The Swiss Financial Market Supervisory Authority (FINMA) has joined the growing club of western institutions who have quietly re-written banking laws to allow depositor “bail-ins” upon the next banking crisis. If Switzerland, the once ultimate safe haven for banking deposits across the world is preparing to confiscate depositors funds, there is no truly protection anywhere other than physical gold.
In the event that a bank is failing or where its capitalization is no longer adequate, the Swiss Financial Market Supervisory Authority (FINMA) may take measures to improve such bank’s financial viability rather than liquidating it. “Loss absorption” and “bail-in” are important instruments to support any such measures.
The document begins by advising that the FINMA now has legal authority to confiscate depositor funds, thanks to a revision of the Banking Act of 1934, completed in 2011, as well as the revision of the Bank Insolvency Ordinance completed November 1st 2012:
In the event that a bank is failing or where its capitalization is no longer adequate, the Swiss Financial Market Supervisory Authority (FINMA) may take measures to improve such bank’s financial viability rather than liquidating it.
“Loss absorption” and “bail-in” are important instruments to support any such measures. This is now possible as a result of a revision of the Banking Act of 8 November 1934 (the “Banking Act”) in 2011 and the taking effect of a revised Bank Insolvency Ordinance on 1 November 2012 (the “Bank Insolvency Ordinance”) and of a revised Capital Adequacy Ordinance on 1 January 2013 (the “Capital Adequacy Ordinance”).
The document states that The Banking Act now grants discretion to FINMA regarding depositor bail-in measures:
Under the Banking Act, if there are concerns that a bank is over-indebted or if a bank does not meet liquidity or regulatory capital requirements, the FINMA may as appropriate: (i) take protective measures; (ii) initiate bank reorganization proceedings; or (iii) order the liquidation of the bank (bankruptcy). The Banking Act grants significant discretion to FINMA in this context. This includes, inter alia, ordering a bank moratorium, a maturity postponement or “bail-in” measures.
And in the scope of bail-in measures, states that bail-ins are to be a measure of last resort:
Scope the loss absorption measures described above relate to capital instruments issued by the bank. In addition, the revised procedural rules as specified in the secondary legislation to the Banking Act applicable in a bank reorganization context (i.e. if FINMA believes that the bank may be successfully reorganized or if at least part of the business of the failing bank may be continued), as enacted by FINMA, provide for the competence of FINMA to convert or write-off other debt (even in the absence of any contractual provision to that effect in the arrangement governing such debt) if and to the extent necessary to allow the bank to meet its regulatory capital requirements after completion of the reorganization (bail-in).
Such bail-in is designed to be available as a measure of “last resort” to be taken in the event that the loss absorption under the capital instruments issued by the bank is not sufficient to restore the required capitalization of the failing bank and if the creditors are likely to be better off than in an immediate insolvency of the bank.
The bail-in must be specified in the reorganization plan, which must be approved by FINMA and – except for banks of systemic importance – also by a majority of non-privileged creditors (calculated on the basis of the claim amounts). If such approval cannot be obtained, the bank would be liquidated in bankruptcy proceedings. In the event that FINMA only applies protective measures, but does not consider any reorganization measures as necessary or adequate, a bail-in could not occur as one of such protective measures.
Full document FINMA: Loss absorption and bail in for Swiss banks