What reforms of the banking sector are to be expected in Switzerland (2024)

Thought reform and measures proposed in the Swiss banking sector by the Report of the Expert Group on Bank Stability (2023)

In March 2023, the Federal Council, the Swiss National Bank (SNB), and the Swiss Financial Market Supervisory Authority (FINMA) had to intervene urgently to safeguard the Swiss economy. A package of measures was adopted on March 19, 2023, which averted potential damage to the Swiss financial system.

In this context, the question of how the resilience of systemically important banks can be further strengthened has been raised. This has been addressed in the much-awaitedReportof the Expert Group on Bank Stability published on 1st September 2023 (Report) as well as lately, by the Basel Committee on Banking Supervision. In this context, the proposed introduction of the Public Liquidity Backstop (PLB) for systemically important banks (SIBs) will also be a crucial step to enhance banking stability. These recommendations and measures will have significant implications for financial institutions in Switzerland, presenting both opportunities and challenges, which will need to be carefully considered.

Thought measures for the Swiss banking sector

Considering the recent events, doubts about the efficiency of the “Too-big-to-fail” (TBTF) regime were raised.

As a reminder, in Switzerland, theSwiss Banking Actand theSwiss Banking Ordinance prescribespecial requirements for SIBs, including, in particular, the preparation of emergency plans to ensure the continuation of systemically important functions in a crisis independently of the other parts of the bank. An SIB must also prepare a recovery plan to stabilize itself so that it can continue its activity without state intervention. Further, the FINMA is responsible for drawing up resolution plans to carry out the restructuring or winding-up of SIBs and may unilaterally order the activation of these plans in a crisis.

The Federal Department of Finance (FDF) established the Expert Group on Bank Stability on May 17th 2023, to analyze March 2023 events and come up with measures for the Swiss banking sector. The Expert Group's Report presents several recommendations or opinions as a basis for the expected projected measures (parliamentary postulate, 23.3443). It is divided in 4 categories (i.e., crisis management, liquidity, monitoring & protective measures as well as equity).

The key proposed measures in relation to the Swiss banking sector reform are summarized below (see or click below for details relevant to each category).

3.Monitoring and Protective Measures

In October 2023, thereportof the Basel Committee on Banking Supervision on the banking turmoil that started in March 2023 provided as well valuable insights on the initial lessons learnt therefrom. In particular, it was noted that a rules-based supervisory approach is insufficient and there is a need for supervisors to exercise judgment and proactively intervene even when specific regulatory capital or liquidity ratios have not been breached. Further, the importance of assessing the effectiveness of a bank’s corporate governance and risk management framework was also underscored. With respect to banking groups, it was highlighted that the risk dynamics throughout the group, including at an entity or sub-group level, should be regularly monitored. Regarding banking regulation, possible issues with the design and operationalization of the Basel III liquidity standards, namely the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), were identified in addition to possible shortcomings of the current regulatory treatment of the interest rate risk in the banking book (IRRBB) in the Basel framework. The report also underlined the need to further assess the complexity, transparency, and role of AT1 instruments in a holistic manner. Of note, it was observed that the distress of relatively small banks (which are not subject to the full Basel III Framework) can trigger broader and cross-border contagion effects, and this may require a review of the general application of the Basel framework for non-internationally active banks.

In December 2023, FINMA’s Report “Lessons Learned from the CS Crisis” also reflects on identified areas in which FINMA believes that an extension of the legal framework or clarification of the implementing provisions needs to be discussed, or where it will make selective adjustments to its supervisory activities. However, FINMA notes that it will never be possible to subject financial institutions to supervision that is 100% watertight. Even with greater regulation and extended supervision there is no guarantee that a financial institution will not fail. However, the possible solutions reduce the probability and impact of a failure. FINMA’s findings are also being incorporated into the Federal Department of Finance’s ongoing comprehensive evaluation of the TBTF rules and regulations.

Public Liquidity Backstop (PLB)

In addition to the above, on the 6th September 2023, the Federal Council adopted the introduction of aPLB for SIBs. Under the PLB mechanism, if an SIB under resolution does not have any other options to finance itself and has insufficient collateral to apply for an ELA, the SNB may grant additional liquidity, on the basis of a guarantee provided by the Swiss Confederation. It may grant the default-risk guarantee at its discretion, considering the risks associated with the granting of the guarantees against the risk of default. The introduction of the PLB has a two-fold rationale. Firstly, it ensures continuation of systemically important functions in cases where the bank is unable to finance itself and the ELA provided may not be sufficient. Secondly, it prevents the loss of confidence, so that its very existence helps to avoid the need to activate it. Indeed, the mere possibility of granting additional liquidity with a default risk guarantee will have a preventive effect on the market and avert, if necessary, an SIB from being stormed by depositors.

An SIB shall be required to pay an ex-ante, risk adjusted lump sum to the Swiss Confederation every year, as a compensation for the risk of loss that the latter may be exposed to, on account of the default risk guarantees granted under the PLB. The lump sum payments must be made annually regardless of whether the liquidity support under the PLB is granted. Further, risk premiums and interest costs are payable on loans disbursed under the mentioned PLB and accrue for as long as the aid remains. As such, the introduction of the PLB will involve significant cost implications for SIBs, which will also serve to offset the competitive advantages they enjoy over Swiss banks without systemic importance.

The implementation of the PLB in Switzerland aligns with international best practices standards and will help in enhancing the stability of the banking sector. The introduction of the PLB should strengthen Switzerland’s current position as one of the most stable international banking centers despite recent events, increase confidence on the part of foreign supervisory authorities in Swiss G-SIB and also address potential competition imbalances that could negatively affect Swiss G-SIB by ensuring a competitive level playing field with their foreign counterparts of major financial centers. Furthermore, it should reinforce investors’ and customers’ confidence in the resolution capacity of an SIB. The confidence gain will also improve the scope for refinancing on the market. However, the introduction of the PLB may involve cost implications for SIBs due to the lump sum and premium payments.

Potential future implications for Swiss banking sector

While increased coordination between the SNB, the FINMA and the FDF in connection with crisis management and the reinforcement of FINMA’s position, would lead to an improved support for banks, it may also result in increased regulatory compliance and public scrutiny.

The proposed measures seek to further empower FINMA to impose sanctions for violations of regulatory ratios, thereby enhancing its enforcement capabilities by broadening the range of proactive and protective measures available to it, allowing for greater intervention.

Of note, the FINMA is the only prudential supervisory authority at an international level that cannot impose fines. Empowering the FINMA in this regard, would drastically change the consequences for non-compliance by Swiss financial institutions, constituting a powerful monetary incentive. Besides financial liability intended as a dissuasive measure, the proposed introduction of the “Senior Manger Certification Regime” would enable FINMA to penalize senior bank managers or other actors that could harm the financial place due to their risky activities and decision-making power, by establishing a causal link between acts or omissions of managers and serious breaches of supervisory law - in other words, implicating their personal responsibility. Further, the publication of enforcement procedures under a “Naming and Shaming” form as used already in the United Kingdom would require from financial institutions a possible review of their risk appetite - given that the public is, at the moment, largely unaware of the true position of a non-complaint financial institution - due to increased public scrutiny and consequently, pressure.

The above could lead to restructuring of business lines, changes in governance as well as improvements in risk management systems, consuming considerable efforts and costs. The recommendations laid out in the Report, if pursued, would have undeniably a considerable impact on the Swiss banking sector.

As an expert in banking and financial regulations, I bring a wealth of knowledge and experience to shed light on the complex landscape of the Swiss banking sector and the measures proposed in the Report of the Expert Group on Bank Stability in 2023.

Firstly, it's crucial to highlight the context that led to the intervention of the Federal Council, the Swiss National Bank (SNB), and the Swiss Financial Market Supervisory Authority (FINMA) in March 2023 to safeguard the Swiss economy. This intervention resulted in a comprehensive package of measures adopted on March 19, 2023, aiming to avert potential damage to the Swiss financial system.

The subsequent Report of the Expert Group on Bank Stability, published on September 1, 2023, became a cornerstone in addressing the resilience of systemically important banks (SIBs) in Switzerland. This report, alongside insights from the Basel Committee on Banking Supervision, laid the foundation for proposed reforms in the Swiss banking sector.

The proposed introduction of the Public Liquidity Backstop (PLB) for SIBs stands out as a crucial step in enhancing banking stability. The PLB mechanism, adopted on September 6, 2023, provides a means for SIBs under resolution to access additional liquidity with a default risk guarantee from the Swiss Confederation. This mechanism not only ensures the continuation of systemically important functions but also acts preventively by instilling confidence in the market, thereby averting a crisis.

The Report categorizes proposed measures into four key areas: crisis management, liquidity, monitoring and protective measures, and equity. In the realm of Monitoring and Protective Measures, insights from the Basel Committee underscore the importance of a judgment-based supervisory approach, moving beyond rules-based methodologies. The report emphasizes the evaluation of a bank's corporate governance and risk management framework and the need for regular monitoring of risk dynamics within banking groups.

Additionally, concerns are raised regarding the design and operationalization of Basel III liquidity standards, such as the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). The report suggests a comprehensive assessment of the complexity, transparency, and role of Additional Tier 1 (AT1) instruments.

Furthermore, the report highlights findings from FINMA's "Lessons Learned from the CS Crisis" in December 2023, indicating areas for potential legal framework extensions and clarifications in implementing provisions.

The introduction of the PLB is not without its challenges. While it aligns with international best practices, the associated costs, including ex-ante lump sum payments and risk premiums, pose financial implications for SIBs. However, these costs are seen as necessary to offset competitive advantages enjoyed by SIBs over other Swiss banks.

Looking ahead, the proposed measures, if pursued, could have far-reaching implications for the Swiss banking sector. Increased coordination among regulatory bodies, empowerment of FINMA to impose sanctions, and the introduction of the "Senior Manager Certification Regime" could reshape the regulatory landscape, enhancing enforcement capabilities and increasing accountability.

In conclusion, the proposed measures, outlined in the Expert Group's Report, demonstrate a comprehensive and forward-looking approach to strengthen the Swiss banking sector. These measures address not only the immediate concerns but also lay the groundwork for a more resilient and accountable financial system in Switzerland.

What reforms of the banking sector are to be expected in Switzerland (2024)


Why is Switzerland so good for banking? ›

Switzerland's banking sector is renowned for its stringent privacy policies and legal frameworks that ensure the security of assets. This tradition of banking secrecy, which dates back to the early 20th century, has been a cornerstone in establishing Switzerland's reputation as a trusted offshore banking jurisdiction.

Is there still banking secrecy in Switzerland? ›

Banking secrecy remains in force for all residing in and taxable in Switzerland only. Disclosing client information has been considered a criminal offence since the early 1900s.

What is the bank resolution in Switzerland? ›

FINMA as a resolution authority

FINMA authorises and supervises financial intermediaries on the Swiss financial markets. If a financial intermediary fails or operates without a licence, it is responsible for ensuring an orderly market exit by means of a liquidation or insolvency.

What are the benefits of Swiss banks? ›

Swiss bank accounts have long been considered special due to their high privacy and confidentiality level. Historically, Swiss banking laws strictly protected the identity of account holders under the principle of banking secrecy, prohibiting the disclosure of account information without the account holder's consent.

Does Switzerland have good banks? ›

Switzerland is among the top countries in Western Europe, with a higher per capita Gross Domestic Product. Even the Swiss Franc (CHF) value has been quite stable compared to other currencies. According to Moody's Investor Service, Switzerland's banking system is stout because the operating conditions are so good.

Why is Switzerland financially stable? ›

That's largely due to its status as a “safe haven” currency or defensive asset. The Swiss franc is heavily backed by large reserve of gold, bonds and financial assets, which help the Swiss National Bank ensure the currency's stability during times of volatility.

Which Swiss bank is in financial trouble? ›

Following several years of scandals, Switzerland's Credit Suisse bank collapsed in March 2023.

Are Swiss banks still safe? ›

For years, Swiss banks have been considered the safest and the most secure in the world.

Why are Swiss banks so secretive? ›

It is the complete financial freedom of Switzerland, more than its fabled bank secrecy, which accounts for the continuing flow of capital. Bank secrecy, which was first written into Swiss law in 1934 to help foil Nazi efforts to ferret out expatriate German money, applies to government as well as to credit managers.

What banking system does Switzerland use? ›

The banking landscape in Switzerland is diverse, including universal banks, cantonal banks, private banks, and wealth and asset managers. Established in 1907, the Swiss National Bank (SNB) has executive offices in Bern and Zurich and branch offices in Basel, Geneva, Lausanne, Lucerne, Lugano, and St. Gallen.

What is the Swiss bank policy? ›

The SNB's monetary policy strategy consists of three elements: a definition of price stability, a medium-term inflation forecast and the SNB policy rate. The Swiss National Bank implements its monetary policy by setting the SNB policy rate.

What is the bank account protection in Switzerland? ›

Deposits at the Bank are covered by the deposit insurance scheme. In the event of the Bank's bankruptcy, the deposit insurance scheme protects client deposits against loss up to the amount of CHF 100 000.

Are Swiss banks still the best? ›

However, Swiss banks are not keeping up with the pace: in 2020 they were still ranked 18th, but two years later they have slipped a further three places.

What is the minimum deposit for a Swiss bank account? ›

Swiss bank minimum balance

The minimum balance for Swiss bank accounts depends on the account type and can vary from free of charge up to millions of dollars. Generally, Swiss banks may require you to deposit at least 10,000 CHF ( $9,000 or EUR 6,800) within a month of opening your account.

What is the minimum balance in a Swiss bank account? ›

The minimum balance depends on the type of account and bank you open with. For example, most major Swiss banks require a minimum initial deposit of one million U.S. dollars for foreigners. However, some banks have no minimum balance.

Which country has the best banking system? ›

Global Top 100
2Zuercher KantonalbankSWITZERLAND
35 more rows
Nov 10, 2023

Why is Switzerland a financial hub? ›

Stability is a hallmark of the Swiss financial centre. Switzerland's solid banks, its reliable legal system and political institutions, and its sound currency make it a “safe haven” for individuals and companies from all over the world. While Swiss banks operate globally, they remain firmly rooted in their home market.

What country has the best banking in the world? ›

Banking system z-scores, 2021:
CountriesBanking system z-scores, 2021Global rank
New Zealand44.783
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