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«Too-big-to-fail»: Green light for new bank regulation

30/09/2011​

The confederate councils have settled their last disagreements of the «too big to fail»-bill. The Swiss parliament is widely following the recommendations of the commission of experts and has moved away from any inappropriate regulations. The new bank regulation is ambitious but reasonable from the economy’s point of view. There is an article in the law, which ensures regular checks on the proportionality with respect to set measures and regulations in other financial centres.

National Council and Council of States have set aside their differences regarding the «too big to fail»-debate at a settlement conference. The National Council was able to come out on top of the first controversial subject: The bill now orders the Federal Council to regulate offset equity capital requirements for major banks in an ordinance which has to be presented to the parliament at first-time passage. Economiesuisse approves of this procedure as it puts in place a lean legislative framework. The new legislation must be done in a way to provide legal certainty for the banking sector 

A second point turned out in the favour of the position of the Council of States: A Withholding Tax is going to be collected upon Contingent Convertible (CoCo) Bonds. In order to provide CoCo Bonds under economically viable conditions, the Parliament will have to implement the reform of the withholding tax, as proposed by the Federal Council in a quick and practice-oriented manner, in a separate bill. Unfortunately, the Parliament had already agreed on dismissing the discount on equity capital for major banks, even though the carrying on of system relevant functions in Switzerland is assured. This decision leads away from the original recommendations of the commission of experts.
 
Regular control checks are inevitable
economiesuisse supports the new regulation as agreed by the two chambers. However, one should consider that the total capital requirements for Swiss major banks will have to amount to some 19% of risk-weighted assets – this is clearly more than the international standards ask for. It is therefore important to monitor the international development closely. If the Basel-III rules would not become the standard abroad and other major banks would  not have to fulfil additional requirements, the „Swiss finish“ would turn out  to be much stricter than the commission of experts had foreseen it to be. This could hamper the international competitiveness of Swiss banking institutions.
Therefore, it is substantial for the new bank regulation to include a review clause: the Federal Council has to assess the impact of the law three years after entry into force and then every two years and to report to the Parliament of any necessary adjustments of the bill or the ordinance.
 
No further legal adjustments
Switzerland leads internationally and faces the too big to fail problem with a Swiss specific solution. It is remarkable that all involved parties could agree to a solution, which sets the right incentives and desists from any miracle cure. In the future it will be important to reject any, inappropriate demands such as a separation of commercial and investment banking, a holding structure according to countries or compensation requirements.
 
Documents and Resources
 
For further Information
Prof. Dr. Rudolf Minsch
Member of the Executive Board
rudolf.minsch@economiesuisse.ch