Investor protection for Swiss Pfandbriefe

Investors in Swiss Pfandbriefe (covered bonds) enjoy the special protection offered by the mortgage bond institutions’ 
(Pfandbriefzentralen) chain of protective measures and other statutory provisions. In the two-tier Swiss Pfandbrief system, the protection mechanisms are effective both directly at the Pfandbrief institution level and indirectly in the event that a member bank is at risk of insolvency.

Swiss Pfandbriefe are issued under the Swiss Pfandbrief Act and covered by additional collateral. Only two special mortgage bond institutions are admitted as issuers of Swiss Pfandbriefe: the Pfandbriefzentrale der schweizerischen Kantonalbanken AG and the Pfandbriefbank schweizerischer Hypothekarinstitute AG. The business activities of the two institutions are restricted by law to: (1) issuance of Pfandbriefe, (2) transfer of the proceeds from the issuance of Pfandbriefe, (3) investment of equity and (4) short-term banking transactions required for (1) and (2). In return for the granting of a registered lien on first-class mortgage loans, the respective member banks are granted Pfandbrief loans in the same amount and with the same terms. The loans granted by the Pfandbrief institutions to their member banks, together with the interest outstanding on these loans, are secured by a statutory lien on all claims of the respective member bank against its mortgage debtors entered in a register. The Pfandbrief loans granted by the Pfandbrief institutions are themselves encumbered with a registered lien in favour of the Pfandbrief investors.

FINMA is responsible for supervising the Pfandbrief system and consequently Pfandbrief institutions. It is also charged with supervising the Pfandbrief and statutory banking regulations of the affiliated member banks, all of which have Swiss banking licences. In addition, FINMA is tasked with implementing recovery and resolution procedures. In this context, it can order protective measures for banks and/or mortgage bond institutions. It is also responsible for initiating and implementing restructuring and bankruptcy proceedings.

The Swiss Pfandbrief’s chain of protective measures

If bankruptcy proceedings are initiated against a member bank, the cover pool is intended to protect the Pfandbrief institutions and thus indirectly the Pfandbrief investors against defaults. Accordingly, the Pfandbrief Act and the Pfandbrief Banks' Valuation Rules to be approved by the Federal Council impose high requirements on the admissibility, valuation and safekeeping of cover pool assets and on managing the register of liens. Secured mortgage bonds bring advantages to the beneficiaries over creditors whose claims are not secured by a lien.

As special protective measures in the Pfandbrief system, FINMA may, in accordance with Article 32 para. 2 PfG, require the revaluation of real estate or order the surrender of the cover pool assets in accordance with Article 40 para. 1 PfG. In order to limit systemic risks, FINMA also has the option of approving separate collocation plans for claims protected by registered lien if necessary in accordance with Article 27 para. 3 BIO-FINMA.

Special regulations for recovery and resolution

Swiss law protects the principle of equilibrium and cover of the Pfandbrief system for member banks in distress. While FINMA can order a deferral and a postponement of maturity for normal claims by applying protective measures, the claims of mortgage bond institutions' covered by Pfandbriefe are explicitly excluded from this. Similarly, covered Pfandbrief loans are also protected against bail-ins in the context of restructuring.