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Stringent Guidelines Proposed For Swiss Banks

by Ulrika Lomas,, Brussels

02 May 2011

At its meeting on April 20, the Swiss Federal Council adopted legislative proposals for dealing with the systemic risks posed by big banks. Under the rules, by 2018, systemically-important banks should build up more capital, meet more stringent liquidity requirements and improve their risk diversification. In addition, the rules prescribe that banks 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 government explained.

The proposals submitted for consultation by the Federal Council on December 22, 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; and
  • 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 in Switzerland, and thus also CoCos (contingent convertible bonds, bonds that are converted into equity capital or written off after a specific event occurs) as well as to boost the Swiss capital market. Switzerland as a business location will also benefit from this, the government said.

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 September 30, 2010. As aforementioned, some amendments were made to the Bill as a result of public consultation. The Federal Council announced the following addendums to the rules, that:

  • “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; and,
  • Concerns about Switzerland forging ahead when compared internationally are taken into account by a report being published on international developments every year.”

With the adoption of the proposals 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. It is proposed that transition periods will be allowed, up to 2018.

TAGS: tax | investment | business | banking | international financial centres (IFC) | offshore | offshore banking | asset protection | withholding tax | Switzerland | regulation

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