Switzerland: Financial Sector Stability Assessment; imf country Report 14/143; April 16, 2014

 
 

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SWITZERLAND
INTERNATIONAL MONETARY FUND
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13. Despite restructuring and deleveraging, it is unclear how the Swiss authorities could 
handle TBTF banks if problems were to re-emerge. Since 2008, UBS has deleveraged its balance 
sheet by more than 40 percent. CS has shrunk by 21 percent. Nevertheless, their balance sheets 
still amount to multiples of the output of the Swiss economy, 2.3 times GDP against a peak at 4.6 
times GDP. They have some of the lowest ratios of risk-weighted assets to total assets among 
major banks (i.e., high leverage). 
14. Developing viable resolution strategies for the G-SIBs is a work in progress. Both 
banks have announced operational and structural reforms which aim to preserve systemic 
operations in Switzerland in the event of the banks’ failure.
Key host jurisdictions are also seeking 
to enhance the robustness of the overseas operations of these banks. FINMA has issued a position 
paper which sets out the potential benefits of a “top down” (TD) or “single point of entry” strategy 
compared to ring-fencing of resources in different jurisdictions.
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Under a TD strategy, loss 
absorbing debt would be bailed-in and capital and liquidity streamed down to entities under stress 
within the group, including overseas. Among other reforms, the following would be required to 
make this viable in practice:
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 
Sufficient loss-absorbing debt would be needed at the point of failure. This would need to 
be of sufficient maturity so as not to roll off prior to bail-in. It may also need to be 
structurally subordinated (e.g., issued out of a holding company) to senior debt which for 
operational or systemic reasons may be difficult to bail-in (e.g., derivatives, uninsured 
deposits, interbank funding).
 
Currently, most of the G-SIBs’ senior debt is issued under foreign law, and would need to 
be issued under Swiss law or have contractual provisions which give effect to the Swiss 
bail-in powers.
 
Intragroup arrangements (e.g., cross guarantees) would also be needed to transfer group 
losses, including in group entities in other jurisdictions, to the entity which issued the debt.