee consumer protection arrangements. - Assessment: Not applicable. - Comments: (none) ### VIII. Accountability and assurances of integrity by financial agencies - 8.1 Appearance before public authority and reporting - Description: Senior SNB officials appear regularly before the Federal Government (the focus naturally being the conduct of monetary policy). Views on the development of the economy and the financial system are exchanged periodically with the Federal Department of Finance, the State Secretariat for Economic Affairs, and the Federal Banking Commission. - Assessment: Observed. - Comments: (none) - 8.2 Public disclosure of audited financial statements - Description: The SNB is an independent public-law institution in the form of a joint-stock company. It is thus required to have external auditors who report to the annual meeting of shareholders, which is public. - Assessment: Observed. - Comments: (none) - 8.2.1 Independent audit and disclosure of accounting policies - Description: The SNB, as a joint-stock company, must apply the Swiss Accounting and Reporting Recommendations. As noted above, an external firm audits the financial statements. - Assessment: Observed. - Comments: (none) - 8.2.2 Internal governance procedures and internal audit arrangements - Description: (no description provided) - Assessment: Not observed (see also section 4.2.2 of the monetary policy transparency assessment). - Comments: (none) - 8.3 Disclosure of operating expenses and revenues - Description: Expenses and revenues are disclosed in detail in a financial report published by the SNB each April. - Assessment: Observed. - Comments: (none) - 8.4 Standards for conduct of personal financial affairs and conflict-of-interest rules - Description: (no description provided) - Assessment: Not observed (see section 4.4 of the monetary policy transparency assessment). - Comments: (none) - 8.4.1 Legal protections for officials and staff - Description: Article 59 of the LNB states that officials and employees of the SNB are subject to federal legislation concerning the responsibility of federal officials under civil penal law. The Federal Law on the Liability of the Confederation, its authorities and officials applies. The Confederation has the right of recourse against an officer of the SNB only if such person acted with intent or gross negligence. Criminal prosecution of Federal officers is permitted only with the agreement of the Federal Department of Justice and Police. - Assessment: Observed. - Comments: (none) ### Table 26. Summary Observance of Transparency Code — Payment Systems (practices grouped by assessment grade) - Assessment grade counts and lists: - Observed: 26 - List: 5.1, 5.1.1, 5.1.2, 5.1.3, 5.1.4, 5.2, 5.3, 5.3.1, 5.4, 6.1, 6.1.1, 6.1.2, 6.1.5, 6.2, 6.4, 7.1, 7.2, 7.3, 7.4, 7.4.1, 7.4.2, 8.1, 8.2, 8.2.1, 8.3, 8.4.1 - Broadly observed: 1 - List: 6.3, 7.3.1 - Non-observed: 2 - List: 8.2.2, 8.4 - Not applicable: 6 - List: 5.5, 6.1.3, 6.1.4, 7.5, 7.6, 7.7 ### Recommended action plan and authorities’ response - Recommendation: No further action needs to be undertaken in the area of payment system policy transparency. - Note: For responses on general transparency issues, see monetary policy transparency assessment. - Authorities’ response: The authorities were in agreement with this assessment. *Source: _cr09243 - 7.4 Financial agencies should establish and maintain public information services.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09243.pdf_