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Public Liquidity Backstop (PLB)
In addition to the above, on the 6th September 2023, the Federal Council adopted the introduction of a PLB for SIBs. Under the PLB mechanism, if an SIB under resolution does not have any other options to finance itself and has insufficient collateral to apply for an ELA, the SNB may grant additional liquidity, on the basis of a guarantee provided by the Swiss Confederation. It may grant the default-risk guarantee at its discretion, considering the risks associated with the granting of the guarantees against the risk of default. The introduction of the PLB has a two-fold rationale. Firstly, it ensures continuation of systemically important functions in cases where the bank is unable to finance itself and the ELA provided may not be sufficient. Secondly, it prevents the loss of confidence, so that its very existence helps to avoid the need to activate it. Indeed, the mere possibility of granting additional liquidity with a default risk guarantee will have a preventive effect on the market and avert, if necessary, an SIB from being stormed by depositors.
An SIB shall be required to pay an ex-ante, risk adjusted lump sum to the Swiss Confederation every year, as a compensation for the risk of loss that the latter may be exposed to, on account of the default risk guarantees granted under the PLB. The lump sum payments must be made annually regardless of whether the liquidity support under the PLB is granted. Further, risk premiums and interest costs are payable on loans disbursed under the mentioned PLB and accrue for as long as the aid remains. As such, the introduction of the PLB will involve significant cost implications for SIBs, which will also serve to offset the competitive advantages they enjoy over Swiss banks without systemic importance.
The implementation of the PLB in Switzerland aligns with international best practices standards and will help in enhancing the stability of the banking sector. The introduction of the PLB should strengthen Switzerland’s current position as one of the most stable international banking centers despite recent events, increase confidence on the part of foreign supervisory authorities in Swiss G-SIB and also address potential competition imbalances that could negatively affect Swiss G-SIB by ensuring a competitive level playing field with their foreign counterparts of major financial centers. Furthermore, it should reinforce investors’ and customers’ confidence in the resolution capacity of an SIB. The confidence gain will also improve the scope for refinancing on the market. However, the introduction of the PLB may involve cost implications for SIBs due to the lump sum and premium payments.
Potential future implications for Swiss banking sector
While increased coordination between the SNB, the FINMA and the FDF in connection with crisis management and the reinforcement of FINMA’s position, would lead to an improved support for banks, it may also result in increased regulatory compliance and public scrutiny.
The proposed measures seek to further empower FINMA to impose sanctions for violations of regulatory ratios, thereby enhancing its enforcement capabilities by broadening the range of proactive and protective measures available to it, allowing for greater intervention.
Of note, the FINMA is the only prudential supervisory authority at an international level that cannot impose fines. Empowering the FINMA in this regard, would drastically change the consequences for non-compliance by Swiss financial institutions, constituting a powerful monetary incentive. Besides financial liability intended as a dissuasive measure, the proposed introduction of the “Senior Manger Certification Regime” would enable FINMA to penalize senior bank managers or other actors that could harm the financial place due to their risky activities and decision-making power, by establishing a causal link between acts or omissions of managers and serious breaches of supervisory law - in other words, implicating their personal responsibility. Further, the publication of enforcement procedures under a “Naming and Shaming” form as used already in the United Kingdom would require from financial institutions a possible review of their risk appetite - given that the public is, at the moment, largely unaware of the true position of a non-complaint financial institution - due to increased public scrutiny and consequently, pressure.
The above could lead to restructuring of business lines, changes in governance as well as improvements in risk management systems, consuming considerable efforts and costs. The recommendations laid out in the Report, if pursued, would have undeniably a considerable impact on the Swiss banking sector.