## _cr14264 — EXECUTIVE SUMMARY, KEY FINDINGS AND RECOMMENDATIONS ## Source details **Canonical URL:** [_cr14264 — EXECUTIVE SUMMARY, KEY FINDINGS AND RECOMMENDATIONS](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14264.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14264.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14264.pdf.json) --- ### Overview - Switzerland has recently made major enhancements in the practice of banking supervision and now has a high level of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs). - Not all results of improvement to date are embedded in the system or yet observable. - The Swiss banking system: - contributes about 10 percent to Swiss GDP and employs over 5 percent of the labor force; - banking sector assets: CHF 2.7 trillion, or over 450 percent of GDP; - 297 banks (end-2012); - two G-SIBs (Category 1) account for about one-half of the Swiss banking system’s global assets and have over 30 percent share in local markets. - Sectoral pressures: transparency and tax-related expectations, major banks adjusting to new international prudential standards. - Recent material domestic and cross-border issues indicated weaknesses in controls or practices being addressed by banks and authorities. - Core high-level recommendations summarized across the assessment: - increase FINMA resources and relax a self-imposed head-count freeze; - aim for higher intensity of supervision (more deep-dive on-site work); - update and selectively strengthen qualitative risk management and control guidance and legislation; - materially improve supervisory risk assessments and guidance to auditors; and - increase skilled resources within FINMA and participation in on-site supervisory work. ### Responsibilities, objectives and powers (CP1) - Key findings: - FINMA’s statutory objectives emphasize protection of creditors, investors and insured persons, and ensuring proper functioning of the financial market (FINMASA Art. 5); these should be clearly stated in legislation as pre-eminent. - FINMASA Art. 5 also states FINMA “contributes to sustaining the reputation and competitiveness of Switzerland's financial center”; assessors note risk of misinterpretation if competitiveness is elevated in status. - Legal framework is highly principles-based; additional qualitative rules, guidance or supervisory methodology should be put in place in selected areas to meet the BCP. - Without more detailed guidance, criteria for regulatory auditors’ assessment are not sufficiently clear, reducing effectiveness of regulatory audit and FINMA’s ability to judge audit outcomes. - Assessment: - Principle 1 — Overall assessment: Compliant. - Recommended actions (verbatim where given): - "Do not elevate the competitiveness objective in FINMA mandate. Instead, consider removing the reference to competitiveness if needed to avoid confusion and confirm that the primary objective for the supervisor is to promote the safety and soundness of banks and banking groups." - "Maintain the current FINMA power to set Pillar 2 add-ons on a group of banks." ### Independence, accountability, resourcing and legal protection for supervisors (CP2) - Key statistics and facts: - FINMA budget for banking supervision expanded "from CHF 39.5 million in 2009 to CHF 65 million in 2013." - Staff: "371 FTE in 2010 to 442 FTE in 2012." - Bank-related staff: "from around 87 FTE in 2010 to 98 FTE in 2012" (of which "some 38 are for off-site supervision and 22 are in risk management"; "authorization accounts for some 13 FTE and resolution/legal some 10-20 FTE"). - External auditors spend around "700 FTE per year" for audit work; "only some 200 FTE ... for regulatory audit" and "some 135 FTE is for special audits and model approval." - Off-site staffing allocation: "five off-site staff for each major bank, one each for the three Category 2 banks, seven for the approximately 30 Category 3 banks and 20 staff for the approximately 300 category 4 and 5 banks." - FINMA training budget: "In the years 2009 to 2011, the amount was CHF 2,000 per FTE per year, since 2012 the amount has been raised to CHF 3,000 per FTE." - Key findings: - FINMA has well-established operational independence enshrined in legislation; funded independently via fees (FINMASA Art. 15). - Resources are insufficient to supervise and regulate the entire banking system effectively, including oversight of supervisory work by external auditors. - FINMA has a "head-count freeze" that assessors state "needs to be relaxed to achieve compliance." - Legal protections: staff not personally and directly liable in civil law for discharging duties; FINMASA Art. 19 limits FINMA liability. - Assessment: - Principle 2 — Assessment: Materially Non Compliant. - Recommended actions (verbatim where given): - "Increase resources for banking regulation and supervision in FINMA." - "Clarify and limit what decisions on individual institutions FINMA’s board should take." ### Cooperation and crisis coordination (CP3) - Key findings: - Well-developed cooperation framework among FINMA, SNB, and FDF, including a tripartite MOU and a Steering Committee (SC) and Committee on Financial Crisis (CFC). - Effective bilateral and multilateral international cooperation: FINMA has MOUs with 17 jurisdictions and organizes supervisory colleges for the two major banks with key US and UK regulators. - Crisis management: FINMA leads international crisis management colleges; BIO and other instruments support bail-in and resolution strategies. ### Supervisory approach, use of auditors, supervisory techniques and tools (CP8–CP9) - Supervisory model facts: - FINMA relies extensively on external audit firms as an "extended arm" conducting regulatory audits; FINMA accredits 7 audit firms and some 150 lead auditors. - Regulatory audit workloads: regulatory audit on medium size banks ~ "1,000-1,500 hours"; deep dive reviews at major banks "1,000-3,500 hours". - FINMA’s own reviews: "some 15 reviews over the past two years on the two category 1 banks; approximately 20 total on category 2 and 3 banks." - Key findings and shortcomings: - Recent material enhancements introduced to increase supervisory intensity; implementation is recent and some impacts are not yet observable. - Oversight, guidance and direction of auditors’ work by FINMA need further enhancement to meet international standards. - Risk assessments require more forward-looking, granular, and consistent approaches across audit firms; FINMA plans revisions to methodology. - The basis for conclusions in regulatory audit reports often lacked transparency on seriousness and on work supporting findings. - For a jurisdiction with systemically important institutions, depth of on-site review by auditors and by FINMA is insufficient, particularly for qualitative risk management and internal controls. - Assessments: - Principle 8 — Largely Compliant. - Principle 9 — Assessment: Materially Non Compliant. - Recommended actions (verbatim and summarized): - "Improve methodology for regulatory risk assessment and enhance FINMA oversight of the process." - "Provide more guidance for rating criteria; require more granularity in risk assessments for larger institutions; strengthen forward-looking elements." - "Enhance guidance for regulatory auditors’ on-site work and FINMA oversight to improve consistency and quality." - Increase FINMA participation in on-site work by auditors and foreign supervisors; conduct more thematic reviews and deep-dive on-site work; reallocate audit scopes where appropriate. ### Consolidated supervision and home-host relations (CP12–CP13) - Key findings: - Consolidated supervision is of high quality in practice, with well-established home-host relations and MOUs. - Legal framework gaps: powers available at the level of the bank do not all clearly apply to holding companies in banking or conglomerate groups; assessors recommend strengthening law to allow enforcement decrees at holding company level. - Assessment: - CP12 — Compliant. ### Board governance, risk management and internal controls (CP14–CP15, CP26) - Board and governance findings: - FINMA interacts extensively with boards of major institutions. - Level of banking and risk expertise in boards of a range of mid-size institutions appears less than desirable; prevalence of separate risk committees is lower than desirable. - Guidance is incomplete; FINMA planned circular revisions in 2014. - Risk management findings: - FINMA generally has high expectations of banks’ risk management. - Comprehensiveness of qualitative guidance in certain areas should be improved, updated, or explicitly reference Basel texts. - Major banks face challenges in timely aggregation of risk positions and risk data. - Recommendations include elevating CRO roles to executive board level at more mid-size systemically important banks and requiring separate board risk committees where appropriate. - Assessment: - Principle 14 — Largely Compliant. - Principle 15 — Largely Compliant. - Principle 26 (internal control and audit) — Compliant. - Recommended actions (verbatim and summarized): - "Consider high level guidance re enterprise-wide risk management expectations." - "Continue to push for improvement in risk appetite frameworks at mid-size banks, conduct thematic reviews, and aggressively push for improvements in data aggregation capability at major banks." ### Capital adequacy and Pillar 2 (CP16) - Key facts and exact figures: - Basel III implemented via CAO; Basel III rules effective in 2013. - Minimum capital: 8 percent of risk-weighted positions; minimum CET1 4.5 percent; minimum Tier 1 6 percent (CAO Art. 42 para 1 and related). - Common equity CET1 buffer of 2.5 percent (CAO Art. 43). - Systemically important banks require common equity of at least 10 percent of risk-weighted position and contingent capital or other qualifying capital of at least 9 percent of risk-weighted positions (buffer capital 3 percent; progressive component 6 percent). Loss-absorbing triggers activate at 7 percent and 5 percent CET1 levels. - Countercyclical buffer: Federal Council activated "an additional 1 percent" countercyclical buffer recommended by SNB (decision Feb 13, 2013); level increased to "2 percent in January 2014" to be fulfilled by end June 2014. - Leverage ratio for systemically important banks introduced (CAO Art. 133); set at a level of "24 percent of the minimum capital ratio requirement for the capital base, the buffer component and the progressive component" (CAO Art. 134). - Capital targets and intervention thresholds by category: Category 2 target "13.6-14.4" percent (intervention threshold "11.5"); Category 3 target "12" percent (threshold "11"); Category 4 target "11.2" percent (threshold "10.5"); Category 5 target "10.5" percent (threshold "10.5"). - Key findings: - Switzerland has a robust capital adequacy framework and early adoption of Basel III, with higher requirements for the largest banks. - FINMA can set Pillar 2 add-ons (CAO Art. 45); assessors caution against Parliamentary initiative to transfer this power to the Federal Council. - Assessment: - Principle 16 — Compliant. - Recommended action (verbatim): - "Do not remove or limit FINMA Pillar 2 powers, or explicitly provide in legislation that any Federal Council decisions re Pillar 2 is to be on the formal recommendation of FINMA." ### Credit risk, provisioning, concentration risk, related parties (CP17–CP20) - Credit risk and provisioning: - FINMA qualitative rules and guidance on credit risk management and provisioning are not fully comprehensive; supervisory and auditing processes fill gaps. - No issues identified with provisioning policies or approach. - Principle 17 — Compliant; Principle 18 — Compliant. - Concentration risk: - Large exposure limits: individual large exposure limit "must not exceed 25 percent of adjusted eligible capital" (CAO Art. 97); large exposure defined ≥ 10 percent of adjusted eligible capital (CAO Art. 95). - Assessment: Principle 19 — Largely Compliant. - Recommended actions: expand guidance/instructions to auditors, conduct thematic reviews beyond single-name exposures, improve stress-testing and concentration assessment. - Related-party transactions: - Existing rules cover credit-style related-party transactions but not the full spectrum (sales/purchases, service contracts, forgiveness of loans). - Assessment: Principle 20 — Largely Compliant. - Recommended action: update framework (possibly circular) to explicitly cover full range of related-party transactions, require market terms and aggregated reporting. ### Market risk, IRRBB, liquidity risk (CP21–CP24) - Market risk: - Principle 22 — Compliant. Guidance in Circular 08/20; advanced approaches used by a small number of banks. - Interest rate risk in banking book (IRRBB): - Circular 08/6 provides comprehensive requirements; Principle 23 — Compliant. - Liquidity risk (exact facts and timing): - Quantitative minimum requirement for ordinary banks: liquid assets at least "33 percent of short-term liability" (LO Arts. 12–17). - LCR rollout: test-reporting started; "Starting July 2013, the LCR reporting is extended to all banks in Switzerland" with monthly reporting. Replacement of the 33 percent rule by LCR planned "at the beginning of 2015." - For the two large banks: specific liquidity requirements in place since 2010 covering 7-day and 30-day stress periods; primary component coverage: "75 percent" for seven-day horizon and "50 percent" for 30-day horizon. - Assessment: Principle 24 — Largely Compliant. - Key findings and recommendations: - Quantitative requirements for large banks are of high quality; those for other banks are outdated. - FINMA should maintain close dialogue with mid-size and smaller banks and auditors during LCR implementation; monitor misuse of proportionality; conduct thematic review after a few years. ### Operational risk and business continuity (CP25) - Framework: - Appendix 1 to Circular 08/21 provides basic qualitative requirements; revised circular under consultation and expected for implementation from 2015. - Key findings: - Current regulatory framework has limited application of basic qualitative requirements and lacks explicit requirements on information systems. - FINMA’s supervisory rating system should explicitly incorporate operational risk. - Operational risk may be primary risk for asset/wealth management banks and is increasing at largest banks. - Absence of clear expectations for reporting operational risk incidents to supervisor (except two large banks). - Assessment: - Principle 25 — Largely Compliant. - Recommended actions (verbatim and summarized): - Proceed with revised Circular 08/21; enhance specialist resources in FINMA to allow thematic reviews, stronger oversight of auditors, and incorporate operational risk into supervisory rating. ### Internal and external audit, financial reporting and disclosure (CP26–CP28) - Internal controls and audit: - FINMA has a well-developed focus on internal controls and audit; regulatory auditors are well placed to judge internal audit effectiveness. - Regulatory auditors must confirm internal audit adequacy in long form reports. - Principle 26 — Compliant. - Financial reporting and external audit: - Mix of accounting standards: some groups use IFRS or U.S. GAAP; many mid-size and smaller banks use Swiss GAAP. - Principle 27 — Compliant. - Note: Swiss GAAP generally provides less disclosure than IFRS; assessors note need to ensure Swiss GAAP differences do not interact with regulatory standards to provide unintended benefits. - Disclosure and transparency: - Pillar 3 disclosure requirements in place; recent regulatory capital review found Switzerland complying with Pillar 3 disclosure requirements. - Principle 28 — Compliant. ### Abuse of financial services, AML/CFT (CP29) - Key findings: - Swiss AML/CFT framework is comprehensive (AMLA, MLO-FINMA, CDB 08). - Banks’ compliance is rigorously checked through significant work by external auditors and FINMA; assessors note "some 1000 a year" STRs reported from banks. - External audits and FINMA inspections (e.g., "inspection of 20 banks in 2011" on PEP compliance) have been used and enforcement proceedings initiated where necessary. - Assessment: - Principle 29 — Compliant. - Notable legal/statutory points preserved verbatim: - "retain records for a minimum of ten years after the termination of the business relationship or after completion of the transaction." (AMLA Art. 7 para 3) - "more than 5 percent" — disclosure threshold for direct and indirect shareholders in financial statement notes. ### Summary of Core Principle grades (selected) - CP1: C (Compliant) — responsibilities/objectives and powers. - CP2: MNC (Materially Non Compliant) — independence, accountability, resourcing. - CP3: C — cooperation and collaboration. - CP6 (Transfer of significant ownership): LC (Largely Compliant). - CP8: LC — supervisory approach. - CP9: MNC — supervisory techniques and tools. - CP11: C — corrective and sanctioning powers. - CP12: C — consolidated supervision. - CP14: LC — corporate governance. - CP15: LC — risk management process. - CP16: C — capital adequacy. - CP17–18: C — credit risk and problem assets. - CP19–20: LC — concentration risk and related parties. - CP21–23: C — country, market and interest-rate risk. - CP24–25: LC — liquidity and operational risk. - CP26–29: C — internal controls, financial reporting, disclosure, abuse of financial services. ### Overarching recommended actions (concise bullets capturing assessment recommendations) - Relax FINMA’s self-imposed head-count freeze and increase resources for banking regulation and supervision, especially for: - in-depth on-site inspection capacity; - specialist risk expertise (operational, legal, data aggregation, liquidity); - oversight of regulatory audit firms. - Strengthen FINMA’s supervisory methodology and guidance: - update and make more specific Circular 08/24 (qualitative risk management and governance) and Circular 08/21 (operational risk); - provide clearer guidance and instructions to regulatory auditors to improve consistency, transparency and forward-looking risk assessments; - enhance CAMELS rating granularity and incorporate operational risk explicitly. - Preserve FINMA’s statutory powers: - do not elevate competitiveness objective to parity with prudential objectives; consider removing the competitiveness reference to avoid confusion; - maintain FINMA’s power to set Pillar 2 add-ons; avoid transferring this power to the Federal Council. - Improve supervisory focus and tools: - increase FINMA participation in on-site work by auditors and foreign supervisors for major banks; - conduct more thematic reviews (mortgage, concentration, liquidity, interest-rate risk, operational risk) and cross-institution analyses; - review and, where needed, broaden scope and clarity of related-party, concentration, and provisioning guidance and reporting expectations. - Implement and monitor international standard adoption: - proceed with LCR implementation and monitor application across bank sizes; review Circular 13/06 implementation within two years; - ensure Swiss GAAP differences do not lead to unintended regulatory arbitrage. *Italic: International Monetary Fund — Switzerland: EXECUTIVE SUMMARY, KEY FINDINGS AND RECOMMENDATIONS (content unit _cr14264, extracted from source PDF chapter).* ### EXECUTIVE SUMMARY, KEY FINDINGS AND RECOMMENDATIONS __________________________ 5 ### EXECUTIVE SUMMARY, KEY FINDINGS AND RECOMMENDATIONS __________________________ 5 ### Major sections covered - INTRODUCTION ________________________________________________________________________________ 13 - INSTITUTIONAL AND MARKET STRUCTURE – OVERVIEW ___________________________________ 16 - PRECONDITIONS FOR EFFECTIVE BANKING SUPERVISION __________________________________ 17 - DETAILED ASSESSMENT ________________________________________________________________________ 21 - A. Supervisory Powers, Responsibilities and Functions ___________________________________________ 21 - B. Prudential Regulations and Requirements ____________________________________________________ 82 - SUMMARY COMPLIANCE WITH THE BASEL CORE PRINCIPLES _____________________________ 163 - RECOMMENDED ACTIONS AND AUTHORITIES COMMENTS _______________________________ 166 - A. Recommended Actions _______________________________________________________________________ 166 - B. Authorities’ Response to the Assessment ____________________________________________________ 167 ### Glossary entries (selected exact terms and acronyms as listed) - AC Additional Criteria - AMA Advanced Measurement Approach - AML Anti-Money Laundering - AMLA Federal Act on Combating Money Laundering and Terrorist Financing in the Financial Sector - BA Federal Act on Banks and Savings Banks - BO Federal Ordinance on Banks and Savings Banks - BoD Board of Directors - BCBS Basel Committee on Banking Supervision - BCP Basel Core Principles - CAMELS Capital, Asset, Management, Earnings, Liquidity and Sensitivity - CAO Capital Adequacy Ordinance - CDD Customer Due Diligence - CEO Chief Executive Officer - CHF Swiss Franc - COCO Convertible Capital - CRO Chief Risk Officer - EBA European Banking Authority - EBK Swiss Federal Banking Commission (predecessor institution of FINMA) - EC Essential Criteria - FAOA Federal Audit Oversight Authority (Switzerland) - FDF Federal Department of Finance - FINMA Swiss Financial Market Supervisory Authority - FIU Financial Intelligence Unit - FSA Financial Services Authority (U.K.) - FSAP Financial Sector Assessment Program - FSB Financial Stability Board - FTE Full-time Equivalent - GAAP Generally Accepted Accounting Principles - G-SIB Global Systemically Important Bank - G-SIFI Global Systemically Important Financial Institution - HQLA High-Quality Liquid Assets - IAS International Accounting Standards - IFRS International Financial Reporting Standards - IRB Internal-Rating Based - KAM Key Account Manager - LCR Liquidity Coverage Ratio - LPA Loss Potential Analysis - LO Liquidity Ordinance - MIS Management Information System - MOU Memorandum of Understanding - MROS Money Laundering Reporting Office Switzerland - PEP Politically Exposed Person - PRA Prudential Regulation Authority (U.K.) - RCAP Regulatory Consistency Assessment Program - SA Standardized Approach - SFBC Swiss Federal Banking Commission (predecessor institution of FINMA) - SNB Swiss National Bank - SRO Self Regulatory Organization - SOP Standard Operating Procedure - STR Suspicious Transaction Report - SCC Swiss Criminal Code - TBTF Too Big To Fail - TIS Team Intensive Supervision - UBO Ultimate Beneficiary Owner *International Monetary Fund — Switzerland: EXECUTIVE SUMMARY, KEY FINDINGS AND RECOMMENDATIONS (page identifiers as listed)* ### EXECUTIVE SUMMARY, KEY FINDINGS AND ### _cr14264 - EXECUTIVE SUMMARY, KEY FINDINGS AND ### Overview - Switzerland has recently made major enhancements in the practice of banking supervision and now has a high level of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs). - Not all results of improvement to date are embedded in the system or yet observable. - The Swiss banking system is very large relative to the size of the economy, conducts significant transactions with non-residents, and contains two G-SIFIs with large international operations and a number of banks that are systemically important in domestic terms. - Sectoral pressures: challenges to parts of business models as expectations related to transparency and tax authorities increase; major banks adjusting to new international prudential standards. - Recent material issues in domestic or cross-border markets indicated weaknesses in controls or practices that are being dealt with by banks and the authorities. - Recommendation summary: authorities need to go farther to aim for a higher level of intensive supervision; update and selectively strengthen qualitative risk management and control guidance and legislation; materially improve supervisory risk assessments and guidance to auditors; increase skilled resources within FINMA and on-site supervisory work. ### Responsibilities, objectives and powers (CP1) - FINMA’s responsibilities and objectives emphasizing protection of creditors, investors and insured persons, and ensuring proper functioning of the financial market, should be clearly stated in legislation as pre-eminent. - Concern: current objectives link competitiveness of the Swiss financial sector to this approach, which risks misinterpretation of FINMA’s objectives. - Parliamentary moves to elevate promoting competitiveness as a separate objective with equal status to prudential and market mandate would risk confusing the purpose of banking regulation and supervision and would not be consistent with the BCP. - Legal framework is highly principles-based; additional qualitative rules, guidance or supervisory methodology should be put in place in selected areas to meet the BCP. - Without more detailed guidance, criteria for regulatory auditors’ assessment is not sufficiently clear, reducing effectiveness of regulatory audit and FINMA’s ability to judge audit outcomes. - FINMA has updated several regulations and guidance, but others need enhancement or explicit reference to international principles. - Proportionality concerns: guidance appropriate for international banks should not apply to smaller banks, but clarity can be enhanced while addressing proportionality. ### Independence, accountability, resourcing and legal protection for supervisors (CP2) - FINMA has limited on-site and off-site supervisory resources; resources have been increased in recent years but are now subject to a self-imposed headcount cap which should be relaxed. - Resources are too little to supervise and regulate the entire banking system in a way that meets the core principles, including sufficient in-depth on-site work and oversight of supervisory work done by external auditors, particularly for medium and small banks. - FINMA’s adherence to a head-count freeze needs to be relaxed to achieve compliance. - FINMA has well-established operational independence enshrined in legislation; accountability arrangements are to the Federal Council through the federal Minister of Finance. - Governance: FINMA governed by an executive reporting to a board which plays more of an oversight role; more clearly delineating and limiting the Board’s ability to be involved in individual decisions could enhance governance and ability to attract Board members. - Parliamentary moves to transfer FINMA’s power to set general Pillar 2 capital buffers to the Federal Council should either not proceed, or legislation should indicate the Council’s power will be exercised only on formal advice of FINMA. ### Cooperation and collaboration (CP3) - Well-developed framework for cooperation on prudential matters among FINMA, the Swiss National Bank (SNB), and the Federal Department of Finance, and with other prudential supervisors internationally via MOUs and other arrangements. - Arrangements were observed to work effectively in practice during the mission. - Close communication and coordination with U.K. and U.S. supervisors given major banks’ operations in those jurisdictions. - Work on recovery and resolution planning and crisis management colleges is proceeding. ### Permissible activities, licensing, transfers of ownership, major acquisitions (CPs 4–7) - Well-developed licensing system: permissible activities only conducted by authorized banks; licensing process actively used to notify and control banks’ activities. - FINMA acts to shut down unlicensed banking activities, including internet cases. - Licensing requires corporate documents to specify organization structure, business lines, and geographies; changes require FINMA notification and approval triggering assessments. - Transfers of ownership: well-developed regime with notification and approval requirements; reviews include fit and proper requirements, beneficial ownership, business plans. - FINMA assesses capability of foreign supervisors’ regimes and exercises due care approving foreign acquisitions. - Concern: scope of entities defined as able to significantly influence a bank’s activities (and thus needing approval) is less clear than desirable. ### Supervisory approach, supervisory tools, supervisory reporting, corrective and remedial powers (CPs 8–11) - Unique process: mix of FINMA resources and extensive use of audit firms doing regulatory audits on FINMA’s behalf. - Material enhancements in past three years to address deficiencies and increase intensity of supervision. - New process requires audit firms to be more forward looking, increases FINMA’s in-house supervisory capability, and enhances FINMA interventions. - Implementation is recent; some impacts not yet observable; oversight and direction of auditors’ work by FINMA need further enhancement to meet international standards. - Risk assessments should be more forward looking, more granular, and more consistent across audit firms; revisions to risk analysis methodology to improve granularity are planned. - FINMA should increase frequency and depth of ‘deep dive’ on-site work proactively assessing risk management governance and internal controls—complements FINMA’s quantitative capital and liquidity work for larger banks. - Requires materially more resources at FINMA and greater ability for off-site staff to direct, monitor and compare audit work done on their behalf. - FINMA needs more resources to participate periodically in regulatory work of audit firms for major banks, including international assessments and selective participation in firms’ ‘deep dive’ work and foreign supervisory reviews. - FINMA should conduct more theme reviews in areas where it is best placed due to expertise or sector-wide view. - FINMA extensively uses general corrective and remedial powers, notably Pillar 2 add-ons as a supervisory tool. - FINMA experience: supervisory requirements and recommendations are treated very seriously by licensed banks; FINMA has experience in closing smaller institutions; progress made in recovery and resolution planning for two largest banks. - Lack of power to fine institutions is not a serious problem; having such power might raise standards of proof and reduce effectiveness. ### Consolidated supervision and home-host relations (CP12–CP13) - FINMA consolidated supervision is of high quality, but legal framework should be enhanced to support such supervision. - Current legal framework does not apply all powers available at the level of the bank to the holding company in banking or conglomerate groups; FINMA can achieve goals indirectly but law should be strengthened to allow interim and permanent enforcement decrees at the holding company level. - Well-established and effective network of home-host relations for prudential matters via MOUs and bilateral relations. - Crisis management colleges and recovery and resolution plan work are progressing. - BCP assessment did not consider international information sharing or cooperation on conduct of business or enforcement matters (outside BCP methodology). ### Board of directors (CP14) - FINMA practice in governance is evolving; assessment of governance effectiveness should be improved. - Interaction with boards of major institutions is extensive. - Level of banking and risk expertise in boards of a range of mid-size institutions appears less than desirable; prevalence of separate risk committees is lower than desirable. - Guidance is incomplete but can be updated to add specificity and reference international standards; FINMA plans to revise relevant circulars in 2014. - Room to formalize and enhance practice of assessing boards by FINMA and/or external auditors. ### Risk management (CP15) - FINMA generally has high expectations of banks’ risk management. - Comprehensiveness of qualitative guidance in certain areas should be improved, updated, or explicitly reference Basel texts. - Guidance to banks and/or auditors should be put in place regarding enterprise-wide risk measurement and risk management. - Recommendation: more domestic systemically-important mid-size banks should elevate the position of CRO to be a full executive board member; more mid-size domestically systemic banks should be required to have a separate board risk committee and interact more regularly with the risk function. - FINMA should review thematically risk appetite frameworks and capital planning and related stress testing across mid-size banks, building on the general approach to mortgage stress testing recently done. ### Capital adequacy (CP16) - Switzerland has a robust capital adequacy framework aligning with strategy to be an early adopter of new Basle rules without exceptions and to provide significantly higher requirements on too-big-to-fail banks. - New requirements based on Basel III rules became effective in 2013 and are assessed as consistent with the Basel rules by BCBS. - The old standardized approach for domestic banks will be phased out in a few years. - Substantially higher capital requirements are imposed on the largest banks including core capital and bail-in instruments. - Lesser levels of Pillar 2 add-ons are required of other banks except the smallest ones. - Framework ensures Swiss banks will continue to have very high capital adequacy ratios. - Number of banks using advanced approaches is limited; FINMA has a robust framework to assess and validate models and methods. - Concern: recent Parliamentary initiative to bring FINMA’s power to require Pillar 2 add-ons to the Federal Council and potentially set the maximum amount would be counterproductive for safety of the banking system. ### Credit risk and problem assets (CP17–CP18) - FINMA qualitative rules and guidance on credit risk management and provisioning are not fully comprehensive or as detailed as in many jurisdictions. - Supervisory and auditing processes fill gaps, are comprehensive and allow FINMA to understand quality of credit risk management and adequacy of provisions. - Improvements to guidance and instructions to regulatory auditors could ensure consistent focus on credit risk management across the range of banks and audit firms. - No issues identified with respect to provisioning policies or approach. ### Concentration risk and large exposures (CP19) - Rules, guidance and/or instructions to regulatory auditors need expansion to ensure relevant concentrations are appropriately identified in banks’ risk management and supervised correctly by statutory auditors on FINMA’s behalf. - Assessments of other forms of concentration risk should be conducted by FINMA under an enhanced stress testing program. - Requirements for statutory auditors to express an opinion on concentration risk have only recently been clearly articulated. - Assessment of concentrations beyond single-name credit concentrations (e.g., system-wide stress event concentrations, funding concentrations) is better addressed by FINMA given the skills and system-wide view needed, through active use of stress and scenario testing. - Major banks appear to run relatively sophisticated approaches, but beyond single-name exposure verification they have not been assessed comprehensively by the supervisory process. ### Transactions with related parties (CP20) - Definition of related party, requirements for dealings at market terms and board oversight need updating. - No major problems identified, but current rules and guidance could miss transactions that should be caught, risking reputation. - Reporting of related party transactions to the supervisor should be brought in line with international standards. - Updated framework (possibly in a circular) should explicitly cover full range of transactions, stipulate requirements for policies and processes, clarify expectation of market terms and conditions, and provide reporting requirements on aggregated related party exposures to the supervisor. ### Country and transfer risk, market risk and interest rate risk in the banking book (CP21–23) - Rules and guidance for country and transfer risk, market risk, and interest rate risk sufficiently meet Core Principle requirements. - Major banks use generally sophisticated approaches; country and market risk are much less for mid-size and smaller banks. - Even mid-size and smaller banks showed necessary awareness and ability to manage interest rate risk. - Supervisory practice should be enhanced, including FINMA thematic reviews for relevant mid-size and smaller banks. ### Liquidity risk (CP24) - FINMA enhanced liquidity quantitative information gathering (LCR reporting from mid-2013) and has updated liquidity risk guidance in progress reflecting international standards; this circular will be in place at the beginning of 2014. - Application of elements to smaller banks could be broadened (e.g., requirement for diversification of funding structure). - Quantitative requirements for large banks are of high quality; those for other banks are outdated. - Authorities’ current plan to implement LCR according to the agreed international schedule will provide substantial improvement. - FINMA needs close dialogue with mid-size and smaller banks and regulatory auditors to set expectations for implementation and supervisory assessment of liquidity risk. - FINMA should monitor to minimize misuse of proportionality arguments by banks to apply qualitative liquidity requirements insufficiently. - FINMA should conduct a thematic review of the new circular after a few years and revise supervisory instructions to auditors to reflect lessons learned. ### Operational risk (CP25) - Current regulatory framework on operational risk has limited application of basic qualitative requirements and lacks requirements on operational risk regarding information systems. - FINMA’s supervisory rating system should explicitly incorporate operational risk to give it more strategic focus. - Operational risk may be the primary risk for banks specializing in asset or wealth management and is increasing in relative importance at the largest banks. - Absence of clear expectations for reporting operational risk incidents to the supervisor (except for the two large banks). - FINMA should assess common operational risk factors proactively and conduct thematic supervisory reviews periodically; this will require additional resources. ### Internal controls and audit, financial reporting and external audit, disclosure and transparency (CP26–CP28) - FINMA has a well-developed focus on internal controls and audit; regulatory auditors are well placed to judge internal audit effectiveness. - FINMA focuses directly and via regulatory audit; intensity has increased recently. - Recent high-profile compliance breakdowns at a number of banks were in some cases related to fraudulent behavior; ex-post FINMA reviews found significant control weaknesses contributed to matters not being detected sooner. - Supervisory approach to qualitative risk management and controls needs to be ramped up proactively to reduce risk of serious breakdowns; part of general supervisory approach assessed under CP8/9. - Use of Swiss GAAP is prevalent outside the largest banks; Swiss GAAP is similar or more conservative generally than IFRS but disclosure obligations are generally less than for IFRS. - Banking sector applies additional Pillar 3 disclosure requirements; recent regulatory capital review found Switzerland complying with Pillar 3 disclosure requirements of the Basel capital rules. ### Abuse of Financial Services (CP29) - Swiss regulatory framework regarding abuse of financial services is well developed. - Banks’ compliance is rigorously checked through significant work by external auditors and FINMA. - Laws and regulations provide comprehensive and very detailed requirements to prevent abuse of financial services, particularly AML/CFT issues. - Banks’ adherence is subject to annual regulatory audits by external auditors, reviewed by FINMA; supervisor has also carried out on-site reviews from time to time. *From: EXECUTIVE SUMMARY, KEY FINDINGS AND RECOMMENDATIONS (_cr14264).* ### INTRODUCTION ### INTRODUCTION ### Assessment scope and methodology - This assessment was completed as part of a Financial Sector Assessment Program (FSAP) update undertaken by the International Monetary Fund (IMF) during 2013 and reflects the regulatory and supervisory framework in place as of the date of completion of the assessment. - The assessment focused on banking supervision and regulation in Switzerland and did not cover the specificities of regulation and supervision of other financial intermediaries. - The Swiss authorities agreed to be assessed according to the Revised Core Principles Methodology issued by the BCBS in September 2012. - The assessors used the set of essential and additional assessment criteria (ECs and ACs) for each principle; the Swiss authorities chose to be assessed and rated against both Essential and Additional Criteria. - Compliance with each principle was assessed qualitatively using a four-part grading system: compliant; largely compliant; materially noncompliant; and noncompliant. A category of “non-applicable” is reserved where criteria do not relate to the country’s circumstances. - The assessment team comprised Nick Le Pan and Mamoru Yanase. ### The 2012 Revised Core Principles (summary from source) - The revised BCPs reflect market and regulatory developments since the last revision and the lessons from the 2008/2009 financial crisis. - Key emphases in the revision: - greater supervisory intensity and allocation of adequate resources for systemically important banks; - application of a system-wide, macro perspective to microprudential supervision to identify and pre-empt systemic risk; - increased focus on crisis preparation and management, recovery and resolution measures; and - fostering robust market discipline through corporate governance, disclosure and transparency. - Supervisors are required to assess banks’ risk profiles in terms of both the risks banks run and the risks they pose to the banking and financial systems, and to consider macroeconomic environment and risk build-up/concentration. - The number of principles increased from 25 to 29. - The number of essential criteria expanded from 196 to 231, including the introduction of 35 new essential criteria. - For countries choosing to be assessed against additional criteria, there are 16 additional criteria. - The methodology reinforces proportionality in expectations on supervisors and standards imposed on banks. ### Assessment process and cooperation - The assessors reviewed laws, rules, and materials provided; held extensive meetings with officials of FINMA; and held additional meetings with auditing firms and banking sector participants. - The authorities provided a self-assessment of the CPs, responses to additional questionnaires, access to supervisory documents and files, staff and systems. - The assessors appreciated cooperation from authorities, noting documentation and access were provided while staff were burdened by many initiatives related to global regulatory changes and changes in Swiss supervisory processes. ### Institutional and market structure — overview - Switzerland’s financial sector is diversified and systemically important to global markets, comprising: - a few significant global players in banking and insurance; - two dozen cantonal banks; - regional financial institutions; - private banks; - foreign banks; - internationally oriented insurance companies; and - many pension funds. - The financial system contributes about 10 percent to Swiss GDP and employs over 5 percent of the labor force. - The banking sector has approximately 70 percent of the total financial sector assets with CHF 2.7 trillion, or over 450 percent of the country’s GDP. - The banking sector consisted of 297 banks (end-2012). - The two large banks account for about one-half of the Swiss banking system’s global assets and are classified as Category 1 banks; they are designated as Global Systemically Important Banks (G-SIBs). - The two largest banks are universal banks in Switzerland and are systemically important domestically with a share of over 30 percent in local markets. - Category breakdown and averages: - Three Category 2 banks average CHF150B of assets. - 27 Category 3 banks have average assets of some CHF20B. - The 250 smallest and least complex banks as classified by FINMA have median assets of CHF250m. - There are 24 cantonal banks (Categories 2 to 4) with a share of around 15 percent of the total banking assets. - Risks by bank type: - Smaller banks: potential risks in credit risk and interest rate risk in the banking book. - Wealth management functions: more exposed to operational and reputational risk. ### Supervisory and institutional arrangements - FINMA is an independent public law institution and a unified supervisor, created in 2008 by unifying the Federal Banking Commission (EBK), the Federal Office of Private Insurance, and the Anti-Money Laundering Control Authority; it started operation from the beginning of 2009. - In banking regulation, laws and ordinances are submitted by the Federal Department of Finance (FDF) and enacted by the Federal Parliament and Federal Council. - The Swiss National Bank (SNB) has responsibility over financial system stability, monetary policy operations, supply of liquidity, and acts as a lender of last resort. - A Memorandum of Understanding (MOU) between FINMA and the SNB provides for regular head-of-organization meetings and ongoing exchange in areas including: - assessment of the soundness of systemically important banks and/or the banking system; - regulations with major impact on soundness of banks, including liquidity, capital adequacy and risk distribution provisions; - contingency planning and crisis management. ### Preconditions for effective banking supervision — macro and policy context - Switzerland has a competitive economy with prudent public finances and one of the highest GDP per capita globally. - Fiscal and monetary framework: - Fiscal policy anchored in a debt brake rule in the federal constitution and in constitutions governing 25 of 26 cantonal governments. - SNB is an independent central bank obliged to act in the interests of the country, ensuring price stability while taking due account of economic developments. - National Bank Act confers on the SNB the mandate of contributing to the stability of the financial system. - Recent macro developments (as described in source): - GDP growth slowed in 2012 to only 1 percent and is expected to reach around 1¼ percent in 2013. - Core and headline consumer price inflation are negative. - Unemployment is low; immigration is fueling labor force growth. - The exchange rate floor was introduced by SNB in September 2011 to contain “safe haven” inflows; inflows resumed in mid-2012 prompting heavy intervention and expansion of SNB’s balance sheet; pressures on the Swiss franc have waned since late 2012. - The real exchange rate has depreciated following the introduction of the floor; Swiss exports have performed well; the current account surplus remains sizable, reflecting favorable net interest income. - The debt-to-GDP ratio is expected to fall further to about 45 percent of GDP in 2016. - Mortgage lending has accelerated, bringing mortgage debt to about 140 percent of GDP; housing prices have been rising in certain segments. - Financial sector policy actions and macroprudential measures: - Switzerland has been an early adopter of new Basel capital and liquidity measures, tailored with additional add-ons for certain banks for systemic reasons. - Higher minimum capital ratios apply to the two G-SIFIs and to a lesser degree to other banks except the smallest ones. - The TBTF legislative revision for regulation of systemically important banks was approved by Parliament on September 30, 2011 and put into force by the Federal Council on March 1, 2012; corresponding amendments to the Capital Adequacy Ordinance (CAO) and the Banking Ordinance (BO) entered into force on January 1, 2013. - The Federal Council decided on February 13, 2013 to activate the countercyclical capital buffer, targeted at mortgage loans financing residential property in Switzerland, on the recommendation of the SNB. - Banks were required to hold an additional 1 percent of their risk-weighted assets in the mortgage sector by end September 2013. - The level of the buffer was further increased to 2 percent in January 2014. The additional requirement is to be fulfilled by end June 2014. - FINMA has introduced measures to raise risk weights for mortgage lending and new requirements for mortgage financing through the Swiss Bankers Association, including a minimum down payment and minimum repayment requirements. *Source: INTRODUCTION (IMF FSAP assessment of Switzerland, as provided in the supplied content).* ### 19. Switzerland has a consensus-driven culture with strong support for principles-based, ### Switzerland has a consensus-driven culture with strong support for principles-based, proportional regulation and supervision ### Institutional culture and supervisory model - Switzerland has a consensus-driven culture with strong support for principles-based, proportional regulation and supervision, once adopted. - Rating agencies have described the domestic credit culture as conservative. - The system of business laws is well developed, as is the practice of professions important to banking such as accountancy and auditing, the legal profession, and banking and risk management. - Given the size and reach of domestic banks, FINMA (and its predecessor) concluded that there were not sufficient high quality resources available in Switzerland to effectively conduct bank supervision using own resources only. - This led to a supervision model relying on the outside auditors of banks, and their global network, to conduct regulatory audits on behalf of FINMA (as an ‘extended arm’), with the audits paid for by the banks. ### Financial reporting and audit requirements - All stock corporations and other commercial entities in Switzerland must prepare financial statements including a balance sheet, an income statement and notes. - The financial statements of stock corporations are subject to an annual audit. - Publicly traded companies, banks, other financial institutions, mutual funds and pension funds are subject to additional reporting requirements. - Auditors of public companies are subject to regulation and inspection by an independent authority. ### FINMA’s supervisory, insolvency, and resolution responsibilities - FINMA is the supervisory authority and also the insolvency and resolution authority for banks and securities dealers in Switzerland. - FINMA is responsible for intensified supervision of banks in a recovery status. - At the point of non-viability, FINMA is responsible for establishing intervention measures, and the resolution or the liquidation of the bank. - Systemically important banks, as required by FINMA, need to establish recovery plans which are subject to FINMA’s approval. - FINMA defines institution-specific resolution plans. - FINMA is responsible for the international coordination and cooperation process regarding the global resolution strategy for both Swiss G-SIBs. ### Crisis management framework and coordination - In 2011, FDF, SNB and FINMA signed a tripartite memorandum of understanding on crisis management. - The MOU governs exchange of information on financial stability and financial market regulation issues, as well as collaboration in the event of a crisis. - Strategic coordination of the crisis management organization and of any intervention is performed by a Steering Committee (SC), comprising the head of the Federal Department of Finance (FDF), the Chairman of the Governing Board of the SNB and the Chairman of FINMA. - Meetings of the SC shall be held whenever necessary. - FINMA leads international crisis management colleges for the two major Swiss banks, especially with participation of the United States and the United Kingdom. ### Recovery, resolution tools, and the Banking Insolvency Ordinance (BIO) - The coming into force of the new Banking Insolvency Ordinance (BIO) established by FINMA was an important step for Switzerland. - The BIO sets out the process so that not only shareholders but also bondholders contribute towards restructuring. - As part of its restructuring plan, FINMA can order a compulsory conversion of bonds or a waiver of claims (bail-in): it ensures that banks can still continue to operate and safeguard financial stability. - For systemically important large banks, additional capital measures have been taken in the form of convertible capital (CoCos). - The CoCos approach involves a two-stage approach: - First step: converts CoCos into equity capital. - Second step: if conversion is insufficient to sustainably stabilize the bank, resolution at the highest group level by means of a bail-in. - This procedure triggers FINMA’s resolution strategy in cooperation with its key host regulators. ### Depositor protection scheme and funding arrangements - In 2008 the limit on depositor protection was increased from CHF 30,000 to CHF 100,000, and extended to employee pension accounts. - The upper limit for overall secured assets was increased from CHF 4 billion to CHF 6 billion. - In September 2011, the temporary provisions were made permanent in the revised Banking Act. - The Depositor Protection scheme is set up as an ex-post financed association with which all banks in Switzerland must be affiliated. - In the event of a bank going bankrupt, all members transfer to this scheme the amounts required of up to a total amount of CHF 6 billion within five days. - To guarantee this, banks are required to deposit 125 percent of the guaranteed amounts in Switzerland. *IMF staff content from the source PDF chapter.* ### 25. Effective market discipline is promoted by the design of key policy measures, such as ### _cr14264 - 25. Effective market discipline is promoted by the design of key policy measures, such as ### Market discipline, disclosure and bank secrecy - Effective market discipline is promoted by the design of key policy measures, such as those related to resolution of banks, and by a transparency in disclosure of financial accounts. - Observers have noted that disclosure under Swiss accounting rules is less in general than under international standards. - “The philosophy of complete bank secrecy related to individual account holders is being altered in some circumstances under international pressure and as a result of specific situations of questionable behavior.” - Market participants believe these trends will have implications for the business model of certain institutions. ### A. Supervisory Powers, Responsibilities and Functions — Overview - Principle 1: An effective system of banking supervision has clear responsibilities and objectives for each authority involved in the supervision of banks and banking groups. 5 - A suitable legal framework for banking supervision is in place to provide each responsible authority with the necessary legal powers to authorize banks, conduct ongoing supervision, address compliance with laws and undertake timely corrective actions to address safety and soundness concerns. 6 ### Institutional responsibilities and mandates - FINMA - The Swiss Financial Market Supervisory Authority (FINMA) is responsible for supervision of banks in Switzerland. - FINMA is “the authority that supervises the financial market” and a “public institution”. (Financial Market Supervisory Act (FINMASA) Art. 4). - FINMA is a unified supervisor with authority over banks, insurance firms, collective capital investments, and audit companies. (FINMASA Art. 2). - FINMA’s authority covers licensing, supervision, application of corrective actions and sanctions, and issuing regulation in the form of ordinances and circulars. - SNB - According to the National Bank Act (NBA), the Swiss National Bank (SNB) has the mandate to ensure price stability while taking due account of the development of the economy. - Within this framework, the SNB has “to contribute to the stability of the financial system” (NBA Art. 5). - The SNB is responsible for the supply of liquidity and act as a lender of last resort in the event of a crisis (NBA Art. 9). - Two particular areas where the SNB participates in decisions affecting microprudential supervision: - Under the Banking Act (BA) Art. 8 para 3, the National Bank designates—after consulting FINMA—the systemically important banking institutions and their systemically important functions. - Under the Capital Adequacy Ordinance (CAO) Art. 44 the Swiss National Bank can issue a proposal to the Swiss Federal Council to activate, adjust, or deactivate a countercyclical buffer. Prior to issuing such a proposal, the Swiss National Bank must consult with FINMA. ### Cooperation framework between FINMA and SNB - A MOU between FINMA and SNB established in February 2010 covers: - Assessment of soundness of systemically important banks and/or the banking system; - Regulations that have a major impact on the soundness of banks; and - Contingency planning and crisis management. - Coordination bodies: - A high-level steering committee which meets at least twice a year. - A standing committee which meets at least four times a year. - The MOU provides a framework for information sharing including confidential information. - Currently the two largest banks have been designated as systemically important. - The relevant legal fundamentals are made public on FINMA’s website and on that of the Swiss Federal Administration. ### Principle 1 — Essential Criteria findings (EC1–EC7) - EC1 — Responsibilities and objectives of authorities - Finding: FINMA is responsible for supervision; its mandate and public status are set out in FINMASA Art. 4 and Art. 2. - The SNB’s role in financial stability and lender-of-last-resort functions is set out in NBA Art. 5 and Art. 9. - Cooperation arrangements and public disclosure of legal fundamentals are in place. - EC2 — Primary objective of supervision - FINMA’s objectives: “[I]n accordance with the financial market acts, financial market supervision has the objectives of protecting creditors, investors, and insured persons as well as ensuring the proper functioning of the financial market” (FINMASA Art. 5). - For banks, prudential supervision “promotes the safety and soundness of banks and the banking system”. - FINMASA Art. 5 also states that “it (financial market supervision) thus contributes to sustaining the reputation and competitiveness of Switzerland's financial center.” The authorities state this contribution is subordinate to promoting safety and soundness. - There is a Parliamentary initiative to expand FINMA’s objectives to include promoting competitiveness as a primary objective. - FINMASA Art. 7 requires FINMA, in exercising its regulatory powers, to take into account the effect that regulation has on competition, innovative ability and the international competitiveness of Switzerland’s financial centre, in addition to the compliance cost and international standards. - EC3 — Powers to set and enforce prudential standards and to increase requirements for risk profile/systemic importance - FINMA supervises banks and banking groups. - Swiss regulatory framework levels: - Federal acts (e.g., Banking Act (BA), FINMASA) issued by Parliament; federal acts are subordinate to the Constitution. - Ordinances based on parliamentary laws issued by the Swiss Federal Council or occasionally by FINMA; explicit delegation required for administrative units like FINMA to issue ordinances. - Circulars issued by FINMA to set forth its practice; binding for FINMA and subject to board approval; circulars do not have the characteristics of Acts or Ordinances and may be appealed in a concrete case. - FINMA also issues guidance (FAQs, position papers) which, while not formally having the same degree of enforceability, are understood by banks and external auditors to complement ordinances and circulars. - EC4 — Updating of laws, regulations and prudential standards; consultation - Authorities monitor national and international financial market developments to identify risks and the effects of international regulations on Switzerland. - Examples of recent revisions: - BA most recently amended in September 2011; - BO June 2012; - the new CAO was issued June 2012; - a number of circulars have been issued each year. - Some circulars, particularly those related to specific risk management requirements, are not revised frequently enough. - FINMA communicates regulatory initiatives and their status; draft regulations and explanatory reports are generally submitted for open consultation and comments received are generally published with a consultation report. - Public hearings, workshops, and joint working groups may be used when justified. - Industry participants generally satisfied with communication with FINMA but some requested more frequent and candid dialogue. - EC5 — Access to boards, management, staff, records; group and foreign bank supervision - (a) FINMASA, Art. 29: supervised entities, their management and staff, auditors, and qualified investors or substantial participants “must provide FINMA with all information and documents that it requires to carry out its tasks.” - (b) FINMA conducts group supervision when a “financial group” or “financial conglomerate” meets the statutory definition (BA Art. 3b f); group supervision can cover domestic and cross-border related entities but excludes entities conducting non-financial activities. - (c) Branches and subsidiaries of foreign banks must obtain a license from FINMA and are subject to similar regulatory and supervisory requirements, including information furnishing. - EC6 — Powers for corrective action, sanctions, license revocation, and resolution cooperation - FINMA has the power to take corrective measures and escalate as appropriate: - Regular supervision: request immediate corrective measures and impose time limits. - Enforcement (Art. 30 FINMASA): open administrative enforcement proceedings if required conditions met. - Interim measures (Art. 36 FINMASA): appoint investigating agent, order interim measures. - Final measures (Art. 31 FINMASA): order restoration of compliance; possible measures not pre-defined. - Additional powers: - Bar a person from management for up to five years (Art. 33 FINMASA). - Confiscate profit made through serious violation of supervisory provisions (Art. 35 FINMASA). - Revoke banking license (Art. 37 FINMASA). - FINMA is the competent authority for resolution and/or liquidation of banks: - FINMA decides on liquidation of a bank (Art. 33 para 1 BA). - FINMA may appoint liquidators subject to its supervision (Art. 33 para 2 BA) or assume the role of liquidator itself (through a specialized unit). - FINMA recognizes effects of bankruptcy/liquidation proceedings over a foreign bank in Switzerland. - EC7 — Powers to review parent companies and affiliates - FINMA establishes consolidated supervision at the level of the parent company if the group meets the definition of financial group; parent companies are included in group supervision and required to provide information and documents. - “Qualified investors or that have a substantial participation” in a bank must provide information and documents. - Companies affiliated with parent companies operating in the financial sector are subject to group supervision; non-financial affiliates are exempted from group supervision and FINMA has no direct power over them. ### Assessment of Principle 1 - Overall assessment: Compliant - Comments: - Changes to the objectives of FINMA to elevate promoting competitiveness to a main objective (as described in EC1) would risk confusing FINMA’s mandate and would be contrary to this CP. - Despite the compliant grade, weaknesses noted in FINMA’s powers affect other CP assessments: - Existence of gaps in the regulatory framework; - Infrequency of updating circulars; - Use of FAQs and other secondary documents to augment regulations; - These issues cause challenges in consistent application of the regulatory framework and in supervisory activities. *Source: Excerpt from the IMF detailed assessment on Switzerland (Principles 1–2, supervisory framework, EC1–EC7).* ### Chapter 2 of FINMASA and further underpinned by the secondary regulations on the ### _cr14264 - Chapter 2 of FINMASA and further underpinned by the secondary regulations on the ### Legal framework and institutional independence - FINMASA Arts. 9 and 10 and the related secondary regulation on the organization of FINMA specify the terms and conditions of the composition and tasks of the Board of Directors (BoD) and the management board. - FINMASA Art. 9 para 1 requires BoD, which is appointed by the Federal Council and comprises seven to nine members, to be independent of the supervised persons and entities. - The Chair of BoD is not permitted to carry out any other economic activity nor hold any federal or cantonal office unless it is in the interest of fulfillment of the tasks of FINMA (FINMASA Art. 9 para 4). - FINMASA Art. 21 para 1 requires FINMA to carry out its supervisory activity autonomously and independently. - FINMA is funded independently from the general federal budget by levying fees for individual cases and services as well as annual supervision charges on supervised entities (FINMASA Art. 15). - FINMA’s budget is only subject to approval by FINMA’s BoD. The relevant Ordinance issued by the Federal Council sets a broad framework of fees and charges but it does not constrain FINMA’s ability to charge banks. - FINMA’s annual report and three year strategic plan is subject to approval by the Federal Council. At least once a year, FINMA discusses the strategy for its supervisory activities and current issues of financial center policy with the Federal Council (FINMASA Art. 21 para 2). - FINMA has its own Personnel Ordinance (subject to approval by the Federal Council) which provides FINMA with increased flexibility regarding the remuneration of its employees compared to the federal administration. - FINMA coordinates with other relevant authorities such as FDF and SNB for regulation above FINMA level (acts and federal ordinances) and for international policy development. - There are no observers from government, politics or industry present in meetings of FINMA’s BoD or Executive Board. The government cannot issue operational instructions to the supervisory authority. - FINMA is accountable to the Federal Parliament, which exercises general oversight (“Oberaufsicht”) over FINMA according to the ordinary working modalities of the Swiss Parliament (FINMASA Art. 21 para 4). - There are no provisions that allow Parliament or the Federal Council to intervene in operational issues under FINMA’s responsibility, such as supervisory actions and decisions on individual banks. ### Governance, appointment and removal (EC2) - The Federal Council appoints the FINMA’s BoD and must ensure the appropriate representation of both genders. It appoints the Chair and the Vice-Chair and determines the level of remuneration (FINMASA Art. 9 para 2). - BoD composition and terms: - BoD has to be comprised of seven to nine expert members, who are independent of the supervised persons and entities. - Members of BoD, including the Chair and Vice Chair, are appointed for a term of office of four years; each member may be reappointed twice (FINMASA Art. 9 paras. 2 and 3). - Removal: - The Federal Council removes members of BoD “if the requirements for holding office are no longer fulfilled” (FINMASA Art. 9 para 5). There is no requirement to disclose the reason(s) for removal. - Executive leadership appointments: - The Chief Executive Officer (CEO) and the members of the Executive Board are appointed by the BoD. - The appointment of the CEO is subject to approval by the Federal Council (FINMASA Art. 9 para 1). - The Federal Council has to approve the decision of BoD to terminate the employment of CEO “if the requirements for holding office are no longer fulfilled” (FINMASA Art. 9 para 5). - FINMA Personnel Ordinance Art. 9 para 4: termination of an employment contract, including the one for CEO, must be for objective reasons and they have to be communicated in writing to the person concerned. - For the CEO and other members of the Executive Board, there is no requirement to disclose the reason(s) for removal. ### Publication of objectives and accountability (EC3) - FINMASA Art. 9 provides that BoD determines the strategic objectives of FINMA and submits them to the Federal Council for approval. - The strategic objectives are determined for a period of 3 to 4 years and published on FINMA’s website (Strategic Goals 2013 to 2016). - FINMASA stipulates that BoD “draws up the annual report and submits the annual report to the Federal Council for approval prior to publication.” (Art. 9, Art. 22). - There is an annual hearing with the relevant Parliamentary Committees. ### Internal governance, decision-making and conflicts of interest (EC4 & EC5) - Division of responsibilities: - FINMASA Art. 9 stipulates that the BoD decides on matters of substantial importance. - FINMA’s Organizational Rules Art. 2 define “matters of substantial importance” to include: - matters of considerable consequence for financial markets or of systemic importance as evidenced at one or more of the supervised institutions; - matters of particular interest for the general public; - matters that result in establishing rules of practice or a change thereto; - matters involving a high liability risk for FINMA or having a long-term effect on FINMA’s reputation; and - matters that are designated as such by at least three members of the Board of Directors. - The Executive Board (consisting of CEO and Head of Divisions) decides all matters that do not fall to BoD. In a few cases of lesser importance, the Executive Board may transfer this competence to the divisions (Organizational Rules Art. 14). - Emergency and timeliness: - BoD and Executive Board can, in urgent cases, pass resolutions via circular (including fax and email). - The Chair of the BoD can take necessary decisions (Chairman’s resolutions) in lieu of the BoD (FINMA’s Organizational Rules Art. 9). - Conflicts of interest and conduct: - BoD members are required to be independent of the supervised persons and entities (FINMASA Art. 9). - The Chair of the BoD is not allowed to carry out any other economic activities, nor hold any federal or cantonal office, unless they are in the interest of fulfilling FINMA’s tasks (FINMASA Art. 9). - New rules introduced in December 2013 prohibit BoD members to engage in any activities in supervised institutions, although it will become effective from 2016. - BoD issued a Code of Conduct applicable to BoD and all staff members including members of the Executive Board; it prescribes rules regarding real and perceived conflicts of interest. - FINMA staff who wish to assume an outside employment position need to get an approval. FINMA Personnel Ordinance regards outside work that results in a conflict of interest as incompatible with employment at FINMA. - Restrictions exist on transactions of securities of supervised entities, with somewhat relaxed rules for BoD members who are not chair/vice-chair. - The Code of Conduct requires BoD, Executive Board and senior management to recuse themselves from matters concerning a supervised entity at which they were employed within the previous year. - Protection and sanctions: - FINMA’s Code of Conduct includes the duty to protect the confidentiality of official matters (Art. 14). - FINMA has rules on the appropriate use of information (Regulations on the protection of information). - Sanctions such as dismissals can be imposed by FINMA for violations (FINMA Personnel Ordinance Art. 10). - A breach of official secrecy is liable to prosecution (Swiss Criminal Code Art. 320). - Perception and quality: - The assessors found the quality of FINMA staff to be very high. This view is generally shared by industry members met by the assessment team. ### Resources, financing and operational capacity (EC6) - Funding and budgetary control: - FINMA is fully financially independent and has a stable and continuous source of funding. - FINMA is funded by directly levying fees for individual cases and services as well as annual supervision charges on supervised entities (FINMASA Art. 15). - FINMA’s costs not covered by specific fees are borne by the supervised banks. - FINMA determines its budget for staff expenses itself, and the related fees and charges, on the base of its resource planning. - Staffing and external expertise: - FINMA views that it has adequate resources to conduct effective supervision and oversight as well as regulatory work on banks. - FINMA integrates external audit firms as an “extended arm” of the supervisory process, reducing the need for specialized resources internally. Audit firms charge the costs of the regulatory audit directly to banks. - FINMA’s budget for the banking supervision department has expanded from CHF *Source: _cr14264 - Chapter 2 of FINMASA and further underpinned by the secondary regulations on the (IMF PDF).* ### 39.5 million in 2009 to CHF 65 million in 2013. The number of staff has increased from 371 ### _cr14264 - 39.5 million in 2009 to CHF 65 million in 2013. The number of staff has increased from 371 ### Staffing levels and allocation - Expenditure and headcount evolution: - "39.5 million in 2009 to CHF 65 million in 2013." - Number of staff: "371 FTE in 2010 to 442 FTE in 2012." - Bank-related staffing: - Bank-related staff increased "from around 87 FTE in 2010 to 98 FTE in 2012." - Of these bank-related staff: "some 38 are for off-site supervision and 22 are in risk management, both of whom also perform FINMA lead reviews." - "Authorization accounts for some 13 FTE and resolution/legal some 10-20 FTE." - External audit resources: - "External auditors spend around 700 FTE per year for audit work in recent years." - Of that, "only some 200FTE of that is for regulatory audit across all categories of firms for normal supervision and some 135FTE is for special audits and model approval." - FINMA lacks statistics for regulatory audit by category of banks; combined data suggests "over two thirds would be for the Category 1 banks and foreign banks." - Off-site supervisory coverage by bank category: - "FINMA has five off-site staff for each major bank, one each for the three Category 2 banks, seven for the approximately 30 Category 3 banks and 20 staff for the approximately 300 category 4 and 5 banks." - "Only some five of the risk management FTE time goes to banks in Categories 2–5." - In specialist areas (e.g., operational risk) "specialist staff is very limited." - Personnel policy and turnover: - "FINMA has put in place a head-count freeze." - Recent turnover: "6.8 percent in 2012, compared to 10.1 percent for FINMA overall." - Senior management and the BoD view current staffing as adequate and prioritize consolidation after rapid growth since FINMA’s establishment. ### Budgets, training, and IT - Budget process and controls: - FINMA queries "the scope of costs for external experts" with each department; CEO/Executive Board and Board of Directors control and approve expected costs. - Training budget explicitly set aside. - Training budget amounts: - "In the years 2009 to 2011, the amount was CHF 2,000 per FTE per year, since 2012 the amount has been raised to CHF 3,000 per FTE." - "Every department has the responsibility to control the necessity of training for each person and to plan the training of staff." - Information systems and travel: - "Regarding the budget for information system, required budget has been allocated." - IT tooling needs are clarified, estimated, prioritized, and approved by Executive Board and Board of Directors. - Travel costs (domestic and international meetings, on-site work, cross-border cooperation) are considered during budgeting; FINMA reports no problems with these budgets. ### Use of external auditors and oversight - Role of external auditors: - External auditors provide technical expertise and augment FINMA resources. - Assessors note need for enhanced FINMA oversight of regulatory audit activities: provide guidance, assess auditors’ work, and maintain frequent communications. - Limitations identified: - Some thematic supervisory reviews "are not amenable to being assigned to regulatory auditors." - Where work is outsourced, "more oversight work is needed." ### Resource planning and risk-based allocation (EC7–EC8) - EC7 — personnel planning: - FINMA’s personnel planning aligns qualitative and quantitative staff needs with strategic needs (e.g., Basel III (Capital & Liquidity)). - Succession planning matches planned natural attrition; gaps feed recruitment and development planning. - EC8 — risk-based resource allocation: - Supervisory programs follow a risk-based approach; higher-risk banks receive more resources. - For the two biggest banks: overseen "by a team of five to six people and supported by specialists in the risk unit as well as in the capital unit, making total FTE allocated to the two biggest banks around 30." - For Category 2 banks: "only one person is assigned to a bank." - For roughly 30 Category 3 banks (including cantonal banks): staff are assigned; smaller banks are covered by relationship managers with portfolios of "at least four to five banks." - Supervisors of smaller and mid-size banks indicate "between one-third and one-half of supervisory time overall is spent on AML/CTF and cross-border issues." ### Legal protections for supervisors and staff (EC9) - Liability and protection: - "FINMASA Art. 19 provides that FINMA is liable only if: a) its management bodies or its staff have committed a breach of fundamental duties; and b) loss or damage is not due to a breach of duty by a supervised person or entity." - Staff are not personally and directly liable in civil law for discharging duties, though prosecution is possible if permitted by the Department of Justice. - If a staff member acts in good faith, FINMA’s policy is to "cover the expenses of a criminal procedure (e.g., court and lawyer fees)." - Litigation history: - Litigations against FINMA "have been relatively limited" and "there has not been any court ruling that is against FINMA since its establishment." No prosecutions or litigation against staff members. ### Assessment, key shortcomings, and recommended actions (Principle 2) - Assessment: - "Assessment of Principle 2 — Materially Non Compliant." - Assessors’ findings: - Current FINMA resources are "not sufficient to supervise and regulate the entire banking system effectively, including effective oversight of supervisory work done by external auditors." - Head-count freeze "needs to be relaxed to achieve compliance." - Resource shortfalls are "acute for middle sized banks" that are domestically systemically important; limited staff "constraining further in-depth supervisory work" even for the largest banks. - Need for more strategic work on thematic issues (operational, legal, reputational risks) for mid-size and smaller banks. - Some important circulars "are not updated as frequently as desirable," partly due to lack of personnel. - Governance concerns: potential legal-framework shortcomings (requirement to consider competitiveness of Swiss financial center) could compromise safety and soundness focus; Parliamentary initiative to upgrade competitiveness element and limit FINMA’s Pillar 2 authority is a concern. - Conflict-of-interest rules for FINMA BoD members were "incomplete" for members who were not Chair or Vice Chair; authorities recently strengthened rules but assessors suggest further delineation. - Recommended actions (verbatim): - "Increase resources for banking regulation and supervision in FINMA." - "Do not elevate the competitiveness objective in FINMA mandate. Instead, consider removing the reference to competitiveness if needed to avoid confusion and confirm that the primary objective for the supervisor is to promote the safety and soundness of banks and banking groups." - "Clarify and limit what decisions on individual institutions FINMA’s board should take." - "Maintain the current FINMA power to set Pillar 2 add-ons on a group of banks." ### Cooperation, information-sharing, and crisis coordination (Principle 3 and EC1–EC5) - Domestic cooperation: - Tripartite MOU between FINMA, the Federal Department of Finance (FDF) and the Swiss National Bank (SNB) for information exchange and crisis cooperation. - Tripartite MOU establishes a senior-level meeting "that meets at least twice a year" and sets up a Steering Committee (SC) and a working-level Committee on Financial Crisis (CFC) that meets "at least once or twice in a year." - CFC in practice meets regularly and frequently to share information on the Swiss financial sector. - Cooperation with prosecution and other domestic authorities: - FINMA "shares relevant confidential information and cooperates with federal and cantonal prosecution authorities, according to FINMASA Art. 38." - Information can be shared with other domestic regulators including the Takeover-Board and the Competition Committee under "AMLA Art. 29." - International cooperation: - FINMA "has MOUs with 17 jurisdictions, including most major financial centers." - FINMA is an active organizer/participant in Supervisory Colleges; for the two big Swiss banks FINMA organizes annual "general colleges" and semi-annual "core colleges" with key US and UK regulators. - FINMA conducts joint supervisory reviews with UK and US supervisors; exercises include sending FINMA staff to on-site work by foreign supervisors and FINMA leading reviews with participation by UK and US supervisors. - "FINMASA Art. 42 authorizes FINMA to cooperate with a foreign supervisory authority even in the absence of a specific agreement," with confidentiality declaration requirements for requests involving confidential data. - FINMA "explains strong cooperation with other foreign supervisory authorities was necessitated and took part in international cases" (e.g., LIBOR, substantial trading loss of a big Swiss bank outside Switzerland). - Confidentiality safeguards (EC3–EC4): - Domestic legal bases for information sharing: "FINMASA Art. 38, BA Art. 23bis, AMLA Art. 29"; professional secrecy under "BA Art. 43, Criminal Code Art. 320." - For foreign authorities, FINMASA Art. 42 requires foreign supervisors to be subject to official or professional secrecy and to use information "exclusively for the direct supervision of regulated institutions"; FINMA generally requires an ad-hoc declaration. - FINMA is an ordinary member (member A) of the IOSCO MMoU; Articles 10 and 11 emphasize confidentiality and specialty. - If legally compelled to disclose confidential information, FINMA will "promptly notify the originating supervisor" and will "use all reasonable means to resist" disclosure where consent is not given. - Resolution support and crisis framework (EC5): - FINMA acts "as both supervisor and resolution authority." - Tripartite MOU sets up SC and CFC: SC chaired by Head of FDF; CFC chaired by CEO of FINMA (with Vice Chair of SNB Governing Board and Director of Federal Finance Administration as members). - "BA Art. 37f allows FINMA to coordinate with foreign authorities in case of foreclosure proceedings against a bank involves processes abroad." ### Licensing authority, criteria, and processes (Principle 4 and 5) - Authority and process: - "FINMA is the legally established authority that issues banking licenses (BA Art. 3 para 1)." - Licensing handled by Authorization Department within Banks division; authorization and supervisory sections "work closely together." - "55 preliminary as well as formal applications has been submitted in the last five years." - Licensing conditions and controls: - New licenses contain conditions; initial business activities are limited based on bylaws and internal rules authorized by FINMA and may be expanded in a controlled manner. - Interim audits may be conducted during the first few years; external auditor (not becoming regulatory auditor) must assess applicant compliance with licensing requirements. - Licenses can be refused by formal decree; appeals to Federal Administrative Court; licenses based on incorrect information can be revoked under general administrative procedural law. - Statutory licensing criteria (BA Art. 3 and BO): - Required elements include: - "Clear scopes of business and adequate organizational frameworks corresponding to their business activities;" - "Establishment of separate bodies for management for one and for providing direction, supervision and control;" - "Fully paid up capital that exceed the minimum determined by the Federal Council (CHF 10 million (BO Art. 4 para 2));" - "Persons for management who are of good reputation and be able to guarantee the proper conduct of business operations;" - "Natural persons or legal entities that has qualified participation to guarantee that their influence will not have a negative impact on the sound and prudent management of banks;" - "Persons in charge of management to be domiciled in a place where they can exercise effective management and assume responsibilities." - FINMA specifies requirements further via ordinances, circulars and FAQs; FINMA publishes a guideline listing documents applicants must submit (business plans, budgets for first three years, information on persons responsible for management, organizational framework). - Fit and proper and ownership transparency: - Fit and proper tests applied to qualified shareholders and significant influencers (ongoing requirement: "BA Art. 3 para 2 let. c.bis"). - Qualified participation defined as "holding directly or indirectly at least 10 percent of the capital or voting rights of a bank or persons who are in any other way able to influence the bank’s business activities in a significant manner." - Focus for qualified shareholders is on reputational aspects; fit and proper for directors/managers assesses competence and integrity. *Italic: Source — _cr14264 (extract) — IMF staff assessment and findings as provided in the supplied content.* ### references and other means, including interviews if necessary. To enforce the fit and proper ### _cr14264 - references and other means, including interviews if necessary. To enforce the fit and proper ### Fit and Proper, Ownership Disclosure and Initial Capital (ECs referenced: EC6–EC7, EC9–EC11) - Fit and proper enforcement - FINMA can impose sanctions including suspension of voting rights or revocation of the banking license (BA Art. 23 ter). - BO Art. 6 para 2 requires legal entities with qualified participation to provide information on group structures; para 4 requires declaration whether participation is for own account or on a fiduciary basis. - Qualified shareholders must disclose origin of wealth and provide evidence of capacity to inject further capital if needed. - Qualified shareholders and banking institutions are legally required to report relevant shareholdings and any changes to FINMA. - Initial capital (EC6) - BO Art. 4 para 1: fully paid in capital must amount to at least CHF 10 million. - If founding shareholder contributes non-cash assets, value and liabilities must be verified by a recognized auditing firm and confirmed to FINMA before authorization. - Conversion of existing corporation to a bank: entire amount of Core Equity Tier 1 can be counted to constitute initial capital with FINMA permission (BO Art. 4 paras. 2,3). - Exception exists for banks affiliated with a central organization and guaranteed by it (BO Art. 4 paras. 2,3). - Licensing assessments of board and senior management (EC7) - Fit and proper criteria include: (i) skills and experience commensurate with intended activities; (ii) no record of criminal activities or adverse regulatory judgments. - BA Art. 3 para 2: persons charged with administration and management must be of good reputation and guarantee proper conduct of business operations. - BO Art. 6 para 1: board and management must enjoy excellent reputation and prove no previous convictions; disclose details of completed or pending legal/administrative proceedings. - FINMA FAQs specify expectations for collective leadership skills and representation of finance and accounting, risk management, controlling and compliance. - Typical evidence: nationality, residency, qualified participations, pending proceedings, signed CVs, references, extracts from Central Penal Register. - Additional evaluation tools: investigations of professional/private environment, inquiries with other authorities/foreign embassies, online tools (World Check, Factiva, Google, IOSCO-Portal), interviews (regularly Chair, CEO, other key positions), credible references. - If doubts remain and candidate not replaced, license application will be rejected; FINMA states this occurs from time to time. - Business strategy, organization and financial projections (EC8–EC9) - Business plan and operational strategy are key elements in license approval; operational structures must be balanced proportionally with planned activities. - Required submissions include: - Detailed description of business activities and processes; - Articles of Incorporation, partnership agreements and regulations; - Organization and additional organizational information (staffing, infrastructure, information system, outsourcing, internal control and risk management, separation of functions, compliance and due diligence, internal audit); - Business plan for the first three financial years; - Financial statements for the first three financial years (balance sheets, income statements). - FINMA analyzes: balanced management structure (Board and management), adequate internal organization incl. separation of functions, effective internal control system (BO Art. 9, FINMA Circular 08/24), AML/CFT measures (AMLA, AMLO-FINMA), proper outsourcing (FINMA Circular 08/7). - Pro forma financials: applicants submit business plans and financial statements for first three business years, including scenario results and external auditor assessment reports on business plans and budgets. FINMA accepts initial unprofitability if medium-term plan is sound. - Monitoring new entrants and conditions on licenses (EC11) - Licenses are initially linked to requirements and conditions; scope of activities during setup is limited and can be extended gradually when resources permit. - Newly authorized institutions are subject to immediate, ongoing supervision; interim audits by external auditors are requested. ### Transfer of Significant Ownership (Principle 6; EC1–EC6) - Definitions and thresholds - BA Art. 3 para 2: “qualified participation” defined as direct or indirect holding of at least 10 percent of capital or voting rights or ability to influence bank’s business activities in a significant manner. - Qualified participation reporting thresholds also referenced at 20 percent, 33 percent, and 50 percent of capital or voting rights. - Notification and approval powers (EC2–EC3) - BA Art. 3 paras. 5 and 6: FINMA must be informed in advance about any changes in qualified participation (buyers, sellers, and the bank); UBO regarded as indirect qualified participation and subject to reporting. - Transaction can only be carried out once FINMA has approved the notification. - FINMA can prohibit intended changes, revoke changes based on incorrect information (FINMASA Art. 31), revoke licenses (Art. 37 FINMASA), suspend shareholders’ voting rights (BA Art. 23ter). - In practice: no transfer of significant ownership denied in the past five years; a few applications withdrawn after FINMA communicated no prospect of approval. - Reporting and corrective powers (EC4–EC6) - Banks must report all direct and indirect qualified participations at least once a year and within 60 days following the end of the financial year (BA Art. 3 para 6); BO Art. 6a requires identity and share details and necessary documents. - FINMASA Art. 29 para 2: supervised banks must report immediately any incidents of substantial importance to supervision, including information about qualified shareholders that may negatively affect reputation or sound business activities. - Assessment summary - Assessment: Largely Compliant. - Comment: Lack of detailed public guidance on what constitutes “ability to influence the bank’s business activities in a significant manner”; recommendation for general qualitative criteria and concrete examples to establish shared understanding. ### Major Acquisitions and Investments (Principle 7; EC1–EC5) - Three restriction/requirement streams (EC1) - Notification/approval before establishing a subsidiary, branch, agency, or representative office abroad (BO Art. 3 para 7; Guidelines on preliminary reporting requirements for establishing physical presence abroad). Includes acquisition of participating interests in foreign financial sector companies. - BA Art. 6b: required information includes business plan, address of business offices abroad, names of persons responsible for administration and management, audit company, and supervisory authorities of the host country. - Significant acquisitions/investments that require changes to articles of incorporation, shareholder agreements or bylaws require FINMA approval; such changes may not be entered in the Commercial Register unless approved by FINMA (BA Art. 3 para 3). - Limits on investments: investments in any company by a bank or group may not exceed 15 percent of net own funds; total financial fixed assets of a non-affiliated company acquired for investment may not exceed 60 percent of net own funds (BA Art. 4 para 4). - CAO Art. 13 provides exceptions where acquisitions are for restructuring or temporary emission or difference covered by eligible capital. - BA Art. 4 bis prescribes bank’s participation in single company must be proportionate to eligible capital. - Criteria and assessment (EC2–EC4) - For foreign operations, Guidelines require demonstration that bank is organized properly and has sufficient financial means; FINMA examines host country legal/regulatory constraints on information flows and adequacy of home consolidated supervision. - For acquisitions requiring changes to organizational rules, banks must meet general banking operation requirements including organization, internal control and risk management; BO Art. 7 Para 3 requires scope of operations commensurate with financial resources and administrative organization. - FINMA assesses adequacy of financial, managerial and organizational resources. - Non-banking activities (EC5) - No specific structural restrictions on bank investments in non-financial activities; assessment occurs where acquisitions require organizational changes, but no specific provision focused on risks from non-banking activities. - Assessment summary - Assessment: Compliant. ### Supervisory Approach and Risk Assessment (Principle 8; EC1–EC8) - Bank categorization and supervisory resourcing (EC1) - FINMA classifies banks into categories 1–5 by relative size and complexity: - Category 1: the two biggest banks (globally systemically important). - Category 2: the three next largest. - Category 3: some 30 banks (most cantonal banks). - Category 4: some 70 banks. - Category 5: the rest, some 160 banks and 50 securities firms. - Median assets for Category 5 banks: CHF250m. - FINMA assigns Key Account Managers (KAMs) and has approximately 24 KAMs each with a portfolio of institutions in categories 3–5. - Supervisory methodology - Combination of annual regulatory review/audit by external auditors (appointed by banks from 7 accredited audit firms and some 150 lead auditors), FINMA-mandated third party reviews, and FINMA’s own offsite and limited on-site reviews. - Risk assessment process: - Assess inherent risk (high/medium/low) across audit areas. - Assess quality of controls (H/M/L). - Produce net risk rating. - No formal FINMA-provided criteria for determining inherent risk ratings; control risk definitions provided in guidance. - No formal FINMA process to vet consistency of risk assessments across institutions in advance of regulatory audit work. - CAMELS-based supervisory rating - FINMA has a camels-based supervisory rating with 9 grades, collapsed into three colors: green, yellow, red. - Rating update frequency: quarterly for Category 1–3 banks; quarterly for Category 4 banks with yellow or red grades; end of annual cycle for Category 4 with green grades and Category 5 banks. - No explicit criteria for green/yellow/red; quality control anchored in annual ratings review meetings. - Current distribution: some 60 percent of banks are in green ratings (down from some 80 percent in 2008); approximately 20 percent in amber (yellow). - Forward-looking elements and resolvability - Some forward-looking work introduced (e.g., auditors now required to rate top ten risks for the two large banks). - Resolvability does not formally factor into the rating system; resolution and recovery planning in place for the two large banks. - FINMA can grant relief to progressive capital component requirements if high probability resolvability improves; no such relief decided in practice to date. - Communication and systemic monitoring (EC4–EC5) - FINMA and SNB hold regular meetings; structured semi-annual macro/market risks report (“Risikobarometer”) informs supervisory work. - Examples of system-wide work: mortgage exposure reviews (starting 2010); vulnerability assessment to a potential Eurozone crisis (2012). - Intensive supervision and crisis handling (EC7) - If camels rating downgrades to a pre-determined level (8 in the 1–9 scale), bank supervised by a specialized team (TIS) for intensive supervision and crisis management. - TIS can conduct on-site investigations, interact with owners/shareholders, and recommend enforcement proceedings. - Perimeter issues (EC8) - FINMA intervenes where bank-like activities occur outside regulatory perimeter, including closing relevant entities or imposing requirements to bring activities in line with authorization. - Assessment summary - Assessment: Largely Compliant. - Key comments and identified improvements: - Need greater granularity in inherent risk assessments for major institutions. - Formalize forward-looking elements (e.g., require explicit consideration whether risks are increasing, stable or decreasing). - Provide more guidance for rating criteria and ensure consistency in ratings and supervisory work. - Strengthen FINMA processes to assess and adjust auditors’ risk assessments across groups of institutions. - Increase in-depth theme reviews of control functions and augment FINMA on-site reviews. ### Supervisory Techniques and Use of Auditors (Principle 9; EC1) - Mix of on-site and off-site supervision - Off-site: examination of reports from banks and external auditors (long form regulatory audit reports), meetings with management, supervisory colleges, discussions with other authorities. - On-site: regulatory audits primarily performed by audit firms selected by banks from FINMA-approved list; FINMA also conducts on-site reviews itself or hires and pays third party reviewers. - Role and oversight of regulatory auditors - FINMA views audit firms as “FINMA’s extended arm” to leverage resources given large and global nature of Swiss banking system. - FINMA accredits 7 audit firms and some 150 lead auditors; only lead auditor needs accreditation. - FINMA applies compensating measures to address independence and mindset issues: - Minimum periodicity and depth of work set by FINMA. - Lead partner separation required for regulatory and financial audit for category 1 and 2 banks. - FINMA can de-certify individual partners/senior staff; has done so. - Ex-post quality assurance inspections performed annually for major audit firms and on a 2–3 year cycle for others; approximately 5 regulatory files selected per year. - Audit scope, opinions and limitations - Audit firms provide overall opinion on compliance with regulatory requirements and licensing conditions; long form reports relayed to FINMA and the bank four months after year-end. - Regulatory audit scope and opinions depend on specificity of FINMA guidance; where guidance is high-level, auditors adopt firm-specific or international methodologies—approach varies across firms. - No clear guidance on what constitutes degrees of significance for findings; some audit firms have adopted internal categorization; others rely on partner judgment. - Audit methodologies may focus on adherence to licensing conditions rather than broader risk management or control effectiveness. - Resourcing and work effort (examples) - Regulatory audit on medium size banks: around 1,000-1,500 hours (135-200 person days). - Deep dive reviews at major banks: normally 1,000-3,500 hours (135-650 person days). - FINMA’s own reviews: some 15 reviews over the past two years on the two category 1 banks; approximately 20 total on category 2 and 3 banks. FINMA reviews generally involve 3–4 persons for a total of 15-40 person days. - Identified weaknesses and planned actions - Variability in audit approaches and judgments; lack of criteria makes audit conclusions hard to compare and interpret. - Audit reports may contain significant factual information but insufficient clarity on seriousness of issues. - FINMA has plans to add more specificity to audit instructions in key risk and compliance areas, with significant parts expected in 2014 or 2015. - Assessment summary - Comments: Using auditors provides system-wide annual review capability, but the approach requires enhanced FINMA oversight, improved guidance to auditors to improve risk assessments, increased on-site work, and more cross-institution analysis to ensure consistency and forward-looking supervision. *Italic: Content derived from the IMF assessment document provided in the source PDF.* ### conclusions in areas where there are only very general requirements (such as what ### _cr14264 - conclusions in areas where there are only very general requirements (such as what ### Key observations on conclusions and reporting - Conclusions in areas where there are only very general requirements (such as what constitutes adequate resources in compliance or risk management), or for understanding the extent to which these conclusions were derived from consistent processes across audit engagements and firms. - Prudential audit reports reviewed by assessors often contained considerable factual description of controls or processes and relatively much less on the issues found, their implications or seriousness or the nature of the work done by auditors to support the audit. *Source: _cr14264 - conclusions in areas where there are only very general requirements (such as what* ### conclusions. ### conclusions. ### Use of external auditors and on-site participation - FINMA staff participate in on-site work conducted by foreign supervisors, particularly in the UK and the US for the two big Swiss banks; the experience seems to be some 2-4 of these a year (which are included in the number of FINMA reviews noted above). - FINMA has participated occasionally in prudential audit firms foreign reviews of large bank operations, but this is not regular practice. - FINMA examines the work performed by recognized audit firms, the result of which is communicated at least once a year to the management of the audit firm. Key account managers provide feedback. - FINMA maintains a special quality control unit for performing this quality control; however the number of regulatory reports reviewed is not large (approximately five per year for banks). - Assessors found extensive interaction between FINMA and auditors of major and mid-size banks, with examples of extensive feedback from individual KAMs to auditors on FINMA findings and analysis from other sources. - Shortcomings noted: - Difficulty in determining adequate consistency and in understanding the meaning of regulatory audit outputs (see EC1). - Some enhanced procedures required by FINMA were introduced relatively recently. - Cross-system/theme reviews by auditors may not meet consistent FINMA expectations; few cross-system/theme reviews are performed by FINMA itself. - Insufficient reporting by auditors of the basis for conclusions and of the nature or seriousness of findings. - Recommendation/high-level remedy: - Enhanced strategic risk analysis, more selective depth in on-site work, clearer reporting by auditors to FINMA, more FINMA off-site thematic work to direct and compare auditor findings, and more frequent in-depth individual or theme reviews by FINMA itself (or through fully independent agents). - Consider substantially increasing FINMA participation in on-site work performed by auditors or foreign supervisors. - Consider whether in certain banks the scope of the base regulatory audit could be reduced from time to time so more audit resources can be redirected to in-depth review of higher risk areas. ### Planning and execution of on-site and off-site supervisory activities (EC2) - FINMA has a coherent process for planning and executing on-site and off-site activities with policies and processes ensuring thorough, consistent activities and effective coordination and information sharing between on-site and off-site functions. - Before prudential audits are performed by recognized audit firms, FINMA receives the external auditor’s annual risk analysis and planned audit strategy at a preliminary stage; FINMA must agree to the risk analysis and audit strategy and may require adaptations in case of disagreement. - Off-site supervision follows “standard operating procedures” (SOP) with clearly defined frequencies and time limits that depend on bank category and rating. - For larger or mid-size banks the Key Account Manager (KAM) examines the whole audit report and often communicates extensively with the audit firm. - For smaller banks risk-rated green or low, only the summary report needs to be read unless relevant findings arise. - Major audit firms employ second partner review on all regulatory audit engagements and address understanding of regulatory audit work by affiliates in foreign locations. - Assessors concluded that department heads show good understanding of risks facing institutions, but considering whether issues from one audit might affect regulatory audits of other similar institutions is less structured and frequent. ### Use of information and supervisory tools (EC3–EC5, EC12) - FINMA uses a variety of information to review and assess safety and soundness: prudential reports, statistical returns, information on related entities, and publicly available information; the supervisor determines that information provided by banks is reliable21 and obtains additional information as necessary. - Reporting and analysis practices: - Category 3 banks provide quarterly business/risk management reports; the KAM analyzes these reports and ensures reliability, clarifying open issues with bank representatives and/or audit firms. - Prudential and financial reports are reviewed annually; additional reports (capital requirements, liquidity coverage, exposure to group) are requested as necessary. - Supervisory tools deployed include: - analysis of financial statements and ratios from the rating system; - business model analysis; - horizontal peer reviews; - review of bank stress test outcomes; - analysis of corporate governance, risk management and internal controls. - Communication and follow-up: - Annual assessment letters sent to all banks in category 1-2 and some banks in category 3 (all at least every two years) containing the FINMA rating and required actions. - Banks receive a copy of the regulatory audit report with reservations and comments; audit firms check implementation and confirm resolution status in the next prudential audit. - Systemic and macro-financial analysis: - FINMA’s Camels-based rating system provides quantitative and qualitative information; outlier analysis and system-generated ratings are produced and accepted or modified by the KAM. - FINMA produces a semi-annual “Risikobarometer” to track macroeconomic and regulatory risks and a semi-annual publication with in-depth real estate market analysis; these have led to additional supervisory reviews and more intensive monitoring and capital add-ons under pillar 2 for selective banks. - The SNB has triggered the countercyclical buffer for real estate exposures. - FINMA establishes a semi-annual macro-financial stress scenario used for Loss Potential Analysis for the two Swiss large banks; since 2010 additional analysis of capital plans based on LPA concepts extended to some category 2 and 3 institutions. ### Internal audit and reliance on bank internal controls (EC6) - FINMA Circular 08/24 requires every bank to have an appropriate and qualified internal audit, directly reporting to the board and independent of operational management. - Many smaller and mid-size banks outsource internal audit to recognized external audit firms. - Regulatory auditors must explicitly confirm in their annual long form reports that internal audit resources, competences, cooperation with external auditors, and access to internal audit reports are appropriate and unrestricted. - FINMA has informal benchmarks for expected internal audit resources relative to institution size. ### Contact with boards, communication of findings and follow-up (EC7–EC9, EC10) - Frequency of contact with boards and senior management depends on bank categorization and rating: - Extensive interaction at board level for the two category one banks. - For other categories, contact is markedly less, especially at the board level. - Regulatory auditors can observe boards but do not perform formal board effectiveness assessments. - Key findings: - Long form audit reports capture key findings from prudential audits; FINMA’s on-site review results are systematically communicated in writing and discussed with appropriate management. - For category 1 banks and institutions in categories 2 (annually) and 3 (at least every two years), FINMA formally notifies shortcomings and required actions by assessment letters provided to boards and senior management. - Tracking of follow-up actions is normally through prudential audit process but can also be directly to FINMA; FINMA’s MIS system tracks deficiencies and identifies issues to raise with senior management or boards. - Licensing and notification workload: - Licensing staff reported they can receive 1,000–1,500 notifications a year from each of the two largest Swiss banks, of which normal year 20–30 are licensing requests (rising to up to 100 in special years). - Any adverse matter must be reported to FINMA by the bank’s audit firm or in the annual audit report. ### Use of independent third parties and quality control (EC11, AC1) - Audit firms and lead auditors must be officially recognized by FINMA (see Circular 13/04) and are subject to ex-post quality controls by a special FINMA unit. - FINMA uses third-party experts/firms for targeted interventions and second opinions; when FINMA mandates independent reviews (e.g., model approval), assessors saw examples of detailed clear instructions. - FINMA has an internal audit function consisting of three people; internal audit reviews adherence to SOPs but not content of supervisory reports or risk/rating analysis. - FINMA may rely on quality controls carried out by an independent person not attached to the head of supervisory activities (12 intensive controls and 16 specific controls were made in 2012). ### Assessment of Principle 9 (supervisory techniques and tools) - Assessment: Materially Non Compliant - Comments and rationale: - Recent enhancements to on-site and off-site processes are appropriate and essential and move FINMA towards more intensive supervision, but potential for material control or risk management weaknesses to go undetected remains. - For a jurisdiction with systemically important institutions, the depth of on-site review by auditors and by FINMA is not sufficient, particularly for qualitative risk management and internal control areas. - Annual broad-based regulatory audits are not a substitute for a sufficient number of proactive targeted in-depth reviews in higher risk/control areas. - Basis of conclusions by regulatory auditors is not sufficiently transparent; scope is not appropriate in certain areas. Focus on compliance with legal/licensing requirements means deficiencies in control and governance processes that are part of FINMA expectations are not consistently assessed. - On-site process risks too much negotiation of findings; important findings may be missed or not adequately highlighted; root cause analysis may be insufficient. - Verification of reliance on auditors has increased but appears light. - Recommendations mirror those in the “Use of external auditors” section: enhanced strategic risk analysis, selective depth on-site, clearer auditor reporting, more FINMA thematic/off-site work, more in-depth FINMA reviews (or via independent agents), increased FINMA participation in on-site foreign/auditor work, consider reallocating base audit scope to enable deeper review of high-risk areas. - Implementation note: - Remedying weaknesses will require adequate resources; FINMA’s commitment to a head-count freeze and difficulty of quickly enhancing audit procedures and guidance may delay immediate compliance. With adequate resources and process changes, remediation can be achieved within the existing model of use of regulatory auditors. ### Supervisory reporting (Principle 10) - Assessment: Compliant - Key points: - FINMA Act (Art. 29) and FINMA Circular 08/14 require banks to report financial results and prudential data (on-/off-balance sheet assets and liabilities, profit and loss, asset quality, loan loss provisioning) and risk topics (Basel III capital adequacy and liquidity, large exposures, risk concentrations, credit and market risk capital adequacy inputs, interest rate risk, and share ownership) at single entity and group level as applicable. - Articles 23 to 27 of the Banking Ordinance prescribe chart of accounts and accounting disclosure structure; supervisory reporting uses the accounting framework banks use for their own accounts. - Some nine banking groups use IFRS and there is one using U.S. GAAP; other banks use Swiss GAAP. - Accounting standards for trading book positions are set out in FINMA-Circular 08/02 Accounting – Banks margin Nos. 22–22d; supervisory standards follow BCBS and are implemented in FINMA-Circulars 08/20 Market Risk margin Nos. 32–48 and 08/19 Credit Risk – Banks margin No. 391; valuation adjustments for less liquid positions set out in FINMA-Circular 08/20 Market Risk margin No 47. - Quantitative data is collected by the Swiss National Bank (SNB) for FINMA; SNB performs verification checks. Art. 22 of the Federal Act on the Swiss National Bank requires the prudential audit firm to examine annually that banks are compliant with the duty to provide information. - Scope and periodicity: standard report scope and periodicity are the same for all banks, but additional individual reporting duties apply to categories 1 to 3 where scope and periodicity vary. - FINMA has legal authority (Art. 29 FINMA Act) to request and receive information from supervised persons and entities, including internal management information and ad-hoc reports. - Limitations and recommendations: - Use of different accounting standards reduces comparability, but not seriously enough to undercut the compliant rating. - FINMA should be given explicit authority to sanction banks for misreporting; currently FINMA does not have explicit authority to sanction banks for misreporting and relies on prudential audit firms to confirm compliance and deadlines. ### Corrective and sanctioning powers (Principle 11) - Key powers and practices: - FINMA raises supervisory concerns early and requires timely corrective actions, documented in assessment letters for relevant categories; corrective measures are monitored via written progress reports typically monthly or more frequently until resolution. - FINMA has an appropriate range of supervisory tools and uses general authority including licensing to impose conditions short of formal enforcement (limits on business activity, Pillar 2 surcharges, other measures). - FINMA Act provides formal enforcement authority where a bank “violates provisions of the legislation or if there are other irregularities”; administrative procedures allow interim enforcement decrees when speedy action is necessary. Decrees are appealable on legal or procedural grounds but not generally on FINMA discretion in interpreting regulatory standards. - Decrees can restrict or prohibit business activities, request management changes, set capital ratios, suspend shareholders’ voting rights or withdraw a banking license. - FINMA does not have ability to impose monetary penalties; assessors note FINMA staff and leadership consider this tool not essential to achieving supervisory mandate. FINMA can refer serious matters for criminal enforcement where fines are possible and can confiscate profits made by supervised entities through serious violation of supervisory provisions (Art. 35 FINMASA). - FINMA may intervene if an institution is at risk of breaching capital or liquidity thresholds by requesting or requiring capital injections or other measures up to revocation of license or insolvency proceedings. Evidence exists of use of these tools in practice. - Practices for escalation: - FINMA follows up conclusively and in a timely manner on identified matters and may require regular written progress reports to check corrective action implementation. *Source: _cr14264 - conclusions.* ### 1. Regular intervention: FINMA will address the issue with the bank under its regular ### 1. Regular intervention: FINMA will address the issue with the bank under its regular ### Regular intervention - FINMA will address the issue with the bank under its regular supervision, or if necessary with the special team focusing on intensive supervision. - It may request the bank to take immediate corrective measures to restore compliance with the law and set time limits for the implementation. - Such corrective measures might include: - the restriction of the current business activities of the bank (e.g., prohibition of business activities in certain markets), - imposing more stringent prudential limits and requirements (e.g., capital or organizational requirements), - withholding approval of new business activities or acquisitions (e.g., acquisitions of other business units/teams), - restricting or suspending payments to shareholders or share repurchases, - restricting asset transfers, - barring individuals from the banking sector, and - replacing or restricting the powers of managers, board members or controlling owners. - If the bank does not implement the requested corrective measures, the issue will be further escalated under regular supervision and may lead to enforcement proceedings. ### Enforcement: triggers and legal basis - FINMA will open administrative enforcement proceedings if: - (a) the bank does not implement the requested corrective measures under its regular supervision, - (b) it is apparent that the bank is unable or unwilling to implement the required corrective measures, or - (c) the situation poses immediate risks to the bank or the banking system or to the interests of depositors. - Legal basis cited: Art. 30 Financial Market Supervision Act, FINMASA; see Enforcement policy. ### Interim measures in enforcement proceedings - In enforcement proceedings, FINMA can order interim measures to safeguard the situation. - In particular, FINMA can appoint an investigating agent to implement the required corrective measures (Art. 36 FINMASA). - Depending on its mandate, the investigating agent has the authority to act for the bank instead of the former management (i.e., interim management). ### Final measures in enforcement proceedings - FINMA can order the restoration of compliance with supervisory law (Art. 31 FINMASA). - FINMA has technical discretion in deciding which corrective measures are required to restore compliance. - Examples of measures FINMA has ordered in the past: - restrict the cross-border activities of a bank, - order the closing of branch offices in order to limit business risks, - impose prudential limits and requirements on a bank’s business, - withhold approval of new activities or acquisitions, - restrict or suspend payments to shareholders or share purchases, - restrict asset transfers. - Sanctions and personnel restrictions: - FINMA may bar a person from acting in a management capacity in the banking sector for a period of up to five years if he/she is responsible for serious violation of supervisory law (Art. 33 FINMASA). - It can prevent a bank from engaging a person for a senior executive position who does not provide assurance of proper business conduct (Art. 3 para let. c BA). - FINMA may replace or restrict the powers of managers or board members and is authorized to appoint an investigating agent. - FINMA also may suspend the voting rights of controlling owners if their conduct is detrimental to the institution (Art. 23ter BA). ### Outcomes and remedies - Often a bank will implement the required corrective measures while the enforcement proceedings are still open. - If this is the case, FINMA may still issue a declaratory ruling (Art. 32 FINMASA) and make its final ruling public (“name and shaming”, Art. 34 FINMASA). - FINMA is authorized to disgorge profits made through a serious violation of the supervisory provisions (Art. 35 FINMASA). *SWITZERLAND INTERNATIONAL MONETARY FUND 73* ### 3. Resolution ### 3. Resolution ### Resolution overview - If a bank no longer fulfills the requirements for its activities or seriously violates the supervisory provisions, FINMA can revoke the bank’s license (Art. 37 Para 1 FINMASA). It will be dissolved. FINMA may appoint one or several liquidators responsible for interim management of the bank (Art. 33 Para 2 BA). - As part of restructuring (Art. 25 f. BA), FINMA may facilitate a takeover by or merger with a healthier institution. - Assessors noted enforcement powers are used in practice: over the recent past there have been up to 20–25 bank exits a year, of which 3–4 have been involuntary through liquidation or enforcement action, and the rest through voluntary exit and M&A. - FINMA is the liquidation authority for banks and has considerable experience in managing exits from the sector effectively over the recent past. - Insolvency authority for FINMA is shortly to be extended to holding companies in financial groups. - FINMA is also strengthening its effort over smaller banks. ### EC5 — Supervisor applies sanctions to banks and individuals - FINMA opens enforcement proceedings against individuals for violations of supervisory law when necessary. - If it finds a person responsible for a serious violation of supervisory provisions, FINMA may prohibit this person from acting in a management capacity in the banking sector for a period of up to five years (Art. 33 FINMASA). - Actions against individuals are far less frequent than actions against banks. - FINMA may find a person no longer provides assurance of proper business conduct (Art. 3 para 2 let. c BA) and thus is unfit to serve as a senior executive officer in the banking sector. - Where FINMA has doubts regarding an individual's ability to provide assurance of proper business conduct, it will: - issue a letter with this requirement to the individual; - register the person in a “Watch List”; - assess fitness if the individual subsequently applies for an influential management position, based on available evidence of past conduct. - Assessment re principle 11: Compliant. ### EC6 — Corrective actions and ring-fencing - FINMA is authorized to take corrective actions required to shield an institution from financial or other risks connected to its parent company, affiliates, shareholders or other related entities (e.g., in parallel-owned banking structures). - Possible measures include: - financial ring-fencing, - additional capital requirements, - restrictions on dividend payments, - organizational measures (e.g., a management structure entirely or substantially independent of related entities). - FINMA may suspend the voting rights of a shareholder if their conduct is detrimental to the institution (Art. 23ter Banking Act). - Certain of these measures have been used in recent years. ### EC7 — Cooperation on orderly resolution and resolvability - FINMA has required the two major banks to prepare recovery and resolution plans, and has had extensive discussions with these banks about those plans. - FINMA is assessing what changes in banks’ structure and operations are needed to enhance resolvability. - FINMA has led supervisory crisis management colleges involving the U.S. and the U.K. - FINMA has considerable experience in managing exits and is the liquidation authority for banks. - FINMA is developing global resolution strategies for major banks and working with key host regulators on a single point of entry approach (see EC5/EC6 in later sections). - Resolution plans and recovery plans are being shared with Crisis Management College members; resolution plans will specify home-host interaction and coordination when triggers are hit. ### Additional criteria — AC1: Timeliness of corrective actions - There is no explicit early intervention framework with defined timelines in laws or regulations. - Under FINMA policies and procedures, banks rated below certain levels must be considered for special supervision and intervention. - FINMA standard operating procedures define timelines within which, depending on the rating, supervisory actions shall be taken. - FINMA is liable if it has committed a breach of fundamental duties (Art. 19 FINMASA), which provides an incentive to act. ### Additional criteria — AC2: Coordination with supervisors of non-bank entities - FINMA is an integrated supervisory agency, including investment funds and insurance business; awareness and coordination with respect to non-bank related entities of a bank (group or conglomerate) are implicit features by design. - FINMA shares relevant information and cooperates with federal and cantonal prosecution authorities and other domestic regulators, including: - Federal Audit Oversight Authority, - Swiss National Bank, - Takeover Board, - self-regulatory organizations (SROs) under the Anti-Money Laundering Act (AMLA), - relevant bodies of the Swiss stock exchanges, - Competition Commission, - based on Swiss law. *Source: _cr14264 - 3. Resolution* ### references to these documents. In other areas (e.g., credit risk) these are missing, though ### _cr14264 - references to these documents. In other areas (e.g., credit risk) these are missing, though ### Audit scope and standards - Basel sound practice papers have been used in previous thematic regulatory audit reviews (such as for credit risk in 2002, and FINMA staff believes that these are understood to continue to apply). - Compliance with laws and circulars is performed by recognized audit firms as part of the regulatory audit. - As noted in CP8/9 auditors are instructed to determine if risk management is “appropriate”. ### Findings from review of audit practices - Review of illustrative reports and discussion with auditors suggests that there can be uncertainty and inconsistency about what this means in practice. - Standards set by FINMA for auditors reporting contain sections on individual risk categories (credit, market, operational liquidity, etc.) but do not contain a section for assessment of overall risk management where issues like comprehensiveness, extent of integration of analysis across risk categories, cross risk data aggregation and so on would normally be included. - Assessors reviewed audit approaches and reports and discussed this process with FINMA and with regulatory auditors. The extent and nature of work performed, and the basis for *Source: _cr14264 - references to these documents. In other areas (e.g., credit risk) these are missing, though* ### conclusions, is unclear in reports submitted to FINMA that assessors reviewed. FINMA has ### _cr14264 - conclusions, is unclear in reports submitted to FINMA that assessors reviewed. FINMA has ### Risk management frameworks, governance and supervisory assessment (EC2–EC5) - Supervisor requires banks to have comprehensive risk management policies and processes to identify, measure, evaluate, monitor, report and control or mitigate all material risks. - Supervisor determines adequacy of processes: - (a) to provide a comprehensive “bank-wide” view of risk across all material risk types; - (b) for the risk profile and systemic importance of the bank; and - (c) to assess risks arising from the macroeconomic environment affecting the markets in which the bank operates and to incorporate such assessments into the bank’s risk management process. - Relevant guidance and requirements: - FINMA Circular 08/24 (paragraph 10), FINMA Circular 13/3, and FINMA-mandated template include mandatory assessment of adequate management of credit risks, market risks, operational risks and other risks. - Findings: - Major Swiss banks face challenges in comprehensive timely aggregation of risk positions and related data adequately linked to the entities G/L for purposes of risk measurement; for some banks this challenge remains material and will for some time. - FINMA has not itself conducted reviews in the area of risk aggregation. - FINMA pays considerable attention to the capital adequacy assessment process; guidance includes FINMA Circular 11/2 and CAO. - For small and medium-sized banks (categories 2–5), FINMA Circular 11/2 Margin Nos. 2, 10, 44, 45 apply; for large banks (category 1), Articles 41–45 CAO and Articles 128–132 define internal capital adequacy assessment process expectations. - For the two large banks, FINMA organizes quarterly technical discussions on methodologies underpinning internal capital adequacy assessment processes (economic capital and stress-testing models). - Liquidity adequacy assessment: banks define risk appetite, perform stress tests, define size and composition of liquidity buffer according to risk appetite and stress tests; stress-test results must inform contingency funding plans. - External auditors assess all qualitative risk management requirements annually and report to FINMA. - The process for small and medium-sized banks will be in place from 2014 onwards; for the two big banks it has been in place since 2010. - Major banks have extensive frameworks; smaller and mid-size banks are less likely to have fully developed risk appetite frameworks linked to strategy. ### Board and senior management oversight (EC4–EC5) - Supervisor determines that Board and senior management obtain sufficient information and understand nature and level of risks and how risks relate to capital and liquidity; they must review and understand limitations and uncertainties of risk information. - Relevant requirements and findings: - FINMA Circular 08/24 margin Nos. 121–126 set supervisory standards for risk and internal control information and reporting to the board and senior management. - Margin Nos. 42 and 43 require executive board responsibility for capital planning and the board of directors to approve capital planning at least annually. - Capital requirements and liquidity reporting requirements are in the capital ordinance and liquidity ordinance respectively. - Executive board must be involved closely in stress-testing; stress-testing results communicated to the board of directors at least annually (FINMA Circular 13/6, Art. 44). - Board of directors required to make a statement on liquidity risk appetite/tolerance (Art. 6, para 1 LO, FINMA Circular 13/6 Arts. 13 and 14). - Regulatory auditors review board and senior management reporting and determine that it is appropriate. - Recommendations/findings: - More domestically-important mid-size banks should elevate the position of CRO to be a full executive board member. - More mid-size domestically systemic banks should be required to have a separate board risk committee. - FINMA should review thematically risk appetite frameworks across mid-size banks and do more thematic reviews to test adequacy of processes relating capital to risk. - FINMA should communicate lessons learned from the mortgage risk capital planning review more broadly. ### Model risk, validation and audits (EC6) - Supervisor determines that where banks use models: - (a) banks comply with supervisory standards on their use; - (b) Boards and senior management understand model limitations and uncertainties; and - (c) banks perform regular and independent validation and testing of models. - Findings and requirements: - These elements are covered by regular audit. - Mandatory reporting template for FINMA Circular 13/3 requires regulatory auditors to assess that methods used for risk measurement and management are adequate. - When models are used for regulatory purposes, model approval standards apply (FINMA Circulars 08/19, 08/20, 08/21). - FINMA Circular 08/24 Margin No. 123; if models used for regulatory purposes, specific validation requirements apply (FINMA Circulars 08/19, 08/20, 08/21). ### Risk information systems and aggregation (EC7) - Supervisor determines banks have information systems adequate under normal circumstances and stress to measure, assess and report exposures bank-wide across all risk types. - Findings: - Explicit requirements or guidance do not exist concerning bank-wide capability of information systems to aggregate and report risk. - Assessment of such information systems is a mandatory element of the regular audit. - Discussions indicate major Swiss banks have considerable ways to go to meet requirements for timely aggregation of risk information. ### New products, risk management functions and CRO role (EC8–EC10) - Supervisor requires banks to have policies/processes to ensure Boards and senior management understand risks in new products, material modifications and major initiatives; major activities should be approved by the Board or committee where required. - Findings: - FINMA Circular 08/24 Margin No. 123 requires adjustment of risk management system to new business lines and new products; no explicit requirement for a new product approval process though major banks have these. - FINMA expects appropriate approval of major new initiatives by senior management and/or the board and can view the process due to licensing interactions. - Risk management function requirements: - FINMA Circular 08/24 (para 114) addresses adequacy of resources and authority; adequacy is a subject of the regulatory audit and must be assessed and reported regularly. - Auditors find difficulty consistently determining how to assess adequacy of resources. - FINMA expects banks in category 1 and 2 and a number of banks in category 3 to have a dedicated risk unit headed by a CRO; banks can have risk as part of finance or merged with compliance, which can reduce stature. - In case of CRO removal, FINMA expects board approval, disclosure and discussion with FINMA. ### Regulatory standards and risk-specific guidance (EC11–EC14) - Supervisor issues standards related to credit risk, market risk, liquidity risk, interest rate risk in the banking book and operational risk. - Applicable standards and circulars: - Pillar 1 standards implemented in CAO and LO and FINMA Circulars: Credit Risk (08/19), Market Risk (08/20), Operational Risk (08/21), Liquidity Risk (13/06). - Interest rate risks in the banking book: FINMA Circular 08/6. - Contingency arrangements (EC12): - Assessment of contingency arrangements is a mandatory audit topic (FINMA Circular 08/10 Margin No. 7 referencing Swiss Bankers’ Association self-regulation). - Art. 9 BA requires systemically important banks to be organized to assure continuation of systemically important functions in impending insolvency. - Art. 21 BO requires preparation and regular updates of an emergency plan assessed by FINMA; FINMA can set deadlines to rectify shortcomings. - Stress testing (EC13): - Capital stress-testing guidance: FINMA Circular 11/2, Margin Nos. 34–45; FINMA Circular 08/24 Margins 1-2, 9–12, 80–81, 85, 113–120, 121–125, 126; FINMA Boards of Directors FAQs 8/12 Q5; CAO Art. 45. - Liquidity stress-testing guidance: LO Art. 9; FINMA Circular 13/6 Articles 41–47. - External auditors assess stress-testing program adequacy (for two large banks since 2010, for all other banks from 2014 onwards). - Stress-testing results must inform size/composition of liquidity buffer (FINMA Circular 13/6 Art. 36c), contingency planning (FINMA Circular 13/6 Art. 48), and decision-making (FINMA Circular 13/6 Arts. 43, 44). - Executive board and board of directors involvement required (Arts. 1, 2 LO, Art. 44; FINMA Circular 13/6 Arts. 13 and 14). - Documentation, maintenance and update requirements (FINMA Circular 13/6 Art. 41 c); severity of assumptions (FINMA Circular 13/6 Art. 45). - Corrective actions FINMA has applied include: (i) a capital multiplier applied to a large bank for operational risk; (ii) more frequent reporting requirements due to increased liquidity risk; (iii) initiating supervisory reviews on specific risk areas (such as basis risk); and (iv) assigning the bank to the intensive supervision group. - Internal pricing and product approval (EC14): - The supervisor assesses whether banks account for risks (including liquidity impacts) in internal pricing, performance measurement and new product approval processes; this may form part of the regulatory audit. ### Other material risks and capital assessment (AC1, assessment of Principle 15 and start of Principle 16) - AC1 (other risks): - Art. 9 BO covers reputational and legal risks. - External auditors must cover all material risks in prudential activity, including reputational risk; FINMA Circular 08/24 margin 98 mentions reputational risk in context of compliance risk. - CAO Art. 45 requires an additional capital buffer to cover risks not well covered by minimum capital requirements. - Assessment of Principle 15: - Largely Compliant. - Commentary: FINMA generally has high expectations but comprehensiveness of qualitative guidance in certain risk management areas should be improved and updated or explicitly reference Basel texts; guidance on enterprise-wide risk measurement and management should be enhanced, either in guidance to institutions or more detailed instructions to auditors. - FINMA should enhance thematic reviews, communicate findings (e.g., from mortgage risk capital planning review) more broadly, and review CRO positioning and board risk committees for mid-size banks. - Beginning of Principle 16 (Capital adequacy): - Supervisor sets prudent capital adequacy requirements reflecting risks; at least for internationally active banks, capital requirements are not less than Basel standards. - EC1 for Principle 16: - BA Art. 4: banks must maintain appropriate capital adequacy and liquidity; Federal Council determines elements and minimum requirements. - CAO sets detailed regulatory capital framework. - As of January 1, 2013 the Basel III framework capital minimum and buffer requirements were implemented along with Swiss-specific rules for systemically important banks by amending CAO. - Composition of capital follows Pillar 1 Basel III; after deductions banks must hold minimum capital in the amount of 8 percent of the risk-weighted positions. - A minimum of 4.5 percent of the risk-weighted positions must be held in common equity tier 1 capital and a minimum of 6 percent must be held in tier 1 capital (CAO Art. 42 para 1). - Banks must hold a common equity tier 1 capital buffer of 2.5 percent of risk weighted assets (CAO Art. 43). - Upon the Swiss National Bank’s request, the Swiss Federal Council may require banks to hold a counter-cyclical buffer of a maximum of [text ends in source]. *Source: SWITZERLAND — INTERNATIONAL MONETARY FUND (excerpt).* ### 2.5 percent of their risk-weighted positions in Switzerland (CAO Art. 44 para 1). According ### _cr14264 - 2.5 percent of their risk-weighted positions in Switzerland (CAO Art. 44 para 1). According ### Capital adequacy and systemically important banks (TBTF package) - Basel III implemented via CAO; Swiss RCAP (first half of 2013) assessed Swiss Implementation of Basel II and Basel III as compliant. - Systemically important banks: - Require common equity of at least 10 percent of the risk-weighted position as a basic requirement. - Require contingent capital or other qualifying capital of at least 9 percent of risk-weighted positions, divided into: - buffer capital of 3 percent, and - progressive component of 6 percent (progressive component varies by bank size and market share). - Loss-absorbing triggers are automatically activated at 7 percent (buffer component) and 5 percent (progressive component) calculated on the basis of the CET1 capital ratio to risk-weighted positions. - Countercyclical buffer: - Federal Council activated a one percent counter-cyclical buffer for loans collateralized by residential mortgages applicable beginning end-September (published February 2013). - Banks could be required to account for a countercyclical buffer of up to 2.5 percent Common Equity Tier 1 (CET 1) capital to cover all or only certain credit positions, based on recommendation by SNB. - Leverage ratio for systemically important banks: - Introduced (CAO Art. 133); set at a level of 24 percent of the minimum capital ratio requirement for the capital base, the buffer component and the progressive component (CAO Art. 134). ### Supervisor powers and Pillar 2 (EC3, EC4, EC6) - FINMA powers: - Can set a specific capital charge (Pillar 2 charge) to cover risks not covered by minimum required capital (CAO Art. 45). - May stipulate special monitoring measures if a bank lacks additional capital. - Can demand further capital on an individual basis if minimum required capital, the capital buffer and additional capital do not ensure appropriate security. - Process for Pillar 2 charge detailed in Circular 11/02 Margin Nos. 30–33. - Capital planning and stress testing: - Banks required to carry out capital planning for both solo and consolidated levels annually since 2012. - Capital planning must be forward looking, provide a reliable forecast of available capital (including in ‘adverse’ conditions), and be approved by BoD. - External auditors must assess banks’ capital planning and comment in regulatory audit reports; FINMA reviews these. - Category 1 banks participate in semi-annual loss potential analysis (LPA) where FINMA prescribes scenarios. - Parliamentary initiative noted: - Proposes study to move FINMA’s power to require Pillar 2 charge across banks to the Federal Council. - Suggests minimum capital ratio for non-systemically important banks should not exceed 13 percent (proportionality argument) — assessors caution against limiting Pillar 2. ### Capital targets and categories (EC4; table excerpts) - CAO and FINMA circulars apply to all banks. - FINMA Circular 11/02 sets additional buffers by bank Category. - Capital ratio targets and intervention thresholds by Category: - Category 2: Determining Capital Adequacy Target 13.6-14.4 (In percent); Intervention Threshold 11.5 (In percent) - Category 3: 12 (In percent); 11 (In percent) - Category 4: 11.2 (In percent); 10.5 (In percent) - Category 5: 10.5 (In percent); 10.5 (In percent) ### Use of internal models and model validation (EC5) - Use of internal assessments approved for: - Six banks using advanced approaches for credit risk. - Five for market risk. - Two for operational risk. - Requirements: - IRB and EPE models: validate models and parameter estimates per Basel Committee minimum standards (Circular 08/19 references). - Market risk models: include back testing and stress testing (margins 320–351). - AMA approaches: quantitative requirements in Circular 08/21 margin Nos. 69–75; validation unit transparency and data quality (margin Nos. 66–68 and 79). - FINMA conducts own model approval audits/assessments/on-site reviews in addition to external audits; receives annual validation reports from banks. ### Credit risk (Principle 17; EC1–EC8) - Legal and supervisory framework: - BO Art. 9 and Banking Ordinance require internal regulations identifying, limiting and monitoring all types of risks, including credit risk. - FINMA Circular 08/24 provides high-level principles on risk management and internal control; board responsibility emphasized. - Swiss Bankers Association mortgage guidelines (2011, and June 2012) recognized as minimum standards by FINMA: - Restrict minimum down payment to 10 percent and limit maximum amortization to 20 years for new lending or increases. - Monitoring and supervision: - Banks must monitor ten largest borrowers/groups and report yearly to FINMA and quarterly to external auditor and BoD. - Supervisory and financial audits include sampling credit files, verifying underwriting, risk rating, reporting, and monitoring of exceptions. - Stress testing and capital planning: - FINMA Circular 2011/02 expects capital planning to take economic cycle into account and demonstrate ability to meet capital requirements over next three years under downturn scenarios. - FINMA may require individual stress tests and defines parameters/scenarios; explicit credit risk stress-testing regulation exists for IRB banks. - Assessment: Principle 17 — Compliant. - Comment: FINMA rules/guidance not as comprehensive in some areas; improvements to guidance for regulatory auditors and greater consistency across mid-size banks recommended. ### Problem assets, provisioning and reserves (Principle 18; EC1–EC12) - Definitions and accounting: - Definitions of impaired and non-performing loans aligned with IAS39 and included in Circular 08/02. - Non-performing: payments overdue by 90 days (interest, commission, amortization, full principal) → loan considered non-performing; interest not recognized in income statement until paid. - Impaired loans: indicators listed (e.g., financial difficulties, breach, concessions, high probability of bankruptcy, disappearance of active market). - Valuation and provisioning: - Impaired loans and collateral to be valued at liquidation value adjusted for debtor creditworthiness; unsecured portion must be fully covered where recovery depends solely on collateral. - External auditors perform prudential audits; FINMA may mandate a second audit firm or make its own assessment if disagreements arise. - Supervisory powers: - FINMA does not have authority to require more provisions directly; would require a Pillar 2 add-on instead. - Assessment: Principle 18 — Compliant. - Comment: FINMA should consider explicit power to require additional provisions as a supervisory remedy in some cases. ### Concentration risk and large exposure limits (Principle 19; EC1–EC7, AC1) - Legal limits and definitions: - Large exposure: total position to a single counterparty or group of related counterparties ≥ 10 percent of the bank's adjusted eligible capital (CAO Art. 95). - Individual large exposure limit: must not exceed 25 percent of adjusted eligible capital (CAO Art. 97). - Adjusted eligible capital = total regulatory capital (Tier 1 and Tier 2) less regulatory deductions. - Reporting and monitoring: - Solo large exposure reporting: every three months within one month after period end to statutory auditor; consolidated reporting semi-annually within six weeks. - Reporting on exposures to same geographic and industrial sectors required. - External auditors verify internal monitoring of large exposures. - Exceptions and special ceilings: - Certain exposures excluded from restriction (central banks/governments risk-weighted at zero percent; domestic mortgage bonds up to 50 percent of property market value; positions covered by certain residential mortgages). - Upper limits may be exceeded if: - (a) excess covered by disposable eligible capital; or - (b) excess attributable solely to affiliation between previously unconnected counterparties or affiliation between bank and companies active in financial sector. - Special ceilings for smaller banks: - 100 percent of adjusted eligible capital, provided adjusted eligible capital ≤ CHF 250 million. - CHF 250 million, provided adjusted eligible capital between CHF 250 million and 1 billion. - Tighter ceiling for SIFIs: single risk concentration must not exceed 25 percent of their common equity tier1 (CET1) that isn’t used to cover the progressive component (CAO Art. 136). - Assessment: Principle 19 — Largely Compliant. - Comments and recommended measures: - Inclusion of residential mortgage exposures fully in calculation of large exposure. - Introduce same interbank exposure limit for smaller banks as larger banks. - Provide clear guidance for auditors and banks on assessing concentration risk, including expectations on policies and processes. - Conduct more supervisory work on concentration, including active use of stress testing for smaller banks and improvements in methodologies, data and integration into ordinary supervisory processes. ### Transactions with related parties (Principle 20; EC1–EC7) - Legal basis: - BA Art. 4ter: credits to governing bodies, controlling shareholders, related persons/companies only in conformity with ‘generally accepted principles of the banking profession’; affected bodies must withdraw from authorization process. - CAO Art. 100 requires reporting of large exposures as “transactions with affiliated parties” involving supervisory body members or qualified shareholders. - Supervisory expectations and audit: - Circular 08/24 requires BoD to regulate conflicts of interest and take measures where conflicts cannot be avoided. - External auditors must assess dealings/businesses with management bodies and significant shareholders and report preferential terms (template for supervisory audit report 6.5.2). - No constant reporting requirements on aggregated exposures to related parties unless they are large exposures; FINMA may request information at any time. - Gaps and assessment: - Related-party rules cover credit risk transactions but not explicitly other transaction types (sales/purchases, service contracts, forgiveness of loans). - No clear guidance on risk management framework, monitoring total related-party exposure, or BoD oversight expectations. - Assessment: Principle 20 — Largely Compliant. - Recommendation: Update regulatory framework (e.g., circular) to explicitly cover full range of related-party transactions, set expectations for policies/processes, and require reporting on aggregated related-party exposures to the supervisor. ### Country and transfer risks (Principle 21; EC1–EC6) - Framework: - Swiss Bankers Association “Guidelines for the Management of Country Risk” (1997) define minimum standards for country and transfer risk; binding minimum standard via FINMA Circular 08/10 Self-Regulation. - Banks must identify, measure, assess, limit, control and document country risk exposures and stress tests; Board responsible for risk policy. - Supervision and reporting: - External auditors examine compliance with Guidelines; audit results conveyed to FINMA. - FINMA monitors country exposures, requires ARIS reporting for intra-group and interbank exposures quarterly and ad-hoc as needed. - FINMA conducts targeted monitoring and stress-testing (e.g., Eurozone crisis readiness assessments, special monitoring of EU peripheral country risk). - Assessment: Principle 21 — Compliant. - Comment: Additional on-site reviews by FINMA, as recommended in CP8/9, could periodically cover country risk practices. ### Market risk (Principle 22; EC1–EC6) - Requirements and guidance: - BO Art. 9 and FINMA Circular 08/24 set general risk management expectations; Circular 08/20 “Market risks” defines trading book roles, valuation independence, and model requirements. - For banks using model approaches additional qualitative requirements set in Circular 08/20 (margins 302–361); currently five banks using advanced market risk approaches. - Valuation and controls: - Daily revaluation required (Circular 08/20 Margin No. 10). - Procedures for transaction capture, reconciliation, independent valuation units, model approval and model validation specified. - Valuation adjustments required for less liquid or complex positions (Margin Nos. 46–48). - Stress testing and capital: - Capital adequacy under adverse scenarios assessed via capital planning (Circular 11/2) and LPA for Category 1 banks. - FINMA intends further supervisory guidelines on valuation adjustments; project to refer to forthcoming EBA guidelines. - Assessment: Principle 22 — Compliant. ### Interest rate risk in the banking book (IRRBB) (Principle 23; EC1–EC4, AC1–AC2) - Detailed framework: - FINMA Circular 08/6 “Bank interest rate risks” provides comprehensive requirements: - Board approval of risk policy, limits, reporting; annual review; weekly information to senior management; stress testing; measurement of repricing, basis and option risks; reporting of present value and income effects. - Banks must report interest rate risk to SNB quarterly (solo) and semiannually (group) per Margin No. 53. - Supervisory practices: - FINMA identifies outliers and harmonizes Pillar 2 calibration for IRRBB exposures; supervisory measures include analysis of replication assumptions, alternative durations, currencies, IRR relative to capitalization and interest income. - Assessment: Principle 23 — Compliant. - Comment: Update thematic reviews for smaller and mid-size banks to ensure sufficiently adverse stress scenarios and appropriate risk management. ### Liquidity risk (Principle 24; EC1 – transition to LCR) - Legal basis: - BA Art. 4 requires banks to maintain adequate liquidity and authorizes Federal Council to establish minimum requirement. - Liquidity Ordinance (LO) provides concrete minimum quantitative requirements for non-systemic banks; these requirements are in transition in preparation of the LCR. - (Content ends in provided text at the start of transition to LCR.) *Source: _cr14264 - 2.5 percent of their risk-weighted positions in Switzerland (CAO Art. 44 para 1). According* ### introduction in 2015. Additional and stricter quantitative liquidity requirements for the two ### _cr14264 - introduction in 2015. Additional and stricter quantitative liquidity requirements for the two large banks are in place since 2010 based on FINMA’s communication to the two banks, which was then included in LO. ### Quantitative liquidity requirement for ordinary banks (LO Arts. 12–17) - Liquid assets should be at least 33 percent of short-term liability. - Definition of liquid assets includes: - cash, precious metals, assets eligible for SNB operations, - debt instruments issued by domestic borrowers that are traded in a representative market (except a bank’s own and other related companies’ debt instruments), - debt instruments of foreign countries and other corporate entities subject to public law traded in a representative market, - debt instruments and acceptances of first-class foreign banks and other equivalent securities falling due within six months, - current accounts receivable and advances falling due within one month that are covered by central bank eligible assets or domestic debt instruments traded in a representative market. - Short-term liabilities composition: - 50 percent of the demand deposits as well as other accounts or passbook accounts with no withdrawal restrictions, - 15 percent of the deposits on savings and passbook accounts as well as on similar accounts with withdrawal restrictions (with no tied pension assets). - For assets and liabilities that mature within one month, their difference (net amount) will be: - added to liquid assets if positive, - added to short-term liabilities if negative. - Reporting: - Banks need to report the status of liquidity to FINMA quarterly. - Usage and scope: - This requirement is only applied to Swiss operations. - All banks have substantially higher amount of liquid assets than required by this rule, which is not used for banks for their international liquidity management anymore. - This ratio feeds into the CAMELS rating. - Replacement by LCR: - This quantitative minimum requirement will be replaced by the LCR at the beginning of 2015. - Test-reporting on the LCR has been started with almost 40 banks. - Starting July 2013, the LCR reporting is extended to all banks in Switzerland. - Reporting frequency is monthly. - Although the average ratio is above 60 percent, there is a wide difference among banks. ### Specific quantitative liquidity requirement for the two large banks (BA Art. 9 para 2b; LO Arts. 19–28) - Main features: - Banks are required to continuously maintain liquidity buffers that cover net expected outflows under stress for the periods of seven days as well as 30 days. - Net outflow is calculated in a similar manner with LCR; balance sheet items both on the asset side and the liability side are multiplied by different factors reflecting different natures of assets and liabilities under a stress scenario assuming banks are losing access to unsecured financing in the markets and there is a large-scale withdrawal of deposits. - Central bank standing facilities within the agreed limits that are still open as well as the exceptional liquidity facility for which arrangements have been made in the coverage for outflows of liquidity—up to the amount that is still available—can be counted to reduce the net outflow for both seven day horizon scenario and 30-day scenario. - Assets eligible for the liquidity buffer are categorized into two components: - Primary component: similar to Level 1 HQLA in the LCR framework and includes government and central bank bonds, certain kinds of mortgage backed securities, and central bank reserves. - Secondary component: comparable to Level 2 HQLA and consists of corporate bonds with high ratings, listed stocks, mortgage backed securities not included in the primary component, among others. - Different haircut ratios are applied to reflect expected liquidity during stress periods. - For the seven-day horizon scenario, at least 75 percent of the gap needs to be filled by the primary component liquidity buffer, whereas for the 30-days horizon scenario it is 50 percent. - Reporting: - Banks need to report monthly the situation of liquidity before the end of next month. - If the requirements are breached or expected to be breached, banks need to report to FINMA and SNB immediately. - Comparison with LCR (FINMA studying conservatism/equivalence): - Generally higher run-off ratios: retail deposits assigned 15 percent to 30 percent run-off ratios compared to three to ten percent in LCR. - Lower inflow rates for some cash inflows: zero percent for retail loans compared to 50 percent in LCR; but higher for maturing securities lending. - Higher haircut ratio for some high quality assets: five percent for domestic sovereign bonds compared to zero percent in LCR; but lower for some (10 percent for Swiss covered bonds compared to 15 percent in LCR). - Supervisory tools: - FINMA uses a range of liquidity monitoring tools beyond the regulatory liquidity requirements (e.g., banks internal stress models) for the two big banks and for selected other banks. ### Qualitative liquidity management requirements (LO and Circular 13/06) - LO Art. 6 requires banks to: - define the extent to which they are prepared to assume liquidity risks (their liquidity risk tolerance); - establish strategies for the management of liquidity risk in accordance with their liquidity risk tolerance; - take into account the liquidity costs and liquidity risks associated with all of their material balance-sheet and off-balance sheet business lines, particularly in price-setting, introduction of new products, and measurement of earnings. - LO Art. 7 requires banks to: - establish sound processes for identification, assessment, management, and monitoring of liquidity risks; - identify, manage, and monitor liquidity risk exposures and funding needs within the entire financial group and across legal entities, business lines, and currencies significant in terms of liquidity risk, taking into account transferability limitations; - identify, manage, and monitor intraday liquidity risk exposures; - manage assets that serve to generate liquidity, differentiating between encumbered and unencumbered assets. - Circular 13/06 specific requirements: - Liquidity risk management processes integrated into bank-wide risk management (Margin No. 11). - Aim to ensure continuous solvency during bank-specific and/or market-wide stress periods (Margin No. 12). - Board of directors to set liquidity risk tolerance and ensure compliance (Margin No. 13). - Senior management or a committee directly reporting to senior management to develop liquidity risk management strategy and processes (Margin No. 15). - Proportionality principle: qualitative requirements apply depending on size, complexity and inherent risk; small banks may be exempted from certain aspects. - Information systems requirement: timely measurement, monitoring and reporting of liquidity positions in comparison with established limits (Margin No. 21). ### Stress testing, contingency planning, and supervisory use (EC6–EC7) - Contingency plans (LO Art. 10 and Circular 13/06 Margins 48–53) must: - be documented (Margin No. 53); - include possible actions depending on level of escalation or stress event (Margin No. 49 c); - include clear definition of roles and assignment of responsibilities (Margin No. 49 e); - include clear procedures, decision trees and reporting duties, and communication paths/strategies for internal and external parties (including FINMA) (Margin Nos. 49 f, 49 g, and 50); - be reviewed annually and updated accordingly (Margin No. 51). - For the two large banks, external auditors assess annually the feasibility of the funding plan and identify deficiencies. - Stress testing requirements (LO Art. 9 and Circular 13/06 Margins 41–47): - Banks must establish various stress scenarios and perform stress tests, including off-balance-sheet cash flows and contingent liabilities (including securitization SPEs). - Scenarios must consider institution-specific, market-wide, and combined causes; varying time horizons and severity; scenario involving loss of unsecured financing and cutbacks in secured financing. - Scenario parameters must be reviewed regularly following onset of a stress event. - Circular requires stress tests to: - be based on historical events, case studies, and/or hypothetical models; - cover all potential material liquidity risks; - cover both short-term and long-term liquidity shortages; - have parameters as conservative as possible. - Small banks can choose one scenario (based on LCR) if they can prove sufficiency given business model. - Supervisory engagement: - Intense and continuous stress-testing dialogue between FINMA and the two big banks on internal models, assumptions, the bank internal “use test” and relation to contingency funding plans. - For other banks, FINMA has started supervisory reviews based on LCR reporting results. ### Foreign currency liquidity (EC8) - LO Art. 7 para 2 requires identification, management, and monitoring of liquidity risk exposures and funding needs across significant currencies, accounting for transferability limitations. - Circular 13/06 requires banks with significant foreign currency positions and mismatches to: - carry out adequate processes to manage foreign currency liquidity in important currencies to ensure fulfillment of commitments; - include separate overviews of liquidity developments for each currency, separate stress tests for these foreign currencies, and explicit consideration in contingency plans for inadequate liquidity; - monitor developments in liquidity on foreign exchange swap markets and the ability to exchange currencies in a timely manner; - integrate into stress tests scenarios affecting FX swap markets that intensify mismatches and cause unexpected price volatilities. - Additional measures: - LCR by currency for the two large banks introduced at the beginning of 2012 as a monitoring tool. - FINMA requires inclusion of an FX swap market shock scenario in stress-testing models for the two large banks. - For other banks, FINMA introduced LCR by currency reporting where a currency is significant (aggregate liabilities in that currency amount to 5 percent or more of the bank’s total B/S). ### Encumbrance and monitoring of unencumbered assets (AC1) - Circular 13/06 requires banks to evaluate legal, regulatory or operational restrictions to use the “liquidity reserve” and acceptability of assets as collateral. - Operational criteria for HQLA (including encumbrance issues) will come into effect when LCR is formally adopted as a minimum standard. - Monitoring of unencumbered liquid assets is undertaken for the two big banks; supervisor frequently discusses overall level of encumbrance with these banks. - Currently imposed limit: - a 30 percent ceiling for covered bond issuance to total mortgage loans is imposed for the big banks; reviewed regularly. - Disclosure and limits: - Assessment of encumbrance impact on long-term cost and availability of funding from unsecured creditors are not required or undertaken. - Neither disclosure of the level of encumbrance nor setting limits to encumbrance is currently required. - Banks in Categories 1 and 2 disclose information on their encumbered/pledged mortgages in covered bond programs as required by accounting standards. ### Assessment, gaps, and recommended supervisory actions - Assessment of Principle 24: Largely Compliant. - Identified gaps and assessor comments: - Draft Circular 13/06 covers substantial parts of principle but lacks elements such as requirement for banks to establish liquidity risk appetites (not just liquidity risk tolerance) and to monitor/assess adequacy of overall encumbrance. - Unable to assess actual application because banks are required to adhere to qualitative requirements only by beginning of 2014. - Exemption of small banks from qualitative diversification requirement is viewed as unwarranted by assessors. - Application of outdated quantitative requirements (and their use in the FINMA internal rating system) for banks other than the largest is problematic; planned LCR implementation will improve framework. - Assessors’ recommendations: - Effective and rigorous implementation of Circular 13/06 and understanding banks’ LCR data are critical. - FINMA should maintain close dialogue with banks and external auditors to set clear expectations regarding qualitative requirements, particularly in applying proportionality. - FINMA needs to monitor how proportionality is interpreted by banks and auditors to ensure it is not used to justify weak risk management frameworks. - FINMA may want to review status of implementation of the circular after a few years and revise it as needed. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### Appendix 1 to Circular 08/21 provides basic qualitative requirements applicable to banks, ### _cr14264 - Appendix 1 to Circular 08/21 provides basic qualitative requirements applicable to banks, ### Operational risk (Principle 25: ECs, Description and findings) - Appendix 1 to Circular 08/21 provides basic qualitative requirements applicable to banks, although those using Basic Indicator Approach of Basel II and whose required capital is less than a certain amount are exempted from the requirements. - Margin Nos. 2, 6, and 7 detail operational risk specific requirements: - BoD must be aware of its bank’s material operational risk. It must––directly or by way of a committee––approve written policies for the treatment of operational risk and review those policies periodically. Such policies concern identifying, assessing, monitoring, and controlling operational risk and measures to reduce the operational risk exposure. - Banks must systematically monitor their operational risk profile and their material operational risk. Senior management and BoD must be kept up-to-date about the corresponding results so that they can proactively determine measures to be taken as needed. - Banks must have frameworks and concrete measures to monitor and/or mitigate material operational risk. These must be matched to the bank’s current situation. - Circular 08/21 is currently under revision (public consultation of May 23 to July 1, 2013) and a revised circular is expected to be published soon, aiming to be implemented from 2015. - The revised circular will include more granular qualitative requirements for managing operational risks (section IV.B) in line with the respective principles published by the Basel Committee. - Small banks (some Category 4 banks and all Category 5 banks) will not be required to comply with all requirements, but only with a subset of them. - Authorities noted that detailed and horizontal assessments on operational risk management over a large number of small banks would be difficult given limited resources. ### Supervisor requirements and findings on governance and oversight (EC2–EC3) - EC2: Supervisor requires banks’ strategies, policies and processes for the management of operational risk (including the banks’ risk appetite for operational risk) to be approved and regularly reviewed by the banks’ Boards. The supervisor also requires that the Board oversees management in ensuring that these policies and processes are implemented effectively. - Circular 08/24 and 08/21 provisions (Margins 9–14) stipulate: - BoD bears responsibility for the regulation, establishment, maintenance, monitoring and regular supervision of an appropriate internal control function tailored to the size, complexity, structure and risk profile of the institution. - BoD regularly discusses with senior management its assessment of the adequacy and effectiveness of the internal controls. - By issuing guidelines for senior management, BoD ensures that employees of all levels are aware of and understand their duties and responsibilities regarding the internal control process. - BoD is required to ensure that the policies for the treatment of operational risk are reviewed by internal auditors. - EC3: Implementation is covered by the regular audit process assessing compliance with Circulars 08/24 and 08/21. - Appendix 1 to Circular 08/21 Margin No. 4 details that senior management bears responsibility for implementing the bank’s policies for the treatment of operational risk, ensuring consistent implementation throughout the organizational structure, ensuring employee awareness of responsibilities, and designing measures to manage operational risk arising from all of the bank’s operations. - Additional qualitative requirements: - SA banks with foreign representations must closely integrate operational risk assessment into overall risk management processes (Margin No. 37). - AMA banks must closely integrate institution-specific quantification systems for operational risk into day-to-day overall risk management processes and make its output an integral part of overall risk profile monitoring and control (Margins 61 and 62). ### Business continuity and technology risk (EC4–EC6) - EC4 (disaster recovery and business continuity): - Appendix 1 to Circular 08/21 Margin No. 8 stipulates that banks must have emergency measures that allow them to continue their activities under extraordinary circumstances to limit the impact of severe impairments of normal business operations. - SBA “Recommendations for Business Continuity Management (BCM)” is treated by FINMA as a minimum standard. - Assessment of adherence is included in the Standard Audit Strategies; external auditors need to assess them. - EC5 (technology risk management): - Current FINMA circulars only implicitly address requirements to the management of technology risks (e.g., Appendix 1 Margin No. 7 requires procedures and measures to monitor and mitigate all material operational risks, which implicitly includes technology risks). - The upcoming revised circular will explicitly refer to technology risk management. - EC6 (information systems for operational risk monitoring and reporting): - Circular 08/24 requires senior management to ensure that all relevant information on day-to-day business is gathered, transmitted and processed through management information system. - Circular 08/21, Appendix 1 Margin No. 7 requires frameworks and concrete measures to monitor and/or mitigate material operational risk but does not explicitly mention information systems. - AMA banks: additional requirements to collect internal loss data and comply with quality and procedural requirements (Margin Nos. 76 to 85). - SA banks with foreign representation: required to collect internal loss data limited to significant losses (Margin Nos. 35 and 36); the definition of significant losses is not defined. - Revised Circular 08/21 (public consultation underway) extends data collection and analysis requirements to a broader set of banks (all banks belonging to FINMA categories 1 to 3 and a large portion of banks in category 4). - Reporting to BoD and senior management: Circular 08/21 Margin Nos. 52–54 stipulate BoD involvement and senior management familiarity for AMA banks; Margin Nos. 62–63 cover reporting and breakdown of AMA outcomes for major business lines. ### Reporting to supervisor and outsourcing (EC7–EC8, AC1) - EC7 (reporting mechanisms to supervisor): - See EC6. No further formal reporting mechanisms exist, but FINMA states that banks generally report their large operational loss incidents to FINMA. - The revised Circular 08/21 will extend requirements for reporting operational risk, including reporting of internal events and breaches to risk appetite and tolerance statements, and reporting of external events occurring at peers with relevance for a specific institution. - EC8 (outsourcing policies and processes): - FINMA Circular 08/07 “outsourcing” provides comprehensive and detailed requirements covering: - Selection of service providers (Margin Nos. 21, 22). - Agreement and contract structure including the outsourcing arrangement (Margin Nos. 25, 51–53). - Arrangement to manage and monitor risks, including security, banking secrecy and data protection (Margin Nos. 26–36). - Control of service providers (Margin Nos. 23–24). - Circular requires that the bank’s internal auditor, external auditor as well as FINMA should be able to inspect and audit outsourced activities (Margin No. 51). - AC1 (identifying common points of exposure): - FINMA tries to identify common operational risk exposure or potential vulnerability across banks and conduct supervisory activities, although no formal framework exists. - Recent FINMA focus areas with issued requirements or recommendations: - Operational risks in capital markets: FINMA issued in December 2011 a selection of recommendations for reducing the risk of unauthorized trading incidents. - Operational risks in handling electronic client data: FINMA developed an extensive new set of requirements in the appendix to revised Circular 08/21. ### Assessment, conclusions and recommendations (Principle 25) - Assessment of Principle 25: Largely Compliant. - Comments and identified deficiencies: - Limited application of basic qualitative requirements: basic and minimum qualitative requirements do not apply to a substantial part of the banking sector. - Lack of reference on operational risk management regarding information systems. - Lack of adequate treatment of operational risk in the supervisory rating system (FINMA’s CAMELS rating system does not incorporate operational risk explicitly). - Absence of clear guidance on reporting of operational risk related incidents to the supervisor. - Assessors’ expectations and recommendations: - Revised circular expected to be implemented from beginning of 2015 and would address most issues, but non-application of some requirements to some Category 4 banks and all Category 5 banks may leave vulnerabilities. - Recommend more close evaluation of inherent operational risk in smaller banks by FINMA staff before deciding which Category 4 and 5 banks are excluded from some qualitative requirements. - Recommend FINMA push external auditors to strengthen intensity and quality of their work on operational risk management; this requires FINMA to increase its own specialist resource. - Recommend supervisory framework give operational risk more priority, at least for banks with business models in which inherent operational risk level is high (e.g., revise CAMELS rating system). - Recommend FINMA take a more proactive stance by assessing common risk factors and carrying out thematic supervisory reviews using FINMA’s own resources or third parties. --- ### Internal control and internal/external audit (Principle 26 and Principle 27: ECs and findings) - Principle 26 (Internal control and audit) — EC1–EC5 summary: - Laws, ordinances and FINMA circulars require banks to have comprehensive internal control frameworks (Art. 3 para 2 of the Federal Law of 8 November 1934 on Banks and Savings Banks; Art. 9 para 4 of the Federal Ordinance of 17 May 1972 on Banks and Savings Banks; FINMA Circular 08/24). - Requirements are expressed as high level principles and judged in practice by banks, regulatory auditors, and FINMA supervisors. - Assessment of these processes mostly occurs through the regulatory audit; auditors must express an opinion on adherence to laws, ordinances and circulars. - FINMA Circular 08/24 requires segregation of duties, adequate resourcing and authority for compliance and risk control functions, and designation of one member of management responsible for compliance and one for risk control (Margin No. 86; Margin No. 108 ff. for compliance duties). - Internal audit: - Banks must appoint internal auditors independent from management; very small entities can be exempted by FINMA after consultation with external audit company. - Internal audit may be delegated to third parties provided external audit confirms competence and independence. - Direct reporting to the board is required; board must appoint head of internal audit; internal audit must meet standards of the Swiss Institute of Internal Auditing. - Requirements for comprehensive risk assessment by internal audit at least annually and reporting of plans for board approval. - For Category 1 institutions regulatory audit must conduct a critical review of internal audit every year. - Regulatory auditors must express an opinion on adequacy of resources in internal audit; FINMA has internal guidelines on expected resourcing of internal audit relative to bank size. - Assessment of Principle 26: Compliant. - Comments: FINMA has pushed regulatory auditors to be more forward looking; recent FINMA reviews of compliance appear more reactive. New qualitative operational risk requirements from FINMA will assist in strengthening supervisory work. - Principle 27 (Financial reporting and external audit) — EC1–EC9 summary: - General remark: FINMA mandates audit firms for much of its on-site activities; FINMA supervises audit firms regarding supervisory audit activities, while the Federal Audit Oversight Authority (FAOA) supervises financial audit activities. - EC1: Boards and management responsible for preparing financial statements in accordance with widely accepted accounting policies; application of IFRS or US GAAP required for issuers on the Main Standard of the SIX Swiss Exchange. - Ten banking groups use internationally recognized standards: two in category 1, four in category 3, and four banks in categories 4/5. - Smaller and mid-size banks can use Swiss GAAP; most banks do so. - EC2: Annual audit required by Banking Act (Art. 18); audits based on ISA for international accounting standards or equivalent Swiss standards (Ordinance of the Federal Audit Oversight Authority on the Oversight of Audit Firms, Arts. 2 and 3). - Independence of audit firm specified in FINMA Circular 13/4 (Margin No. 32 ff.) and based on Swiss Code of Obligations (Art. 728) and Auditor Oversight Act (Art. 11). - EC3: Valuation practices: FINMA Circular 08/20 Market risks – banks sets specific provisions for prudent valuation of fair values (Margin Nos. 32 ff.). - EC4: FINMA cannot specify scope of external financial audits but can use regulatory audit scope to have additional work done if concerns exist. - EC5: Financial audit must cover loan portfolio, loan loss provisions, non-performing assets, valuations, trading, derivatives, securitizations, off-balance sheet vehicles and adequacy of internal controls; audits follow Swiss Code of Obligations and international auditing standards. - EC6: FINMA and FAOA have power to reject and rescind appointments of external auditors lacking expertise or independence. - EC7: Rotation: lead auditor may exercise mandate for seven years at most and may accept same mandate again only after interruption of three years (Swiss Code of Obligations). - EC8: FINMA interaction with audit firms for regulatory audits is extensive; same audit firms carry out regulatory and financial audits (except for category 1 and 2 banks where separation applies). - EC9: Reporting duties for audit firms: - Ongoing reporting obligation under FINMASA Art. 27 for serious violations of supervisory provisions or serious irregularities. - FINMA Circular 03/13 Auditing (Margin No. 78) specifies criminal acts must be reported immediately. - Regulatory long form report duties (FINMA Circular 03/13, Margin No. 55 ff.) require reservations or recommendations for breaches or significant deficiencies. - FAOA Circular 1/2010 outlines reporting to the Audit Oversight Authority by audit firms under state oversight. - These obligations overrule duty of confidentiality. - AC1: FINMA has access to working papers for both the regulatory audit and the financial audit. - Assessment of Principle 27: Compliant. - Comments: FINMA needs to ensure differences in Swiss GAAP with IFRS (e.g., valuation standards for traded instruments, permitting macro hedging) do not interact with emerging regulatory rules to provide unintended benefits to banks using Swiss GAAP. ### Disclosure and transparency (Principle 28: ECs and findings) - EC1: Laws, regulations or the supervisor require periodic public disclosures on a consolidated and, where appropriate, solo basis. - Banks and banking groups must publicly disclose their annual financial statements (solo and consolidated), except private bankers who do not publicly solicit customer deposits (Arts. 26 and 27 of Banking Ordinance). - Annual financial statements include a balance sheet, income statement and comprehensive appendix with quantitative and qualitative explanations (Arts. 23–28 of the Banking Ordinance and FINMA Circular 08/02). - Banks with a balance sheet of more than CHF 100 million are required to disclose semi-annual balance sheets and income statements (Art. 23b of Banking Ordinance). - Quarterley disclosure is made by the biggest banks. - Additional quantitative and qualitative disclosure required by Circular 08/22 (Pillar 3 of Basel II) with frequency (annual, semi-annual or quarterly) depending on size of capital requirements; Pillar 3 simplified for smaller banks to essential details of available and required capital only. - Auditors confirmed disclosure obligations under Swiss GAAP are less than for IFRS. - EC2: Required disclosures include qualitative and quantitative information on financial performance, position, risk management strategies and practices, risk exposures, related-party exposures and transactions, accounting policies, business, management, governance and remuneration; scope and detail commensurate with risk profile and systemic importance. - EC3: FINMA Circular 08/22 requires description of regulatory scope of consolidation, names of material group companies with inclusion indicators, consolidation technique, and disclosure of subsidiary balance sheet and equity amounts and main activity. - Assessment of Principle 28: (No final grade provided in the excerpt.) - Notes: Swiss GAAP differences from IFRS and disclosure levels for smaller banks are relevant considerations. *Source: Excerpt from IMF assessment text in the provided content unit.* ### appendix to the financial statements of a list of all material permanent participations ### appendix to the financial statements of a list of all material permanent participations ### Overview - Requirement: list of all material permanent participations (regardless of whether a consolidation has been made or not), indicating the name, activity, equity and the percentage of detention. - Requirement: all direct and indirect shareholders having more than 5 percent of the voting rights of the bank must be disclosed in the notes to the financial statements. - Supervisory assessments refer to FINMA, FINMASA, AMLA, MLO-FINMA, BA, BO, CDB 08, Circular 8/24 and related instruments. ### Principle 28 — Disclosure (findings and assessment) - EC4: The supervisor or another government agency effectively reviews and enforces compliance with disclosure standards. - FINMA examines financial reports disclosed by banks to assess proper use and compliance with disclosure standards. - For IFRS or US GAAP users, FINMA conducts critical reviews of the quality of these financial statements. - After agreement between FINMA and the Swiss Stock Exchange (SIX), SIX is responsible for controlling correct application of accounting rules by listed companies applying IFRS or US GAAP; FINMA is fully responsible for the listed users of its accounting standards. - EC5: The supervisor or other relevant bodies regularly publishes aggregate information on the banking system to facilitate public understanding and market discipline. - Considerable aggregated information is published by the Swiss National bank. - AC1: Disclosure requirements promote understanding of a bank’s risk exposures during a financial reporting period (e.g., average exposures or turnover), though average measures are not mandatory. - FINMA considers the information that must be publicly disclosed (see EC1) sufficient to fulfill AC1, even though disclosure of average measures is not mandatory. - Assessment of Principle 28: Compliant ### Principle 29 — Abuse of financial services (findings, criteria EC1–EC13) - Summary assessment: Compliant - EC1: Laws/regulations establish duties, responsibilities and powers of the supervisor related to supervision of internal controls and enforcement regarding criminal activities. - FINMASA Art. 24: FINMA carries audits of supervised persons and entities, either by itself or through auditing firms appointed by the firms or third parties appointed by FINMA. - AMLA: Anti-Money Laundering Act sets duties re prevention of money laundering and financing of terrorism; AMLA Art. 12 provides FINMA responsibility for supervising banks’ compliance with AML/CFT duties; Art. 17 allows FINMA to specify duties of diligence and how they must be fulfilled. - FINMASA supervisory instruments: restoration of compliance (Art. 1 and 31), prohibition from acting in management (Art. 33), confiscation of profits (Art. 35), appointment of investigating agents (Art. 36), revocation of licenses/withdrawal of recognition/cancellation of registration (Art. 37). - FINMA Circular 8/24 “Supervision and internal control” specifies rules for corporate governance, supervision of business activities and internal control. - In practice, adherence assessed mostly through regulatory audits by external auditors; regulatory audits review the issue annually and audit at least once in every three years. - EC2: Supervisor determines banks have adequate policies/processes to promote high ethical and professional standards and prevent criminal misuse (including reporting). - BA Art. 3 and BO Art. 3: senior management must enjoy a good reputation and guarantee compliance; banks must establish internal rules and guidelines for risk management. - AMLA Art. 9: obligation to file a report if suspect assets connected to criminal offence, proceeds of a felony, subject to power of disposal of a criminal organization, or serve financing of terrorism. - FINMASA Art. 25: prevention requires personnel of integrity and appropriate training; obligation on banks for prudent selection and regular training. - MLO-FINMA: sets general requirements for policies/processes including detection of high-risk transactions, due diligence obligations and reporting requirements. - CDB 08 (2008): self-regulation recognized by FINMA as minimum standards for due diligence and professional ethics. - Note: assessors discussed that number of STRs from banks is only some 1000 a year; FINMA explained banks have low thresholds for alerts and then analyze before deciding whether to file STRs. - EC3: Banks report to supervisor suspicious activities/material incidents when material to safety, soundness or reputation. - FINMASA Art. 29 para 2: supervised persons/entities must immediately report to FINMA any incident of substantial importance to supervision (includes fraud and criminal activities material to safety, soundness or reputation). - MLO-FINMA Art. 31: banks must inform FINMA of reports filed with MROS which concern business relations with significant assets or events that could affect reputation of the financial intermediary or Swiss financial centre. - EC4: Supervisor informs FIU and other authorities if aware of additional suspicious transactions; shares information related to suspected/actual criminal activities. - AMLA Art. 16: FINMA obliged to inform MROS if reasonable grounds to suspect a criminal offence, assets are subject of a felony or under power of disposal of a criminal organization or serve financing of terrorism, where no STR has been submitted. - AMLA Art. 29: supervisor and MROS may provide each other any information/documents required for enforcement; prosecution authorities may provide supervisor information/documents required. - FINMASA Art. 38 and 39: legal basis for mutual and administrative assistance between supervisor and prosecution authorities of the Confederation and the cantons; supervisor shall notify competent prosecution authorities where it obtains knowledge of felonies/misdemeanors. - In practice, FINMA communicates and shares information with competent authorities as needed. - EC5: Supervisor ensures banks establish documented CDD policies integrated into risk management; CDD program elements specified (a)–(f) including five year retention period. - Legal framework: AMLA Chapter 2 and MLO-FINMA specify CDD duties; CDB 08 complements MLO-FINMA (Art. 32). - MLO-FINMA Art. 6: banks with foreign branches or part of groups must identify, mitigate and monitor legal and reputational risks at global level; allow group internal control/audit access to information essential for management of legal/reputational risks; ensure branches/group companies abroad comply with core principles of AMLA and MLO-FINMA (MLO-FINMA Art. 5). - MLO-FINMA Art. 24 and Art. 6: banks must issue internal directives for CDD covering criteria for identifying increased risks, monitoring principles, involvement of internal compliance, PEP policy, and methods to record/limit/monitor increased risks and threshold amounts. - Specific statutory requirements (selected): - AMLA Art. 4: verify identity of contracting partner when establishing business relationships. - AMLA Art. 6: identify nature and purpose of business relationship; clarify economic background/purpose when transaction appears unusual or indicates proceeds of a felony, subject to power of disposal of criminal organization, or serves financing of terrorism. - MLO-FINMA Art. 12 and 13: extent of information determined by risk; increased risks subject to enhanced due diligence. - Banks not allowed to accept assets they know or are expected to know are proceeds of criminal activities. - MLO-FINMA Arts. 7 and 8: prohibition on maintaining relations with fictive banks or known terrorists/criminal organizations. - CDB 08 Art. 6 and 29: written declaration of beneficial owner when contracting partner differs; refuse or terminate relationships where serious doubts persist. - MLO-FINMA Art. 19 para 1 and Art. 12: obligations to monitor and have an information system to detect high-risk transactions; Art. 23 requires information system to provide information to relevant authorities. - MLO-FINMA Art. 14: additional investigations for increased-risk relationships; may lead to termination or report to FIU. - MLO-FINMA Arts. 12–13 and Art. 17–18: identification and annual review procedures for PEPs and increased-risk relationships; acceptance requires senior approval. - MLO-FINMA Art. 20 and AMLA Art. 7 para 2: documentation must enable FINMA/audit/agents to form reliable opinion within reasonable period; banks must be capable of providing information on initiator of outgoing payments and account powers (MLO-FINMA Art. 36). - AMLA Art. 7 para 3: records retention minimum of ten years after termination of business relationship or completion of transaction. - Compliance assessment primarily through external auditors via annual regulatory audits; FINMA may conduct own assessments (e.g., inspection of 20 banks in 2011 on PEP compliance, resulting in enforcement proceedings). - EC6: Correspondent banking specific policies/processes. - MLO-FINMA Art. 12: business relations with foreign correspondent banks classified as increased-risk; additional investigations required. - MLO-FINMA Art. 34: bank obliged to execute further clarifications for correspondent relationships with foreign banks; ensure not conducting relations with fictive banks; ascertain adequacy of correspondent bank controls; define procedures for repeated payment orders with incomplete information. - EC7: Banks have sufficient controls/systems to prevent, identify and report potential abuses including ML/TF. - Compliance with due diligence reviewed as part of FINMA’s supervisory approach; annual regulatory audit covers AML/CTF issues; standard audit strategies emphasize money laundering and criminal activities. - Remedial work followed up by audit company and FINMA; FINMA may conduct inspections. - Assessors confirmed significant supervisory time devoted to AML/CTF by external auditors and FINMA staff. - EC8: Supervisor has adequate enforcement powers against non-compliant banks re criminal activities. - MLO-FINMA Art. 9: violation may call into question proper business conduct and trigger enforcement measures (suspension, disgorgement etc.). - FINMA will address non-compliance and escalate to administrative enforcement proceedings if needed. - Example: FINMA instituted enforcement proceedings against six banks after inspections on PEP compliance in late-2011. - EC9: Banks have requirements for internal audit/external experts, compliance officers, screening policies, and ongoing training. - MLO-FINMA Art. 6: group internal control bodies and audit company access to information across group. - MLO-FINMA Art. 22: each bank must designate one or more qualified persons to form a competence center to combat money laundering and assume responsibilities. - MLO-FINMA Art. 25 and Circular 08/24: integrity and training requirements; designate a management member responsible for compliance. - MLO-FINMA Art. 25: banks required to ensure staff integrity and appropriate training; Circular 08/07 Outsourcing defines outsourcing requirements (Margin No. 21). - EC10: Policies/processes for staff reporting of AML/CTF problems and management information systems. - FINMA Circular 8/24 margin No. 28: management must maintain organizational structure with defined responsibilities and information flows. - MLO-FINMA Art. 22+ and Art. 24: roles/responsibilities of compliance department and requirements for internal policies including escalation to senior management. - EC11: Legal protection for staff reporting suspicious activity in good faith. - AMLA Art. 11: anyone who reports suspicious transactions in good faith is not held liable for breach of official professional or trade secrecy or breach of contract. - EC12: Supervisor cooperates with domestic and foreign supervisory authorities and shares information related to suspected/actual criminal activities for supervisory purposes. - AMLA Art. 29: FINMA, MROS and law enforcement may exchange all information needed and do so. - FINMASA Art. 42: enables FINMA to exchange information with equivalent foreign authorities if conditions are met (e.g., information used exclusively for direct supervision of foreign institutions). - EC13: Supervisor has in-house specialist expertise and provides information on ML/TF risks to banks. - FINMA maintains a money laundering and financial crime unit which: - participates in national risk and threat assessments; - supervises financial institutions and self-regulatory organizations including SBA; - observes international developments and participates in law-making projects; - specifies AML/CFT regulation within delegated area of responsibility; - regularly updates financial institutions on generic financial crime risks and regulatory developments, including sanctions and embargoes. - Note: information on particular criminal cases is provided to banks by law enforcement agencies and not by FINMA. ### Key quantitative and specific references (exact phrasing preserved) - "more than 5 percent" — direct and indirect shareholders disclosure threshold. - "some 1000 a year" — approximate number of STRs from banks noted by assessors. - "Regulatory audits ... audit at least once in every three years." — frequency requirement for regulatory audits. - "inspection of 20 banks in 2011" — example FINMA inspection on PEP compliance. - "assets exceeding more than CHF 100,000 are physically deposited in a single or series of deposits at the onset of the business relationship" — criterion deeming increased-risk transactions. - "records ... at least a five year retention period." — stated general CDD records retention period (EC5 preface). - "retain records for a minimum of ten years after the termination of the business relationship or after completion of the transaction." — AMLA Art. 7 para 3 statutory retention period. - Legal and regulatory references repeatedly cited: FINMASA, AMLA, MLO-FINMA, BA, BO, CDB 08, Circular 08/24, Circular 08/07. *IMF — appendix to the financial statements of a list of all material permanent participations (CR14264) — extracted findings and assessments* ### 1. Responsibilities, objectives and powers C Initiatives to give competitiveness more weight ### 1. Responsibilities, objectives and powers C Initiatives to give competitiveness more weight ### Overview and key findings - Inclusion of competitiveness as flowing from FINMA achieving its main objectives can be confusing to some observers. - FINMA’s framework of rules and guidance is highly principles based and less comprehensive and detailed than in many other jurisdictions, especially with respect to qualitative risk and control requirements. ### Core Principle grades and selected comments (by principle) - CP1-Responsibilities, objectives and powers: C - Do not elevate competitiveness objective in FINMA mandate; consider removing competitiveness reference. - CP2-Independence, accountability, resourcing: MNC - Resources of FINMA are too little to supervise and regulate the entire banking system in a way that meets the core principles, including sufficient in-depth on-site work and oversight of supervisory work done by external auditors. - FINMA’s adherence to a head-count freeze, that it has decided upon, needs to be relaxed to achieve compliance. - New rule precludes FINMA Board members from having certain positions in the financial sector, but the board’s ability to decide to be involved in any supervisory issue would still affect sound governance and ability to attract Board members. - Parliamentary efforts well advanced to restrict FINMA’s Pillar 2 power. - CP3-Cooperation and collaboration: C - Appropriate frameworks domestically and internationally for prudential matters; BCP assessment does not cover communication and collaboration on market conduct or enforcement issues. - CP6-Transfer of significant ownership: LC - Definition of who holds a qualified participation and therefore needs approval lacks clarity, which could damage the effectiveness of current system that relies on banks reporting and assessments by external auditors. - CP8-Supervisory approach: LC - Major improvements only recently implemented and results are not fully evident. - Risk assessments (implemented) made by auditors and approved by FINMA that drive supervisory process are not as comprehensive, granular and forward looking as they need to be. - CP9-Supervisory techniques and tools: MNC - Use of regulatory auditors as an extension of FINMA supervision gives an annual broad view; major enhancements underway. - Control and direction of regulatory auditors’ work to ensure consistency and quality need material improvement. - Amount of proactive, in-depth on-site work and cross-system theme reviews is not sufficient without material increase in FINMA resources and on-site work. - CP11-Corrective and sanctioning powers: C - FINMA uses its existing powers extensively; for prudential issues having the authority to impose monetary penalties is not necessary. - CP12-Consolidated supervision: C - FINMA supervision is of high quality; certain powers do not apply to holding companies in financial groups, but FINMA uses other powers aggressively to compensate. - Risk assessment of non-financial affiliates could be enhanced. - CP14-Corporate governance: LC - FINMA practice evolving to more formally assess governance effectiveness. - Guidance does not fully cover required risk and banking skill sets on boards, and requirements for risk appetite frameworks. - For mid-size banks that can be domestically systemic the lack of separate risk committees in a number of cases, and management structures, may mean risk management and CROs do not have enough stature. - Requirement for independent directors only applies to one third of the board. - CP15-Risk management process: LC - Comprehensiveness of risk management guidance in several areas is below standards. - Development of risk appetite frameworks at mid-size banks requires improvement as does data aggregation capability at major banks. - FINMA’s review of banks relating capital to risk could be enhanced. - CP16-Capital adequacy: C - CP17-Credit risk: C - Credit risk management guidance not as comprehensive or detailed as in many other jurisdictions; supervisory and auditing process fills gaps. - CP18-Problem assets, provisions, and reserves: C - CP19-Concentration risk and large exposure limits: LC - Rules/guidance/supervisory instructions to auditors need to be expanded. - FINMA and regulatory auditors have not conducted thematic reviews of other than single name credit concentrations. - CP20-Transactions with related parties: LC - Definition of what is a related party and definition of required terms for related party transactions have gaps and/or are unclear. - CP21-Country and transfer risks: C - CP22-Market risk: C - CP23-Interest rate risk in the banking book: C - CP24-Liquidity risk: LC - FINMA updated guidance to reflect international standards will not be in place until 2014. - Quantitative requirements for mid-size and smaller banks are outdated. - CP25-Operational risk: LC - Current qualitative requirements have some basic gaps and do not apply to many banks. - FINMA’s supervisory rating system does not explicitly incorporate operational risk. - FINMA’s capability to do thematic reviews, oversee auditors work, or update guidance is limited because of specialist resource constraints. - CP26-Internal control and audit: C - CP27-Financial reporting and external audit: C - Swiss GAAP used by many mid-size and smaller banks; generally more conservative than IFRS, though it does permit macro hedging. - CP28-Disclosure and transparency: C - Swiss accounting standards provide for less disclosure generally than does IFRS; recent BCBS Basel III review found that Pillar 3 disclosures were compliant. - CP29-Abuse of financial services: C ### Recommended actions (excerpted, by CP reference) - CP1: Do not elevate competitiveness objective in FINMA mandate. Instead consider removing competitiveness reference. - CP2: Increase FINMA resources, especially for on-site inspection and risk expertise. Clarify and limit cases in which the Board can become involved in supervisory decisions and improve conflict code. Do not remove or limit FINMA Pillar 2 powers, or explicitly provide in legislation that any Federal Council decisions re Pillar 2 is to be on the formal recommendation of FINMA. - CP6: Broaden and clarify definition of qualified participation subject to the rules. - CP8: Improve methodology for regulatory risk assessment and enhance FINMA oversight of the process. Specific improvements include: - Updating of Circular 08/24 re qualitative risk management and governance standards and related auditor instructions. - Providing more guidance for rating criteria. - Ensuring inherent risk assessments reflect actual business risk. - Requiring more granularity in risk assessments for larger institutions. - Enhancing methodology to emphasize forward-looking elements such as explicit consideration of whether risks are increasing decreasing or stable. - Instituting more cross-institution analysis by FINMA staff of risk assessments and implications for supervisory effort and focus. - CP9: Enhance guidance for regulatory auditors’ on-site work and FINMA oversight to improve consistency and quality. Proactively add more in-depth supervisory review by auditors and by FINMA. Increase FINMA participation in foreign supervisor reviews conducted by auditors or by other supervisors. - CP12: Extend FINMA authority to issue enforcement decrees to apply to holding companies in conglomerate or consolidated groups. - CP14: Enhance guidance re skill sets on boards. Use supervisory process proactively to have more separate risk committees at major mid-size banks and to ensure CRO role has adequate stature. Consider gradual increase in requirements for more independent board members. - CP15: Consider high level guidance re enterprise-wide risk management expectations. Continue to push for improvement in risk appetite frameworks at mid-size banks, conduct thematic reviews, and aggressively push for improvements in data aggregation capability at major banks. Have FINMA conduct more regular thematic reviews of banks' capabilities to relate capital to risk. - CP19: Expand rule, guidance or instructions to auditors on assessing risk concentrations. FINMA should conduct thematic reviews of concentration risk other than single name credit exposures. - CP20: Update definition of related party transactions to cover all transactions. Make clear that transactions with related parties must be at market terms and conditions. - CP23: FINMA should update and extend thematic reviews on interest rate risk in the banking book to more banks, including small and medium-sized ones. - CP24: Proceed with plans to update qualitative guidance and quantitative metrics. Plan a cross-system review of implementation within two years of implementation. - CP25: Proceed with plan to update qualitative requirements. Enhance FINMA specialist resources to permit enhanced supervision, thematic reviews, and enhanced oversight of auditors' work. Give operational risk relatively more focus in supervisory methodology and practice including by making it an explicit part of the supervisory rating system. - CP27: FINMA should satisfy itself that differences in Swiss GAAP and IFRS do not interact with emerging regulatory standards to provide unintended benefits to banks. ### Authorities’ response (paragraphs 26–30) - 26: Swiss authorities thank the IMF for its “Detailed Assessment of Compliance” relating to the “Basel Core Principles (BCP) for Effective Banking Supervision” as part of its comprehensive Financial Stability Assessment Program on Switzerland. Discussions were constructive. - 27: Swiss authorities welcome the positive assessment of compliance with the BCPs, acknowledging strong efforts in recent years to enhance the effectiveness of banking supervision. Switzerland has been ahead of most countries in implementing enhanced regulation, as evidenced by the Regulatory Consistency Assessment Program of the Basel Committee on Banking Supervision. They welcome the observation on BCP2 that FINMA’s power to set general Pillar 2 capital buffers should not be removed. - 28: Swiss authorities request clarifications on assessment results and recommendations. On BCP2, IMF concluded that “resources of FINMA are too little to supervise and regulate the entire banking system in a way that meets the core principles”, contributing to shortcomings. Swiss authorities state that with current resources FINMA feels well equipped to effectively supervise the Swiss banking system, borne out by recent track record in prevention, correction and enforcement. They believe the IMF comment that “FINMA’s adherence to a head-count freeze, that it has decided upon, needs to be relaxed to achieve compliance” does not reflect preparedness to act where needed. FINMA has the budgetary independence required for additional resources to be added if deemed necessary. - 29: On BCP9, IMF stated FINMA’s resources and auditors’ methodology do not result in adequate in-depth supervisory reviews on a proactive basis. FINMA disagrees given its track record and the currently applied risk-based approach with experienced and skilled people. Concerning auditors’ methodology, FINMA recently introduced amended guidance on risk analysis for auditors and it is too early to judge its effectiveness. - 30: IMF recommendations: many are already in process of implementation; others will be additionally considered. As part of an already planned policy review FINMA will assess whether and where amendments are required to better reflect qualitative risk management and governance standards as well as expectations regarding skill sets on boards and enterprise-wide risk management. To maintain and further improve effectiveness and efficiency of FINMA’s supervisory and regulatory processes the adequacy of FINMA’s resources will periodically be reassessed and, if deemed necessary, corresponding measures to reallocate or adjust resources will be taken. *IMF staff report excerpt: 1. Responsibilities, objectives and powers C Initiatives to give competitiveness more weight* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14264.pdf_