Two Dispatches on the financial system measures package adopted
Bern, 05.11.2008 - In its meeting today, the Federal Council adopted the Dispatch on the package of measures to strengthen Switzerland's financial system. The dispatch contains a federal decree on a loan for recapitalising UBS. In addition, the Federal Council has decided to submit measures to parliament designed to bring a rapid improvement in depositor protection. The amendments to the Federal Act on Banks and Savings Banks (Banking Act) required for this should, once adopted, come into force immediately. Both matters will be discussed by parliament in the coming winter session.
On 15 October 2008, the Federal Council, the Swiss National Bank (SNB) and the Swiss Federal Banking Commission (SFBC) decided on a package of measures to stabilise the Swiss financial system and to strengthen confidence in Switzerland's financial market. In Switzerland, the intense turmoil in the global financial markets primarily affected the two major banks involved in the US market, although UBS was clearly more severely hit in the process than Credit Suisse. The vulnerability of UBS manifested itself towards the end of the third quarter of 2008 in a greatly increased outflow of client funds, a disappointing trend in earnings and, despite countermeasures, a continued problematic high exposure to illiquid assets.
As it could not be ruled out that UBS would not suffer from a deeper crisis of confidence if the markets continued to deteriorate, which would have resulted in a massive burden on the entire Swiss financial system, measures were required to strengthen the entire system. The collapse of a major bank would at least in the short term have destabilised the supply of liquidity and the payment system in Switzerland and would have had serious, long-term economic consequences.
UBS package of measures
The Swiss package of measures is aimed at the main problems: it supports a systemically important institution by relieving its balance sheet of illiquid assets and at the same time strengthening its equity capital. This part of the package is made up of two main measures:
- The first measure, overseen by the SNB, is the transfer of up to USD 60 billion of currently illiquid UBS assets to a fund entity specifically set up for this purpose. This will bring additional liquidity to the bank, while at the same time relieving it of risks. These risks can be better borne by the SNB because it can wait until the markets recover to sell these assets. These support measures are linked to conditions, including the injection by UBS of up to USD6billion of equity capital into the fund entity.
- With the second measure, the capital base of the UBS will be reinforced by the Confederation subscribing to mandatory convertible notes to the value of CHF6billion. This measure is directly connected to relieving UBS of illiquid assets. It allows the bank to fund an entity with the necessary equity capital, without diminishing its own capital base. For the Confederation the mandatory convertible notes have the advantage that the commitment is securely and commensurately compensated (coupons of 12.5 %) and that the Confederation will not, at least not initially, become a co-owner of the bank. The Federal Council is committed to putting a time limit on the participation of the Confederation. To this end, a clear exit strategy is needed which includes the option for the Confederation to withdraw from its commitment during the term of the loan.
The legal basis for the measure on strengthening the capital base of UBS is provided by an ordinance in accordance with Art. 184 para. 3 and Art. 185 para. 3 of the Federal Constitution. The Federal Council has taken account of the urgent need for the capital increase in view of the unfavourable developments in the financial markets. The authorisation of the required loan was given with the approval of the Finance Delegation at the expense of amendment II to the 2008 budget. Together with this dispatch, the loan will be submitted to parliament for retrospective approval.
Strengthening depositor protection
As a second element in the package of measures to strengthen Switzerland's financial system, amendments to Switzerland's depositor protection are also essential. The revision proposed by the Federal Council has five elements:
- Protected deposits should be increased from CHF 30,000 to CHF 100,000. This would make the level of protection for deposits in Switzerland substantially higher than the recent increase in the EU minimum limit.
- Banks will now be obliged, in relation to their customers' preferred deposits, to hold domestic secured claims or other domestically held assets at all times. Clients can therefore be sure that their preferred deposits are secure in every bank in Switzerland. The majority of the banks already meet the minimum requirements or will be able to do so in the near future. The SFBC may make exceptions in duly substantiated cases.
- In addition more generous immediate payments of insured deposits from the resources of the bank in difficulties are envisaged. The SFBC will determine the size of the immediate payment in each individual case. The amount should, however, be considerably more than the current CHF 5,000.
- The depositor protection upper system limit is to be increased from the current CHF4billion to CHF6billion.
- Finally the Federal Council is recommending granting privileges separately to deposits in employee benefits foundations and in addition to already insured bank deposits.
These measures must, in line with their intended purpose, have an impact immediately. To this end, the required changes to the law must be declared to be urgent and must come into force immediately after being adopted. It is planned that the emergency provisions will remain in force until 31 December 2010. By then depositor protection with the basic improvements can be integrated into standard law.
Further measures
The package of measures to strengthen the financial system comprises four other measures:
- Current reforms to company law are to be amended by adding regulations on remuneration policies. At the same time the SFBC will draw up minimum standards for the entire financial sector. In addition and after prior consultation with the SFBC, the UBS will be obliged to bring its remuneration policies for its board of directors and management in line with established international institutions. The involvement of the Confederation is thereafter subject to the condition that UBS implements the requirements of the Federal Council in the area of corporate governance. A report on implementation will be provided as part of the Federal Council business report and the federal accounts.
- Furthermore, in November 2008, the SFBC will issue more stringent capital requirements for major banks. Generous capital requirement reserves strengthen the resilience of the financial system in that, by acting like a shock-absorber, they provide protection against losses which jeopardise ones existence.
- Furthermore by spring 2009, the Federal Council wants to carry out a fundamental review of the deposit guarantee system. Today's system can only be extended in a restricted way due to the fact that financing is provided retrospectively, i.e. only when an institution has become insolvent. This brings considerable disadvantages (resources not available immediately, danger of a chain reaction). Today's system of depositor protection is also unable to cover deposits in the bigger banks in full. The upper limit of the system cannot be arbitrarily increased, because if a stricken bank were to be rescued, the other banks would also get into difficulties. An in-depth review of the system must thus be carried out to achieve a long-term improvement in depositor protection.
Address for enquiries
Peter Siegenthaler, Director, Federal Finance Administration, tel. 031 322 60 05
Publisher
Federal Department of Finance
https://www.efd.admin.ch/efd/en/home.html
