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Federal Council adopts dispatch on strengthening financial sector stability

Berne, 20.04.2011 - At its meeting today, the Federal Council adopted the dispatch on the legislative proposals for dealing with the systemic risks of big banks. By 2018, systemically important banks should build up more capital, meet more stringent liquidity requirements and improve their risk diversification. Moreover, they should be organised in such a way that a national economy's systemically important functions are ensured even in the event of threatened insolvency. The proposed package of measures is designed to prevent the state from having to use tax revenues in the future in order to bail out systemically important banks.

The proposals submitted for consultation by the Federal Council on 22 December 2010 were in principle largely positively received by the interested circles. Changes were proposed to individual items. The Federal Council maintained the general thrust of the bill, but made a few adjustments.

The key focus of the bill is on four core measures:

  • Strengthening of the capital base
  • More stringent liquidity requirements
  • Better risk diversification
  • Organisational measures to ensure the maintenance of systemically important functions (e.g. payment transactions) in the case of threatened insolvency

For implementation of the more stringent capital requirements, various instruments need to be provided for in the Banking Act (reserve capital and convertible capital). The Federal Council is proposing tax measures to promote the issue of bonds, and thus also CoCos[1], in Switzerland as well as to boost the Swiss capital market. Switzerland as a business location will also benefit from this.

In addition, the bill includes regulation of the remuneration of those systemically important banks that have to be bailed out using federal funds despite all efforts to strengthen financial sector stability. In such cases, the Federal Council will be obliged to order that adjustments be made to the remuneration system of the bank in question. The bill is largely based on the recommendations of the Commission of Experts, which submitted its final report to the Federal Council on 30 September 2010.

With the adoption of the dispatch for parliament, the bill can be considered by the first chamber during the summer session and by the second chamber during the autumn session in 2011. The legislative amendments could thus come into force at the start of 2012 at the earliest. Transition periods up to 2018 should facilitate implementation.

Adjustments as a result of the consultation

Some of the adjustments and clarifications made by the Federal Council are as follows:

  • Systemically important banks must demonstrate by means of an emergency plan that systemically important functions can be maintained in the event of threatened insolvency. The bank is basically free to formulate its emergency plan as it wishes. The Federal Council should now determine the criteria for demonstrating such a plan, and also define which measures FINMA can prescribe if proof is not provided.
  • The tax measures will be phased in. In a first step, the issue tax on debt capital should be abolished. In a second step, the planned withholding tax changes should be presented in a separate draft in September 2011 at the latest.
  • All financial institutions, regardless of their legal form, can now issue CoCos.
  • It has been clarified that, in the case of systemically important banks, there must be interventions also in the remuneration system of group parent companies in the event of state assistance.
  • The restructuring measures have been modified to allow for the rapid and sustainable transfer of systemically important functions to an independent legal entity.
  • Concerns about Switzerland forging ahead when compared internationally are taken into account by a report being published on international developments every year.

Economic implications

The FDF and the State Secretariat for Economic Affairs (SECO), together with FINMA and the Swiss National Bank, analysed the economic implications of the planned regulation in a report. As a result of the proposed measures, massive consequential costs of severe financial crises can be avoided for the entire economy. While the costs for systemically important banks will increase in the short term, investor confidence will increase over the long term, constituting a competitive advantage for Switzerland's financial centre and the institutions affected. The implications for domestic lending are considered to be minor in the short to medium term. No negative repercussions are expected longer term. The analysis shows that the long-term benefits for the national economy exceed the cost of the measures.

[1] CoCos (contingent convertible bonds) are bonds that are converted into equity capital or written off after a specific event occurs (when a threshold, or trigger, is reached).

Enclosure:

Basic information (pdf, 130kb)

Address for enquiries:

Mario Tuor, Communications, State Secretariat for International Financial Matters (SIF),
tel. +41 31 322 46 16

Publisher:

Federal Department of Finance
Internet: http://www.efd.admin.ch
The Federal Council
Internet: http://www.admin.ch/br/index.html?lang=en


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