On 8 March 2019 the Federal Council initiated a consultation on a partial revision of the Banking Act, in particular regarding the:
- restructuring of failing banks;
- strengthening of the deposit insurance system; and
- supplementary provisions for the segregation of intermediated securities.
The Banking Act currently regulates only the main features of the restructuring procedure for banks, while the more detailed provisions are given in the Swiss Financial Market Supervisory Authority Banking Insolvency Ordinance. To strengthen legal certainty, instruments such as capital measures (eg, a bail-in) interfering with the rights of bank owners and creditors will now be regulated on the legislative level (ie, in the Banking Act itself). Moreover, the banks are no longer allowed to secure half of their contribution obligations to deposit insurance in the form of additional liquidity, but now must deposit securities or Swiss francs in cash with a custodian. If a bank liable to pay contributions does not meet its payment obligations, deposit insurance will use these deposited values. The pay-out deadline for the funds from deposit insurance to the bankruptcy liquidator will be reduced from 20 to seven days. On receipt of the bank client's payment instructions, the secured deposits will be paid to the client within a further seven days.
The proposed amendments in the Intermediated Securities Act will require that custodians of intermediated securities separate their own holdings from their clients' portfolios. If assets are held by a custodian abroad, the Swiss custodian that has a direct relation to the foreign custodian must take measures to protect the intermediated securities booked with the foreign custodian. In addition, the information provided to clients in this context will need to be improved.
According to the current legal framework (in particular, Articles 37a and 37b and 37h-37k of the Banking Act), in the event of the bankruptcy of a bank (or a securities dealer), deposits of up to Sfr100,000 per customer are privileged. Insofar as the institution in bankruptcy has sufficient liquid funds, the privileged deposits up to the maximum amount are paid out immediately and outside of the ordinary procedure. If these funds are not sufficient, the deposit guarantee is applied to deposits of up to Sfr100,000 at Swiss branches (Article 37h Paragraph 1 of the Banking Act) (ie, secured deposits). This is financed by the other banks through contributions levied in the event of an incident by the self-regulation body (esisuisse), which ensures that the amount can be paid out as quickly as possible in the form of advance payments. To the extent that the deposit guarantee makes payments, the secured claims of depositors are transferred to them.
The current system of deposit protection has generally proved its worth in principle and is not therefore under review as a whole. The Federal Council considers that there is a need for reform in three specific areas:
- Pay-out period – according to practical experience, depositors expect that the disbursement of their funds may take several months. This damages confidence in the system and increases the danger that a banking run cannot be credibly prevented. In order to achieve the necessary credibility and ensure the functionality of the system, a clearly defined and shortened legal deadline, within which payment to depositors is required, will be introduced. In particular, there will be a new seven-day deadline for payment by the deposit guarantee to the bankrupt bank and from the latter to the bank's customers. In order to guarantee this, the banking institutions will be obliged to provide the necessary technical equipment.
- Type of financing – according to applicable law, the deposit guarantee is financed only once a failure of a bank actually occurs. This means that the other banks are obligated to provide liquidity to the affected bank (via the esisuisse system) only when the deposit guarantee is activated (ie, ex-post financing). This system can have a pro-cyclical effect in that the (already tense) financial situation of the provider banks will be further aggravated. This situation can have a negative impact, especially in the event of a systemic crisis with numerous banks affected. For these reasons, there is a clear international trend towards the creation of ex-ante funds. As an alternative to an ex-ante fund, the existing system can also be significantly strengthened by depositing securities. Therefore, according to the Federal Council's proposals, the current system with its specifications for the keeping of additional liquidity by the banks is to be replaced by the obligation to deposit securities (ex-ante components). In particular, the banks will have to deposit half the amount of their contribution obligations in the form of readily realisable securities in hard currencies or Swiss francs in cash at a suitable third-party custodian. Alternatively, smaller institutions will be able to deliver equivalent securities in the form of a cash loan in favour of the deposit protection system. In case the deposit protection system needs to kick in, the deposited securities can be realised if the bank obligated to pay is not able to do so.
- Maximum obligation – the deposit guarantee scheme is currently limited to a maximum of Sfr6 billion (Article 37h Paragraph 3 of the Banking Act). The legislature increased the upper limit from Sfr4 billion in 2004 to Sfr6 billion in 2011 to prevent widespread instability if several banks failed. As the total amount of the secured deposits has increased in recent years – while the contribution obligations of the banks have remained constant – the maximum limit will be adjusted in line with these developments to 1.6% of the total amount of secured deposits.
In contrast to deposits, securities account values (eg, stocks, shares and fund units) are considered to be owned by customers even if in custody of the bank. Therefore the customers of an affected bank have the right to request the segregation and delivery of these assets in the bankruptcy proceedings of a failing bank. This rule applies to both custody account assets and physical assets held at the affected bank (eg, precious metals deposited by customers). In order to allow such segregation and delivery in the event of bankruptcy, the holdings of customers must be separated from the bank's own holdings (ie, via segregation). In order to strengthen this procedure, the rules for segregation (in particular for book-entry securities) will be improved throughout the entire domestic custody chain and the first foreign depository, if any.
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