Until recently, depositors’ protection in Switzerland has seldom been an issue, because banks and securities dealers were considered to be safe. The ongoing financial crisis, however, has changed that view and has led the federal government and parliament to increase the protection afforded by Swiss banking law. Richard Kuster reports.
Swiss banking law has traditionally offered several ways to protect customers of banks and securities dealers in the event of a bankruptcy, the first one being the requirement set forth in the Swiss Federal Act on Banks and Savings Banks (Banking Act) and the accompanying ordinance that a bank must have liquid assets available at any time which must cover at least 33 percent of its short-term liabilities. In addition, the Banking Act provides for depositor protection rules which apply to banks and, analogously, also to securities dealers. These regulations, however, in the current financial crisis were considered by the authorities to be insufficient, and in order to strengthen the credibility of the financial system, the authorities have amended the Banking Act by implementing several measures, including:
• an increase of the amount of the preferential deposits;
• distribution of the entire liquidity available at the bank or securities dealer collapsed;
• coverage requirement for preferential deposits; and
• raising of the system boundary from CHF 4 billion to CHF 6 billion.
According to Swiss bankruptcy law, the claims of creditors of a bankrupt bank or securities dealer are split into three classes. The first class comprises generally labour claims, certain family law claims and certain accident insurance and pension fund related claims. The second class includes further social security claims, while the third class comprises all non-preferential claims. Payment of second-class claims takes place only after all first-class claims have been settled and third-class claims are settled following the payment of the second-class claims.
The preferential deposits (deposits which are not bearer denominated as well as treasury certificates) under the terms of the Banking Act are classified in the second class in a privileged amount of CHF 100,000, instead of CHF 30,000. Accordingly, this amount of CHF 100,000 will be treated as preferential debt in the event of a bank or securities dealer collapsing, thus taking priority over the claims of other creditors ranked in the third class.
This step is intended to strengthen the trust in the Swiss financial system and corresponds to the recent increase made in the European Union, which amounts to EUR 50,000.
Credibility boost
While the increase of the amount of the preferential deposits and their privileged treatment in case of a bankruptcy of a bank or a securities dealer is aimed at strengthening the credibility of the depositor protection scheme, it would not accomplish that purpose without a regulation concerning quick disbursement.
In this respect, a new rule has been implemented in the Banking Act providing for a pay-out of the preferential deposits out of the entire available liquid assets of the insolvent institution excluding any right of set-off in favour of the collapsed bank or securities dealer and outside of the formal liquidation procedure as quickly as possible. While the former regulation provided for a strict limit of CHF 5,000 per depositor to be paid out as quickly as possible, the new law providing for up to CHF 100,000 per depositor does not establish a strict boundary, but grants the Swiss Financial Markets Authority (FINMA) the discretion to determine on a
case-by-case basis which amount may be refunded immediately, thereby taking into account the other classes of creditors. This new provision allows for more flexibility than the original rule and is anticipated to create a more effective and quicker solution with respect to a substantial number of depositors’ claims.
Besides the increase in the amount of the preferential deposits and the amended rules regarding a quick disbursement, another substantial change has been made with respect to the coverage of the preferential deposits. While banks and securities dealers until recently have been obligated to fulfil certain liquidity and own capital requirements, there was no particular regulation in place with respect to a coverage of the preferential deposits. This has been seen as an important gap in the system of depositors’ protection by the federal government and the parliament and accordingly a new article has been included in the Banking Act committing each bank to hold assets in Switzerland covering at least 125 percent of the preferential deposits. This percentage may be raised or also be decreased by FINMA, provided, however, that a decrease must be well-founded and may only be approved by FINMA in case the business structure of a bank allows for an equivalent coverage.
One of the characteristics of the Swiss depositors’ protection system is the requirement to secure the preferential deposits by way of self-regulation amongst the banks and the securities dealers, which are obliged to provide liquid funds in case of a collapsing bank or securities dealer in favour of the customers of such bank or securities dealer. This obligation, however,
is limited and until recently amounted to CHF 4 billion. This system boundary, however, has also been raised and is now CHF 6 billion, meaning that if a bankrupt bank or securities dealer does not have sufficient assets to cover its preferential deposits, the other banks and securities dealers will contribute up to CHF 6 billion to cover the existing shortfall. This amount, accordingly, is the maximum amount guaranteed by the banks and securities dealers in case of a bankruptcy scenario.
While in the current economic climate such change is expected to raise confidence in the financial system, it does not solve the problem that the current system does not envisage payments in advance by the banks and securities dealers in order to cope with a potential bankruptcy.
These amendments came into force on 20 December 2008 and will, unless extended, expire on 31 December 2010. In the meantime the authorities will work towards a further general revision of the depositors’ protection system in Switzerland, in which particularly the general defect of ex post financing in case of a bankruptcy of a bank or securities dealer shall be rectified. These are important steps in order for the general aims of a working depositors’ protection – being an appropriate, however limited,
protection of deposits, a quick pay-out and adequate financing – to be secured.
This article is one of several that appear in
European Legal Developments Bulletin, Spring 2009.