How to regulate Swiss banks: a step-by-step guide

Swiss Finance Minister Karin Keller-Sutter wants to revise bank supervision. Keystone / Anthony Anex

How should Switzerland regulate its banks following the collapse of Credit Suisse in 2023? The government's proposals were made public mid-April. SWI swissinfo.ch breaks down the most important elements at a glance.

March 19, 2023, saw an unfortunate entry in the Swiss history books, as Finance Minister Karin Keller-Sutter announced that Credit Suisse would be taken over by UBS – backed by billions of francs from the Swiss government.

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Just over a year later, the government presented its proposals to beef up banking regulation in the future. We outline the three most important elements:

1: More equity capital for bank parent companies

A central element of the government’s proposal concerns the capital requirements of parent companies. They are to be “substantially” tightened, writes the governing Federal Council in its banking report. But what exactly is a parent company?

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This entity is otherwise known as a holding company, and it often holds shares of subsidiaries within the group. UBS’s parent company holds shares in the bank’s United States business, among other things.

Such investments must currently only be backed by around 60% of the bank’s own equity capital (made up of assets the bank owns). This means that the parent company can partially finance an equity increase in its US unit by borrowing money from the debt markets. This is often cheaper for the bank, but results in the parent company having to stockpile comparatively little equity.

In future, this type of equity financing will no longer be possible to the same extent. The proposed new rule is intended to strengthen the parent company.

2: Government resists progressive capital increases

By contrast, the Federal Council is against increasing the progressive capital requirements for big banks – which is the extra capital reserves demanded of ‘Too Big to Fail’ banks. This decision runs contrary to the expectations of many experts and the Swiss National Bank (SNB), the Swiss Financial Market Supervisory Authority (FINMA) and the State Secretariat for Economic Affairs (SECO), according to the Tages-Anzeiger newspaper.

The progressive equity component already exists today. It leads to a disproportionate increase in capital requirements when a bank grows. And because equity is expensive, this means that the larger a bank is, the more expensive it is to expand further.

However, the Federal Council does not want to make business growth even more expensive. For this reason, the progressive capital requirement for big banks will not be increased.

3: Extra central bank liquidity available for banks

The third element of the Federal Council proposals would oblige the SNB to make more money available to banks in an emergency.

This is important because failing banks are almost always dependent on money from the central bank to pay out their customers. Credit Suisse could draw a maximum of CHF250 billion ($280 billion) from the SNB in 2023 to prevent a default.

A more remarkable aspect of the Federal Council’s proposal is the desire to also expand the supply of liquidity via the SNB’s ordinary instruments – despite the constitutionally protected independence of the central bank.

This relates specifically to the SNB’s so-called ELA (Emergency Liquidity Assistance) loans.

According to reports, the Federal Council wants the SNB to accept less high-grade collateral from banks when it issues ELAs in future. What makes this awkward is that the SNB already has the power to make these decisions by itself. Despite this knowledge, the Federal Council has nevertheless decided to exert political pressure on this issue.