Extension of Resolution Authority of FINMA to Bank Holding Companies

In connection with the current overhaul of the Swiss financial market laws, the Federal Government has determined that it seeks an extension of the resolution authority of FINMA to bank holding companies and other important group companies, which are not currently subject to FINMA’s resolution powers. With this move, Switzerland accords to stipulations from the Financial Stability Board to bring all relevant members of a banking group under a sole resolution authority.

By René Bösch (Reference: CapLaw-2014-23)

In connection with the publication in late 2013 of a proposal for a Financial Market Infrastructure Act, the Swiss Federal Council has attached a proposed amendment to the Swiss Banking Act to that law seeking the extension of the resolution authority of the Swiss Financial Market Supervisory Authority FINMA (FINMA) to bank holding companies of a financial group that are domiciled in Switzerland in relation to resolution and liquidation proceedings. The same shall apply to those Swissdomiciled group companies which shall be declared important by FINMA.

This proposed amendment to the Banking Act must be understood against the background of the current debate about the improvement of the resolvability of large systemically relevant banking groups. The Financial Stability Board (FSB) in October 2011 published recommendations to the national legislators and regulators under the title “Key Attributes of Effective Resolution Regimes for Financial Institutions”. These “Key Attributes” shall provide guidance how the resolution of systemically relevant financial conglomerates may be improved. The recommendations include inter alia the request that the resolution and/or liquidation of an internationally active bank shall lie within the competence of one single resolution authority. In Switzerland, FINMA currently has only the resolution power on regulated banks as well as Swiss regulated branches of foreign banks, but not in relation to bank holding companies that do not have the status of a regulated bank. As a consequence, this would currently mean, that while a bank belonging to a financial group would be subject to the resolution authority of FINMA, its parent company, if domiciled in Switzerland, would be subject to the ordinary bankruptcy and liquidation procedures set forth in the Swiss Bankruptcy Act.

While the Federal Government has just announced its plans for a major overhaul of the Banking Act and its transformation into a socalled Financial Institutions Act, it is likely that this major legislative effort will take a number of years towards implementation. Therefore, the Federal Government decided that in a first step, an amendment to the Banking Act shall be attached to the Financial Market Infrastructure Act, which shall be submitted to Parliament within the next few months and according to the hopes of market participants should be passed by Parliament rather quickly, hopefully with an implementation and entering into force by the summer or fall of 2015. The Financial Institutions Act would be enacted later and, if so, would then simply transform that provision in the Banking Act into the new legislative framework.

The now proposed amendment to the Banking Act has been welcomed by the industry as it closes a gap in current Swiss regulation. It refers to the Too Big To Fail-legislation that was entered into the Banking Act as of 1 March 2012, and for the first time made explicit reference to the submission of bank holding companies to the Banking Act outside of themes relating to consolidated supervision. And it goes beyond and seeks to submit to the resolution authority of FINMA those Swiss-domiciled Kgroup companies that are not regulated as banks but exercise important functions within the group. These “important functions” shall include, according to the recommendations of the FSB, services in the areas of treasury, risk management, accounting, human resources, information technology, trading and settlement and legal and compliance. The draft also contemplates that FINMA will determine the important group companies on the basis of these criteria per financial group and name them in a public register.

René Bösch (rene.boesch@homburger.ch)