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Banking Industry Compliance Updates in Switzerland: Lessons Learned from Recent Turmoil

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The Basel Committee on Banking Supervision’s report on the banking turmoil that began in March 2023 has provided valuable insights into the initial lessons learned from the crisis. The report highlights the need for supervisors to exercise judgment and intervene proactively, even when regulatory capital or liquidity ratios have not been breached.

Key Takeaways

  • Assess a bank’s corporate governance and risk management framework
  • Exercise judgment and intervene proactively in crisis situations
  • Consider the complexity, transparency, and role of AT1 instruments in a holistic manner

The report identifies potential issues with the design and operationalization of Basel III liquidity standards, as well as shortcomings in the current regulatory treatment of interest rate risk in the banking book.

FINMA’s Report: Lessons Learned from the CS Crisis

FINMA’s Report “Lessons Learned from the CS Crisis” also reflects on areas where an extension of the legal framework or clarification of implementing provisions is needed. However, FINMA notes that no supervision can be 100% watertight, but possible solutions can reduce the probability and impact of a failure.

Public Liquidity Backstop for Systemically Important Banks (SIBs)

In September 2023, the Federal Council introduced the Public Liquidity Backstop (PLB) for SIBs. The PLB mechanism allows the Swiss National Bank to grant additional liquidity to an SIB under resolution if it has insufficient collateral and no other options to finance itself.

Key Features of the PLB

  • Allows the Swiss National Bank to grant additional liquidity to an SIB under resolution
  • Requires SIBs to pay a risk-adjusted lump sum to the Swiss Confederation annually as compensation for the risk of loss associated with default risk guarantees granted under the PLB
  • Includes risk premiums and interest costs payable on loans disbursed under the PLB

The introduction of the PLB aims to ensure continuation of systemically important functions, prevent loss of confidence, and reduce the risk of cross-border contagion.

Potential Future Implications for the Swiss Banking Sector

Increased coordination between the SNB, FINMA, and FDF in crisis management may lead to improved support for banks but also increased regulatory compliance and public scrutiny. The proposed measures aim to empower FINMA to impose sanctions for violations of regulatory ratios, enhancing its enforcement capabilities.

Key Proposals

  • Senior Manager Certification Regime: enables FINMA to penalize senior bank managers or other actors who harm the financial sector through their activities and decision-making power
  • Naming and Shaming: publication of enforcement procedures under this form could lead to increased public scrutiny and pressure on financial institutions

These measures may result in restructuring of business lines, changes in governance, and improvements in risk management systems, consuming considerable efforts and costs. The recommendations laid out in the Report are expected to have a significant impact on the Swiss banking sector.