Banking stability: Swiss government wants to close gaps in too-big-to-fail regulation

In mid-March 2023, the imminent collapse of Credit Suisse was averted by the state-backed takeover of Credit Suisse by UBS. This succeeded in safeguarding financial stability and preventing damage to the economy and the taxpayer.

The assessment of the existing too-big-to-fail regime has shown that various elements of the existing regulations have been effective. However, it has also been shown that there are gaps in the regulatory framework. It did not prevent Credit Suisse from ending up in an existential crisis. Although the restructuring and liquidation of Credit Suisse would have been possible in theory, the risks for the Swiss economy and international financial market stability would have been enormous.

In its report, the Swiss Federal Council has now evaluated the existing too-big-to-fail regime, based on a broad set of internal and external expert opinions. It concludes that many of the measures already introduced at national and international level to increase financial stability have generally proved their worth. However, the assessment also revealed gaps in the existing regime, and thus a need for action to further develop and strengthen regulation.

The Federal Council's package of measures is divided into three focus areas:

1. Strengthening prevention: Explicit regulatory requirements and an expanded toolkit for the Swiss Financial Market Supervisory Authority FINMA should be used to impose good corporate governance and more accountable risk management on the part of systemically important banks. This includes a senior managers regime (clear allocation of responsibilities) and rules on bonuses (such as retention periods and clawbacks). The introduction of powers for FINMA to impose fines is being examined. In addition, the quantitative and qualitative capital requirements for systemically important banks should be tightened in a targeted way and supplemented with a forward-looking component. This should strengthen the capital base and improve resolvability. Finally, FINMA's options and duties with regard to early intervention should be expanded.
2. Strengthening liquidity: The strengthening of systemically important banks' own liquidity holdings has already been implemented in legislation that came into force in January 2024. In addition, the potential for liquidity provision by the Swiss National Bank should be significantly expanded. Furthermore, the possibility of a public liquidity backstop as part of a potential restructuring of a systemically important bank should be enshrined in ordinary law, as already proposed to Parliament by the Federal Council in September 2023.
3. Expanding the crisis toolkit: In a crisis, systemically important banks must be able to exit the market in an orderly manner. In order to strengthen resolvability, resolution planning should be expanded and the legal risks associated with implementation should be further reduced. The crisis organisation and the cooperation between the authorities should also be strengthened and more clearly defined where necessary.

There should be a targeted introduction of the proposed measures for systemically important banks, and in part specifically for UBS as the sole remaining global systemically important bank in Switzerland. However, certain measures also apply to other banks and financial institutions, in areas where limiting them only to systemically important banks would have been inappropriate and hard to justify.

In addition, the proposed measures are in line with international regulations and instruments. At the same time, they take account of the specific circumstances in Switzerland as a major financial centre with UBS as the only global systemically important bank.

Next steps

As part of the further work on implementing the proposed measures, the Federal Council will also take account of the findings of the Parliamentary Investigation Committe. In a first step, amendments to ordinances are to be made; these can be approved by the Federal Council. In a second step, amendments at legislative level are to be drawn up and submitted to Parliament.

More information: www.efd.admin.ch