Banking Compliance Rules in Switzerland Face Major Overhaul After Recent Turmoil

The Basel Committee on Banking Supervision has recently released a report highlighting the need for stricter banking compliance rules in Switzerland to prevent future financial crises. The report analyzed the March 2023 banking turmoil and found that a rules-based approach is insufficient, and supervisors must exercise judgment and intervene proactively even when regulatory capital or liquidity ratios are not breached.

FINMA Report: “Lessons Learned from the CS Crisis”

The Swiss Financial Market Supervisory Authority (FINMA) has also released its own report, “Lessons Learned from the CS Crisis,” which identified areas where the legal framework needs to be extended or clarified. FINMA notes that while it is impossible to guarantee a financial institution’s stability, increased regulation and supervision can reduce the probability and impact of a failure.

Public Liquidity Backstop (PLB) Mechanism

To address these concerns, Switzerland has introduced a Public Liquidity Backstop (PLB) mechanism for systemically important banks (SIBs). The PLB provides additional liquidity support in cases where an SIB is unable to finance itself and does not have sufficient collateral. The mechanism requires SIBs to pay an ex-ante risk-adjusted lump sum to the Swiss Confederation as compensation for the risk of loss.

Alignment with International Best Practices

The implementation of the PLB aligns with international best practices and aims to enhance the stability of Switzerland’s banking sector. However, it may also result in increased regulatory compliance and public scrutiny for SIBs.

Empowering FINMA to Impose Sanctions

The proposed measures seek to empower FINMA to impose sanctions for violations of regulatory ratios, allowing for greater intervention. This could lead to increased coordination between FINMA, the Swiss National Bank, and the Federal Department of Finance, resulting in improved support for banks.

Cost Implications and Restructuring Efforts

However, this may also result in significant cost implications for SIBs due to the introduction of new regulations and public scrutiny. The proposed “Senior Manager Certification Regime” and “Naming and Shaming” measures could lead to restructuring of business lines, changes in governance, and improvements in risk management systems, consuming considerable efforts and costs.

Conclusion

Overall, the recommendations laid out in the reports are expected to have a significant impact on Switzerland’s banking sector, leading to increased regulatory compliance and public scrutiny. As the industry adapts to these new measures, it is essential to strike a balance between ensuring financial stability and minimizing cost implications for SIBs.