Federal Council sets parameters to amend the too-big-to-fail provisions
Bern, 21.10.2015 - At its meeting today, the Federal Council adopted the parameters for amendments to the current too-big-to-fail provisions. It thereby fleshes out the need for action identified in the evaluation report of February 2015 to eliminate the too-big-to-fail risks in Switzerland. The new requirements must be met by the end of 2019. Once they are implemented by the banks concerned, the too-big-to-fail risks in Switzerland will once again be significantly reduced. The resilience of systemically important banks will thereby be further enhanced and the possibility of restructuring or orderly resolution without costs to taxpayers will once again be improved.
The Federal Council already identified the need for action in the evaluation report adopted on 18 February 2015 in relation to the Swiss too-big-to-fail provisions. Subsequently, a working group under the leadership of the Federal Department of Finance (FDF) with representatives of the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank (SNB) drew up proposals for the necessary legal amendments. The parameters for the planned ordinance amendments were adopted by the Federal Council today.
By meeting what are known as going concern requirements, systemically important banks should have sufficient capital to ensure continuity of service so that even in a stress scenario, they do not require state support or have to be restructured or wound up. However, going concern requirements cannot prevent the company from being restructured or wound up in every case. For this, the banks must in addition hold gone concern capital.
The going concern requirements consist of a basic requirement for all systemically important banks as well as, depending on the degree of systemic importance, a progressive component. The latter is measured according to the market share and size criteria which already exist in the current system. The basic requirement for the leverage ratio (proportion of regulatory capital to the unweighted total assets) is 4.5%, and 12.9% for risk-weighted assets. When extended by the expected progression based on the benchmarks, this results in going concern requirements for the two big banks of 5% overall for the leverage ratio and 14.3% overall for risk-weighted assets. The currently applicable going concern requirements are 3.1% for the leverage ratio and 13% for risk-weighted assets. The leverage ratio can be fulfilled holding a maximum of 1.5% of contingent convertible bonds (CoCos) and the risk-weighted assets holding a maximum of 4.29%. The remaining requirements are to be met with high-quality common equity Tier 1 capital such as paid-in share capital and disclosed reserves. For existing capital instruments which can no longer be issued as eligible under the new requirements, transitional provisions are envisaged in the sense of grandfathering.
In addition to the going concern requirements, systemically important banks operating internationally must hold additional capital to guarantee their restructuring or continuation of the systemically important functions in a functioning unit and wind up of the other units without recourse to public resources (gone concern). This mirrors the going concern requirements in that the two big banks must fulfil gone concern requirements again of 5% for the leverage ratio and 14.3% for risk-weighted assets. The gone concern requirements are fulfilled in principle with bail-in instruments (bonds with conversion rights activated by the supervisory authority). Provisions may be eased if proof is furnished of improved global resolvability; however, in compliance with international requirements, the leverage ratio and the risk-weighted assets must not fall below 3% and 8.6%, respectively.
The relevant gone concern emergency plans for systemically important banks which do not operate internationally have yet to be developed. The specific need for gone concern requirements for these banks will be the subject of the Federal Council's next evaluation report to be adopted in accordance with Article 52 of the Banking Act by the end of February 2017.
Under current law, there is no deadline for complete implementation of the Swiss emergency plans. Provision will now be made for a deadline of this nature and will generally be three years from the point in time when a bank is designated as systemically important. The two big banks that operate internationally must have fully implemented their emergency plans by 31 December 2019. Global resolvability is also part of the review of the Swiss emergency plans, where this is relevant for their implementation.
In setting the parameters, the Federal Council based itself on the current international discussions concerning standards for the capital requirements of systemically important financial institutions and on countries with the world's highest requirements. Switzerland should be one of the countries with the highest capital requirements in the world for global systemically important banks.
The Federal Council has instructed the FDF to make the respective amendments to the Capital Adequacy Ordinance and the Banking Ordinance, to conduct a hearing on this and to submit the texts of the ordinances to the Federal Council by the first quarter of 2016.
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