Resolution of banks

If FINMA is forced to withdraw a bank’s licence, the bank is put into compulsory liquidation. Where the licence is returned voluntarily, the bank is responsible for dissolving itself under FINMA’s oversight. When there is a risk of insolvency, FINMA will first assess the possibility of restructuring the bank and only if a restructuring is impossible will it open bankruptcy proceedings. In the case of systemically important banks, FINMA can draw on the institutions’ resolution plans, which are prepared as a precaution and require FINMA’s approval.

Trigger for a resolution and possible measures

FINMA intervenes as soon as there is a real risk of a bank becoming insolvent, for example if there are well-founded concerns that it is over-indebted or has serious liquidity problems or the bank has breached capital requirements. FINMA assesses this risk on a forward-looking basis using both quantitative and qualitative criteria. Its statutory mandate requires it to intervene before depositors and other creditors are avoidably harmed. However, it is always first and foremost the responsibility of the bank’s management and shareholders to avert a threat of bankruptcy by their own efforts and without state support.

Initially, FINMA’s intervention typically consists of protective measures. For example, the bank can be prohibited from making payments for a certain period to avoid large deposit withdrawals in the event of a bank run. Protective measures can also be put in place to prepare a subsequent restructuring or liquidation.

A formal restructuring can be launched if there is a good chance of its successful completion, or of ensuring continuity of individual banking services. Moreover, FINMA may only restructure an institution if this is expected to be more beneficial to creditors than immediate insolvency (the “no creditor worse off” principle). If there is no prospect of restructuring the bank or a restructuring has failed, the bank must be placed into bankruptcy.

The restructuring procedure

The objective of a restructuring procedure under Swiss banking legislation is to return the bank to viability, i.e. to continue its business operations after the restructuring or at least continue some of its services. FINMA is responsible for initiating the process, although it can appoint a restructuring agent to prepare and carry it out.

A restructuring begins with a decision by FINMA to initiate the restructuring procedure, which is made public. A restructuring plan lays out the basic elements of the process and stipulates the measures that need to be taken. Restructuring plans contain a menu of different measures including writing down the bank’s capital and issuing new equity. It can also involve converting debt into equity and writing down assets (see bail-in).

Continuity of services

In addition to a bail-in, the legislation also explicitly mentions the possibility of a complete or partial transfer of assets and liabilities to an acquiring bank. The acquirer can be either an established institution or a bank specially created for this purpose, known as a bridge bank. The aim of the transfer is for the acquiring institution to carry on the services that are at risk.

Standard contracts in the banking business often contain termination rights or an automatic termination of contracts if the authorities intervene in a bank. The launch of a resolution can therefore lead the bank’s counterparties to terminate their contractual relationships forthwith, which can make successful restructuring much more difficult. FINMA can therefore impose a stay of a maximum of two working days on the termination of contracts.

Protection of creditors’ rights

A resolution can affect the rights of creditors with the “no creditor worse off” (NCWO) principle protecting these rights. The NCWO principle stipulates that creditors may not be in a worse position as a result of a restructuring than they would have been if the bank had been put into liquidation. The procedural rights of creditors differ according to the nature of the institution. If the restructuring plan of a non-systemically important bank contains an intervention in the rights of creditors, FINMA must present the plan to creditors and set a deadline for them to accept or reject it. If the creditors reject the plan, FINMA will place the bank into bankruptcy. In the case of systemically important banks, however, FINMA approves the restructuring plan without consulting the creditors beforehand. In order to protect financial stability, creditors are barred from blocking the restructuring plan of a systemically important bank.

However, both shareholders and creditors can lodge an appeal against the restructuring plan with the Swiss Federal Administrative Tribunal. By law the appeal against the approval of the restructuring plan does not have a suspensive effect. If the appeal by a creditor or shareholder against the approval of a restructuring plan is successful, the court can only direct the payment of compensation.

The measures contained in the restructuring plan take full legal effect as soon as the plan has been approved. For example, if a bail-in is imposed, the bank’s balance sheet is restructured as soon as the plan has been approved. This is important, as a resolution usually has to be carried out in a timely manner.

Declaring a bank insolvent

If there is no prospect of successful resolution, FINMA will withdraw the bank’s licence, place the bank into insolvency and announce this publicly. The aim of the bankruptcy procedure is to meet the claims of all creditors equally in accordance with the creditor hierarchy. Immediately after the launch of the insolvency, the privileged deposits of the bank’s clients in its Swiss subsidiaries and branches up to a maximum of CHF 100,000 per depositor are paid out from the bankrupt institution’s available liquid assets. If the liquid assets are insufficient to pay the full amount, the shortfall up to the CHF 100,000 limit is covered as far as possible by the depositor protection scheme.

Any remaining shortfall along with the other deposits and assets are ultimately dealt with based on the creditor hierarchy. Custody assets held on behalf of clients are segregated and transferred back to the client. The liquidation dividend is only paid out once all lawsuits relating to the identification of the assets and liabilities are resolved and all of the insolvent bank’s assets have been realised. The insolvency proceedings end with the deletion of the bank from the Commercial Register. The liquidation process can be accelerated if parts of the business are sold to other market participants.

Deploying a liquidation agent

FINMA does not usually carry out the insolvency proceedings itself, but appoints a liquidator as its representative. The liquidator carries out the insolvency under the supervision and direction of FINMA. This consists essentially of paying out the protected deposits, distributing any segregated assets, realising the bank’s assets, drawing up the schedule of claims, conducting lawsuits and distributing the bankruptcy dividend. FINMA may convene a creditors’ meeting or creditors’ committee. The latter is particularly useful as a forum for supporting the liquidator’s work while at the same time representing creditors. The committee is defined in law as a supervisory body that represents the interests of the creditors as a whole. The liquidator informs creditors of the insolvent bank at least once a year of the status of the liquidation proceedings by means of a circular.