Switzerland’s “too big to fail” regime for banks

The “too big to fail” problem arises in particular in the case of banks whose failure would seriously damage the Swiss economy and financial system. Such banks are deemed “systemically important”. They perform indispensable functions for the economy that cannot be substituted by alternative solutions in the short term. Chief among these are the domestic deposit and lending business as well as payment services. Accordingly, systemically important banks are required to hold higher capital and liquidity buffers and maintain recovery and emergency plans.

UBS, the Raiffeisen Group, Zürcher Kantonalbank and PostFinance are systemically important banks. They are particularly large, interlinked and their services are difficult to substitute with alternative solutions in the short term. After consulting FINMA, the Swiss National Bank therefore designated these banks and their functions or services as systemically important.

Systemically important banks must fulfil special statutory requirements to strengthen their resilience to crises. Higher capital and liquidity requirements make banks more stable. In addition, the banks and FINMA must plan appropriate preparatory measures for recovery, restructuring and, if necessary, bankruptcy, which can be implemented in the event of a crisis situation.

Systemically important banks must show FINMA annually in their recovery planning how they can stabilise themselves through their own efforts when in distress. The measures contained therein must be effective both at the liquidity level and at the capital level. They must be flexible and capable of being used in different scenarios. FINMA approves the recovery plan.

If recovery fails and the bank is at risk of insolvency or failure, FINMA must order measures under insolvency law. In preparation for this, FINMA produces a resolution plan for systemically important banks. It sets out how it would restructure or liquidate a systemically important bank if needed. It also assesses the resolvability of UBS on an annual basis (see also “Financial Stability Board”).

In their emergency plan, the systemically important banks must also show FINMA each year how their Swiss systemically important functions could continue uninterrupted if they were at risk of insolvency (Art. 9 BA). FINMA reviews the measures in the emergency plan for their effectiveness and feasibility. If necessary, it can set deadlines for remedying deficiencies or – as a last resort – impose specific measures.

FINMA regularly reports to the public on the status of crisis and resolution planning for systemically important banks and on the resolvability of UBS (reporting).