By Benjamin Leisinger / Daniel Hulmann (Reference: CapLaw-2023-40)
At its meeting on 6 September 2023, the Swiss Federal Council adopted the dispatch on the introduction of a public liquidity backstop (PLB) for systemically important banks or banks that are a member of a systemically important financial group (such bank a SIB). A PLB is a government liquidity provision that only comes into play when, firstly, the SIB’s own liquid assets are no longer sufficient to meet its financial obligations and, secondly, the options for the Swiss central bank (SNB) to provide liquidity assistance against collateral (in Switzerland, the ordinary intraday facility, the liquidity-shortage financing facility and the emergency liquidity assistance) have been exhausted. It is then possible for the SNB to provide additional liquidity which is guaranteed by the Federal Government as part of a restructuring of the affected SIB. The level of the guarantee is defined on a case-by-case basis depending on the circumstances. The draft legislation further explicitly clarifies that there is no legal entitlement to the granting of a guarantee by the Federal Government for liquidity assistance loans from the SNB.
The key parameters for a PLB to strengthen the stability of the financial sector had already been adopted by the Federal Council in 2022 and were subsequently implemented for a first time in March 2023 by the passing of an emergency ordinance as part of the takeover of Credit Suisse Group AG by UBS Group AG through a merger by absorption. The PLB and individual provisions of the emergency ordinance that are still required are now to be transferred into ordinary Swiss law.
The draft legislation provides for certain restrictions for a SIB that receives PLB, including a prohibition to pay dividends and, with the exception of the fulfillment of pre-existing ordinary interest, amortization and repayment obligations, the redemption of AT1 instruments, Tier 2 instruments or Bail-in bonds. An intentional violation of these restrictions would be subject to criminal sanctions (imprisonment for up to three years or a fine).
In contrast to the previous consultative draft, the draft legislation now provides for a “lump-sum compensation”, which SIB must pay in advance to the Swiss Confederation. This lump sum is intended to compensate the Swiss Confederation for the risk and also to mitigate competitive distortions. The lump sum applies regardless of whether a PLB is ever granted to a SIB. A SIB incurs additional interest and premia if a PLB is actually granted to it.
A PLB is not a Swiss specialty but rather one of the standard international instruments for dealing with banking crises. For example, the United Kingdom, the United States, the EU, Japan and Canada, among others, have introduced a PLB or a similar instrument. The PLB or the availability of similar additional liquidity measures is said to increase the chances of success of a possible restructuring, or rescue, of a SIB, thus contributing to financial stability in Switzerland and internationally. Introducing such a tool into ordinary Swiss law would level the international playing field and put SIBs in Switzerland in a comparable situation to their foreign peers.
Benjamin Leisinger (benjamin.leisinger@homburger.ch)
Daniel Hulmann (daniel.hulmann@homburger.ch)