With its FINMA Banking Insolvency Ordinance (BIOFINMA), Switzerland is one of the first countries to have a set of instruments at its disposal that in principle allows the resolution (and winding down) of systemically important financial groups to be carried out effectively.
BIO-FINMA meets almost all of the requirements set out in the FSB’s ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’. This has been confirmed by initial international reviews carried out by the IMF and other institutions in 2013. BIO-FINMA is also equivalent to the draft EU Directive on a ‘Framework for the Recovery and Resolution of Credit Institutions and Investment Firms’ and the US Dodd–Frank Wall Street Reform and Consumer Protection Act. Any measures required to be taken by FINMA and the SNB therefore fall within the international standards.
In view of doubts voiced by the Federal Administrative Court about the legal basis of certain BIOFINMA provisions and in the light of international developments in insolvency standards, FINMA is currently assessing whether further action needs to be taken in this area of regulation.
The global resolution strategy for globally active systemically important Swiss banks is based primarily on a ‘bail-in’41 triggered by FINMA, involving a conversion of debt into equity. This means that bond holders as well as shareholders will bear some of the burden. Under FINMA’s preferred approach, known as the ‘single point of entry’, this will take place at the highest level of the group under the auspices of its home supervisory authority. On top of this are a range of measures such as the restructuring of the group, the winding-up of individual units or business areas, or a change of management. Only in the worst-case scenario, where the bail-in is impossible to execute, will the financial group have to be split up, with the local emergency plans being triggered.
Once agreement had been reached with the British authorities (Bank of England, FSA) and those in the US (Fed, FDIC, OCC and the authorities of individual states) on a common basis for a resolution strategy, FINMA published a position paper on the subject on 7 August 2013. It provides transparency on how FINMA will proceed in the event of failure of a global systemically important bank and makes clear that the state does not intend to use taxpayers’ money to rescue such institutions.
Initially, the bank’s investors and creditors are to be called upon to bear the burden. Since they now have legal certainty on this point, in future they can factor the possibility of a bail-in into their investment decisions.
Planning for recovery and resolution begun in 2012 was developed further. In 2013, the large banking groups submitted their first complete recovery plans to FINMA, explaining how they would stabilise the situation in a crisis and maintain at least parts of their operations, including the systemically important functions, without government intervention.
In the event of an improvement in their global resolvability, banks designated systemically important under the ‘too big to fail’ rules may obtain a rebate on the special capital requirements applying to them. In its communication with the big banks, FINMA indicated that it views incorporation of the Swiss business into a separate legal entity with a registered office in Switzerland as a key prerequisite for granting a capital rebate. At the end of 2013, both UBS and Credit Suisse announced the establishment of separate Swiss legal entities into which they plan to bundle the Swiss business, including the systemically important functions.
At the same time, FINMA worked on resolution plans by means of which it resolves financial groups threatened with insolvency or winds them down in an orderly manner. The first versions of these plans were finalised for Credit Suisse and UBS at the end of June 2013, and were then submitted to the SNB and the supervisory and resolution authorities in the US and UK for consultation.
In joint working groups, FINMA discussed recognition of, and cooperation in, the (operational) implementation of the single point of entry resolution strategy, and the expedient structuring of the banks and their debt issuance.
One key area in 2014 will be the operational implementation of a bail-in and its process planning.
Having an effective and internationally coordinated resolution strategy in place is pivotal in tackling the ‘too big to fail’ issue at systemically important banks.
(From the annual report 2013)