25 January 2012

FSB completes peer review of Switzerland

The peer review examined the steps taken by the Swiss authorities to address FSAP recommendations on regulatory and supervisory issues in the following areas: banking and supervisory framework; banking supervision; (re)insurance regulation and supervision; and pension regulation and supervision.

The Financial Stability Board (FSB) published today the report on the peer review of Switzerland. The main purpose of the report is to assess Switzerland’s progress in addressing regulatory and supervisory issues raised by the International Monetary Fund (IMF) under the Financial Sector Assessment Programme (FSAP) in 2006-07. The report also provides an overview of market and regulatory developments since the FSAP was published.

The response of the Swiss authorities to the problems of one of the two systemically important banks (SIBs) during the financial crisis was swift and effective. Their actions, in combination with strong macro-economic fundamentals, allowed the economy to recover fairly quickly with very limited fiscal stimulus.

Nevertheless, the crisis did reveal the considerable macro-economic and financial system risks arising from a SIB’s failure, and demonstrated that large losses by these institutions were not merely a theoretical possibility. As a result, strengthening their resilience has become a key priority for the authorities. The lynchpin of their response is the recently-approved too-big-to-fail (TBTF) package, which is due to come into force on 1 March. The FSB commends the Swiss authorities for developing this package, particularly in the absence of an internationally-agreed framework at the time on how to deal with systemically important firms. The package goes beyond international minimum standards in terms of regulatory capital requirements and has been influential in the international policy debate on this issue.

Implementation issues, such as the use of contingent capital instruments and the application of regulatory capital “rebates” for firms that are able to demonstrate resolvability and resolution beyond minimum requirements, will be important for the success of the TBTF package. However, at least as important is ensuring: (1) a rigorous corporate governance framework in SIBs to ensure that their risks are well-understood and adequately managed internally; and (2) a robust supervisory framework in the prudential authority (FINMA) with sufficient resources and intensive supervision. These two factors are particularly relevant given the size, global reach and business models of the two large banks.

Press release

Full report

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