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Swiss Regulator Outlines Too Big To Fail Response

by Ulrika Lomas, Tax-News.com, Brussels

12 August 2013


The Swiss Financial Market Supervisory Authority, FINMA, has released a new position paper discussing the recovery and resolution capability of systemically-important banks as part of an ongoing debate in Europe on strengthening banking sector safeguards.

FINMA highlighted the need to arrive at a solution that does not penalize the domestic financial system but ensures that the risk for banks of insolvency remains to ensure they maintain discipline. On the "too big to fail" issue, FINMA underscored the "vital" importance of an effective, internationally coordinated recovery and resolution strategy.

As set out in its position paper, FINMA proposes an approach whereby the home supervisory authority would take the lead in coordinating group-wide recovery and resolution plans when a banking group faces financial difficulties. Where necessary, the home supervisory authority would order a bail-in in which the bank's creditors bear losses, it proposes. This means in particular that the holders of senior bonds contribute towards recapitalizing the institution affected. The bail-in process also creates time to reorganize the viable parts of a bank and transfer them to a sustainable business model, FINMA recommended.

A process of this kind has major advantages, FINMA pointed out. "Business operations can continue without significant interruption and the continuity of economically critical functions is assured. This increases the likelihood that the recovery or resolution of a global systemically important bank will not affect system stability in the home country of the bank or abroad," it said.

FINMA prefers the concept, referred to internationally as the "single point of entry" (SPE) approach, in which the "haircut" begins with the top-level group company and is used to cover losses suffered by other group companies. The SPE approach aims to avoid the preventive ring-fencing of individual parts of the business in the various markets and enable the orderly wind-down of foreign subsidiaries.

FINMA pointed out that its position paper largely reflects the European Union's draft guidelines on recovery and resolution published at the end of June 2013.

TAGS: individuals | tax | business | banking | financial services | international financial centres (IFC) | offshore | offshore banking | Switzerland | services | Europe

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