The online magazine of the Swiss Bankers Association
March 30, 2015


Too big to fail: Where do we go from here?

Too big to fail: Where do we go from here?

In a report issued in mid-February, the Federal Council presented an evaluation of the Swiss "Too big to fail" package and defined the further course of action. Overall, the report finds the Swiss regulatory model to be positive in international comparison, but nonetheless identifies further need for action.

On February 18, 2015, the Federal Council presented its report on the "Too big to fail" (TBTF) issue to the Federal Assembly. In doing so, it has fulfilled its mandate to review Swiss TBTF legislation in a comparative international analysis within three years of the entry into force of the corresponding provisions set out in the Banking Act, and to identify any necessary amendments at the legislative and ordinance levels.

The Swiss model is suitable

To a significant extent, the Federal Council based both its evaluation and recommendations on the final report issued by the group of experts on the further development of the financial market strategy (Brunetti group of experts) in December 2014. The central message is that the existing provisions are generally suitable for diminishing the TBTF issue, and that no realignment of the Swiss regulatory model is therefore required.

Overall, the report finds the Swiss regulatory model to be positive.

Some adjustments still necessary

Notwithstanding, in its report the Federal Council draws on the recommendations made by the Brunetti group of experts to look into the tightening of specific aspects of the legislation and to further improve the resilience of systemically relevant institutions.

The existing Swiss TBTF package already contains capital requirement, liquidity, risk diversification and organisational (emergency planning) components. The Federal Council in particular acknowledges the strong emphasis in the Swiss TBTF legislation on prudential or preventative measures, and wishes to continue to refrain from directly intervening in the organisational structures of banks (e.g. the segregated bank system, size limitations). For the improvement of the ability to restructure or liquidate, it supports the principle of subsidiarity, whereby legislation defines the objective, and the concrete implementation is left to the respective bank.

It is essential that the timing and content of any potential amendments are coordinated in line with international developments.

In the view of the Swiss Bankers Association (SBA), it is essential that the timing and content of any potential amendments to the Swiss measures are coordinated in line with international developments. For example, the Financial Stability Board’s (FSB) current work on new requirements for capital raising through bail-ins (Total Loss Absorbing Capacity, TLAC) should be taken into account.

According to the group of experts and the Federal Council, future tightening of legislation could also in particular affect the required equity base. From the point of the view of the banks it is key that, in this context and under normal circumstances, the leverage ratio remains designed to serve as a safety net when determining capital requirements, and does not lead to an increase in risk-weighted capital requirements.

Where do we go from here?

The Federal Council has instructed the Federal Department of Finance (FDF) to submit concrete proposals for any appropriate legal amendments by the end of 2015. A task force will be formed to this end under the leadership of the FDF, with representatives from the Swiss National Bank (SNB) and the Swiss Financial Market Supervisory Authority (FINMA). The affected parties are to be included in the work conducted by the task force in a targeted manner and heard with regard to planned changes.

In addition, the effectiveness of the overall Swiss TBTF package is to be revised periodically in the future. This is foreseen to take place every two years. The report by the Federal Council outlined here will therefore by no means be the last one.