René Bösch and Benjamin Leisinger of
Homburger explain how the country’s treatment of
bank capital differs from EU standards
Who are the relevant supervising authorities that govern
financial institutions in the context of national Basel III/
CRD IV implementation and what is their remit?
Switzerland fully implemented Basel III as of January 1
2013. However, not being a member of the EU, it will not
implement CRD IV.
The Swiss Financial Market Supervisory Authority (FINMA) was
and still is responsible for issuing implementing regulations
and, hence, also for the implementation of Basel III.
Are instruments other than common shares eligible to
qualify as CET1 for banks and mutuals?
The Capital Adequacy Ordinance that implements Basel III
names as instruments that qualify as CET1 the paid-in company
capital, which includes nominal share capital, free reserves
and retained earnings. Under Swiss company law, in addition to
common shares, it would be possible to issue participation
securities that in our view could qualify as CET1;
participation certificates are essentially a form of non-voting
stock, with which, however, no preferential rights would be
According to FINMA Circular 2013/1, however, a bank that
claims two or more different equity shares as CET1 of a bank,
must demonstrate that these shares are treated equally
regarding profit and loss sharing (also in the case of a
liquidation). Additionally, for banks and financial groups
supervised by FINMA that are organised as corporations and the
common stock of which is traded on a Swiss or foreign stock
exchange (with supervision that is equivalent to that of the
Swiss stock exchange), only the common stock, and no other
instrument, is eligible for CET1. Shares that do not qualify as
CET1 of a bank must be allocated to additional tier 1 capital
(AT1) or to tier 2 capital, provided they meet the necessary
A bank's CET1 is subject to deductions. For example,
deferred tax assets, the realisation of which depends on the
bank's future profitability, must be fully deducted from a
bank's CET1. However, netting with associated deferred tax
liabilities within the same geographical and factual taxation
jurisdiction is permitted.
What instruments qualify as AT1 capital?
In its implementation of Basel III, Switzerland followed
very closely the wording in the Basel III documentation in
relation to AT1 capital. This means that essentially the
following characteristics must be fulfilled:
(i) fully paid-in;
(iii) first possibility to call the instrument at the option
of the issuer no earlier than five years after issuance;
(iv) notification of holders that the supervisory authority
will approve repayment, repurchase or redemption only if the
issuer will have sufficient capital following that repayment,
repurchase or redemption, or that the issuer will replace the
instruments with instruments of the same or better quality;
(v) distributions are at the discretion of the issuer and
may only be made if sufficient distributable reserves are
(vi) distributions must not increase over time in accordance
with fluctuations in the issuer's specific credit risk. In
addition, AT1 instruments must have a capital trigger at 5.125%
CET1/RWA, meaning that if the ratio between CET1 and
risk-weighted assets falls below 5.125%, the instrument must be
written off or converted into equity. Finally, AT1 instruments
do need to include a PONV-trigger.
How does Switzerland implement combined buffer requirements
laid out in CRD IV and what is the relevant legislation/
Again, not being a member of the EU, Switzerland will not
implement CRD IV, but rather, has implemented Basel III.
Switzerland implemented Basel III without any 'Swiss finish'
for banks other than systemically relevant financial
institutions (Sifis), thus providing for a basic capital
requirement of 8% of which 4.5% must be met with CET1 and at
least 6% with tier 1 capital (CET1 or AT1; the remainder can be
filled with tier 2), a capital buffer of 2.5 % to be filled
with CET1, and an anti-cyclical buffer of up to 2.5 %
(currently, the Swiss government requires an anti-cyclical
buffer of 2%).
Additionally, FINMA may require banks to hold additional
capital. FINMA may exclude certain categories of banks from
this obligation. This additional capital should specifically
cover the risks that are not protected or that are not
sufficiently covered by the minimum required capital if
applying a risk-orientated approach (see also 12.1 below).
In addition to the rules that apply to all banks, the Swiss
rules require that Sifis maintain a base capital of 4.5% of
their RWA in the form of CET1. Sifis must also have a capital
buffer of 8.5% of their RWA. Up to a maximum of 3% of that
buffer may be in the form of convertible or write-down
instruments that must meet the requirements for AT1 or tier 2
instruments and provide for conversion or write-down when the
ratio of its eligible CET1 to its RWA falls below 7% (so-called
high trigger instruments). At least 5.5% must be in the form of
CET1. Together with the base capital, therefore, Sifis must
have a CET1 capital of at least 10%. Moreover, Sifis must meet
a progressive component requirement that is dependent on their
size (leverage ratio exposure) and their market share in the
bank's domestic systemic relevant business, but which amounts
to at least 1%. The progressive component must be satisfied
with convertible or write-down instruments that meet the
requirements for AT1 or tier 2 instruments and provide for
conversion or write-down at 5% CET1/RWA at the latest
(so-called low-trigger instruments). Alternatively, a Sifi may
opt to satisfy the progressive component requirement with CET1.
Added together, Sifis must have regulatory capital of up to 19%
(assuming 6% in the progressive component) or even more of
their RWA of which at least 10% must be in the form of CET1.
Sifis must also fulfil particular capital adequacy requirements
relative to their total commitment, the so-called leverage
ratio (see section 9 below). Finally, as for all banks, the
Swiss capital requirements for Sifis provide for a supplemental
counter-cyclical buffer of up to 2.5% of their RWA in the form
of CET1 (which is currently set at 2%).
What capital triggers are expected/ are in place for AT1
securities and what is the relevant legislation/
The capital trigger for AT1 securities is set at a minimum
ratio of 5.125% between CET1 and risk-weighted assets. This
requirement is set forth in the Capital Adequacy Ordinance.
How is the PONV defined?
The Capital Adequacy Ordinance does not define the point of
non-viability, or 'PONV', but solely refers to the point of
threatening insolvency. However, we believe that the PONV
should refer to a situation where customary measures to improve
the capital adequacy are inadequate or unfeasible and,
therefore, the conversion or write-down of debt instruments is
an essential requirement to prevent an issuer from becoming
insolvent, bankrupt, or unable to pay a material part of its
debts or from ceasing to carry on its business. In addition,
the receipt of an irrevocable commitment of extraordinary
support from the public sector that has or will have the effect
of improving the bank's capital adequacy (not liquidity) will
also constitute a PONV.
What is the status of Switzerland's treatment of stress
tests? Have plans for upcoming tests been announced, and/ or
are results of previous stress tests outstanding?
Neither Swiss legislation nor regulation provides formally
for external stress testing. Notwithstanding this, FINMA and
the Swiss National Bank may and regularly do require banks to
perform stress tests, however, without those tests becoming
public or the authorities reporting or commenting publically on
them. There is no information available on any parameters or
methodologies applied in these tests.
Which national body is conducting the tests?
FINMA, as the competent supervisor over banks, would be the
competent body, but the Swiss National Bank may also require
tests, based on its authority to supervise the stability of the
financial system (macro-prudential supervision) and to assure
that banks retain sufficient liquidity and reserves.
How will Switzerland's supervisory authority change in the
next 12 months, if at all?
Switzerland was a fast mover after the global financial
crisis and has achieved an overhaul of its financial
supervisory regime since then. It has implemented legislation
to address the too-big-to-fail conundrum and other aspects that
ensued from the crisis. While there are plans to amend the
banking laws, those plans relate to a more formal overhaul of
the Banking Act rather than a substantive one. The one
important plan that exists is to subject external asset
managers to prudential supervision.
Are AT1s and/ or tier 2 CoCos tax deductible?
Under Swiss income tax laws, interest payments under AT1s
and tier 2 contingent convertible securities (CoCos) and
write-down securities are tax deductible.
Are coupon payments from AT1 and/or tier 2 CoCos subjected
to withholding tax?
Generally, debt instruments issued by Swiss companies,
including banks, are subject to Swiss withholding tax. However,
the legislator introduced in 2012 a temporary exemption for
interest payments on AT1 and tier 2 CoCos and write-down notes
if they have been approved by FINMA. This exemption expires on
December 31 2016, and was intended to be replaced by a
different system (see below, 6.3). Instruments issued before
that date, however, will be grandfathered.
To what extent have local rules been changed or are
expected to change to enhance tax efficiency of AT1 and tier 2
The exemption from the Swiss withholding tax for AT1 and
tier 2 CoCos and write-down notes is only temporary, lasting
only until the end of 2016 if not re-enacted or adopted for an
indefinite period. However, aside from that, there are general
initiatives to abolish the Swiss withholding tax regime,
probably replacing it with a paying agency deduction
What is the tax treatment in terms of the capital gains on
a write down or conversion?
Capital gains in the case of write-down or conversion of the
AT1 or tier 2 securities would generally qualify as taxable
income. As a matter of practice, issuers obtain respective
rulings from the tax authorities.
What type of loss absorbency features are, or will be
required for AT1 and for tier 2 securities, and what is the
For debt instruments to qualify as AT1 instruments, they
must provide for a capital trigger at 5.125%, falling below
which the instrument must either be fully written-off or must
be converted into CET1 equity securities, for example, shares.
In addition, a PONV-trigger must be included, again requiring
the write-off or the conversion into CET1 equity securities.
For tier 2 securities that do not qualify as conversion capital
under Swiss capital rules for Sifis (that is, that do not have
a capital ratio-related trigger at 5% (low-trigger) or 7%
(high-trigger) CET1/RWA at the latest), merely a PONV-trigger
Must all regulatory capital instruments –
including tier 2 – be loss absorbing?
Yes. In order to qualify as regulatory capital instruments,
all instruments must be loss absorbing, that is, they must at
least provide for a PONV-trigger.
Are there any additional local rules that would affect an
issuer's ability or its discretion to pay a coupon?
In addition to the issuer's discretion to pay a coupon, an
issuer must have sufficient distributable profits or freely
available reserves to pay a coupon. Whether or not an issuer
has such distributable profits or freely available reserves
must be determined by reference to Swiss company law.
How are MDAs calculated, and what happens in case of a
In Swiss law, there is no banking-related mechanism or
formula to calculate the maximum distributable amounts (MDA) in
certain situations. Rather, Swiss company law only refers to
distributable profits and freely available reserves. This
amount must be calculated for a relevant bank by reference to
Swiss company law set forth in the Swiss Code of Obligations
and the Swiss Code of Obligations' accounting rules. However,
if an institution's capital falls below the target level as
individually defined by FINMA on a non-public basis, FINMA may
order it to reduce or refrain entirely from dividend payments,
share buybacks and discretionary remuneration components or to
carry out a capital increase. The banks are subject to regular
reporting duties as to their capital adequacy and, in the case
of a breach of the minimum requirements, must immediately
inform FINMA and its auditor. However, these breaches are
normally not made public, neither by the bank nor by FINMA,
unless FINMA orders draconian measures.
In the Regulatory Consistency Assessment Programme (RCAP),
assessment of Basel III regulations – Switzerland of
June 2013, the regulation in Switzerland on the distribution
constraints was held to be 'partially compliant', but the lack
of full compliance labelled as 'not material'.
Is it expected that the leverage ratio will be implemented
sooner than Basel III/ CRD IV requires? What are the relevant
ratios and dates?
Switzerland implemented a leverage ratio for Sifis as of
January 1 2013. Swiss systemically relevant banks must fulfil
particular capital adequacy requirements relative to their
total commitment. This leverage ratio requirement is determined
by reference to capital requirements and is, therefore,
indirectly subject to phase-in arrangements. The target ratio
is 4.56% (assuming a total capital requirement of 19%, that is,
with no capital relief in the progressive capital
However, the introduction of a leverage ratio has been
proposed in accordance with Basel III also for all other banks.
FINMA may oblige banks to report their Basel III leverage ratio
to them during an observation period, and FINMA collects the
data to calculate the leverage ratio on a stand-alone and
consolidated basis. The intention is for banks and securities
dealers to disclose the leverage ratio from 2015 on. It is not
yet clear whether Switzerland will follow the timetable
indicated in Basel III or whether it will actually move faster
than is required by Basel III.
What is Switzerland's position on whether AT1's can count
towards financial institutions' leverage ratio?
Under the prevailing rules applicable for Sifis, AT1
instruments may count towards an Sifi's leverage ratio, and
even tier 2 instruments, if they constituted conversion capital
(CoCos or write-down notes) within the meaning of the
provisions in the Capital Adequacy Ordinance in relation to
Sifis and were either part of the buffer capital or the
progressive component. The proposed leverage ratio for all
banks would allow counting AT1 towards the leverage ratio.
Have local authorities specified how mutuals can comply
with regulatory requirements?
Switzerland has addressed the question of how cooperatives
can and have to comply with regulatory requirements (they also
did so for cantonal banks and private banks not being organised
as corporations), but they have not extended this guidance to
Have additional rules and regulations been issued in
relation to Sifis?
Yes, in early 2012 Switzerland adopted a too-big-to-fail
legislation that imposes additional requirements on Sifis in
relation to capital, liquidity, large exposures and emergency
planning. These additional requirements came into effect on
January 1 2013. In Switzerland, UBS, Credit Suisse,
Zürcher Kantonalbank and Raiffeisen have been identified
by the Swiss National Bank as systemically relevant. UBS and
Credit Suisse qualify as global systemically important banks
according to the Financial Stability Board.
What, if any, examples are there of regulatory intervention
(eg cases of nationalisation or restructuring) of failing
Under Swiss banking laws, FINMA as the prudential regulator
over banks has the power to intervene and order protective
measures in the case of a threatening insolvency or liquidity
shortage, or if the institution does not fulfil the capital
requirements after having been so reprimanded. Protective
measures may include the giving of directions to the bank's
governing bodies, appointing a special agent for the bank,
discharging members of the senior management or the boards,
ordering a halt on payments by the bank or putting the bank
either into restructuring or liquidation proceedings. However,
by operation of law, FINMA does not have any nationalisation
There are no recent examples where FINMA had to intervene
and make use of its broad powers.
Does local regulation specify pillar 2 requirements, and
what are those?
In 2011 FINMA issued a circular addressing pillar 2
requirements for banks. Under that circular, banks will fall
into one of five categories, in accordance with their size in
terms of balance sheet, assets under management, privileged
deposits and required capital under pillar 1. For each of these
categories, a target capital ratio is determined, ranging from
10.5% for small banks (as opposed to a minimum of 8% provided
for by the Capital Adequacy Ordinance) to 14.4 % (9.2% CET1;
2.2% AT1; 3.0% tier 2) for large banks that do not qualify as
Sifis. The circular also defines intervention levels at which
FINMA may intervene with the bank. Large banks qualifying as
Sifis are not subject to this circular as they have to hold a
higher share of risk-bearing capital over and above the minimum
requirements under pillars 1 and 2. The RCAP, assessing
compliance with the Basel III framework for Switzerland in June
2013, graded Switzerland as compliant with the pillar 2
supervisory review process. The assessment stated that
Switzerland implemented all four key principles of pillar 2 in
close alignment with the Basel III standards.
If so, what are the disclosure requirements around pillar
2, if any?
Finma requires that the methodologies used for calculating
capital adequacy requirements be specified in the qualitative
information disclosed, if material at the time of the annual
accounts. The additional disclosure obligations required by
Basel III are explicitly referred to as well. Compliance with
those disclosure obligations is subject to the annual
verification of the external auditors.
There are no special requirements in place providing for a
bank's duty to disclose specific information, for example, the
size of their buffers, in road shows or transaction or
Large banks meeting certain requirements must also quarterly
publish their CET1, tier 1 (CET1 and AT1) and ordinary
regulatory capital ratios (tier 1 and tier 2) of the group and
the most important bank subsidiaries and subgroups in
Switzerland and abroad that have to comply with capital
requirements and the minimum required capital.
Additionally, Sifis must quarterly report their ratios
regarding CET1 and high- and low-trigger conversion capital.
For the conversion capital, Sifis are required to disclose
which of their conversion capital instruments have an AT1 and
which have a tier 2 host instrument.
Are there any local provisions that could trigger early
No. There are no such local provisions. Generally, in line
with Basel III, regulatory capital instruments qualifying as
AT1 or tier 2 may be redeemed or repurchased in the case of the
occurrence of a tax event or regulatory event. That redemption
or repurchase is, however, still subject to FINMA approval.
Do local rules specify the use of credit default swaps or
other tools to hedge against default or other credit events in
order to lower regulatory capital requirements?
Minimum standards that should be met before capital relief
will be granted in respect of any form of collateral are not
explicitly stated in the Capital Adequacy Ordinance. However,
FINMA has formulated certain minimum requirements in its FINMA
Circular 2008/23 'Risk Diversification – Banks', in
order for the credit derivative to be recognised. For instance,
the credit risk must actually be transferred to the protection
provider, and certain minimum criteria must be met.
Has the BRRD been implemented and if so, how? If not, what
plans for implementation have been made?
Because Switzerland is not a member of the EU, the BRRD will
not be implemented. However, Switzerland has overhauled its
bankruptcy and liquidation laws applicable to banks, providing
for a modern resolution framework based on the principles or
guidelines of the Financial Stability Board. The relevant rules
are set forth in the Swiss Banking Act and the Ordinance of
FINMA on the Insolvency of Banks and Securities Dealers
(BIO-FINMA). In restructuring proceedings, FINMA has a variety
of tools, including bail-in and the transfer of assets, to try
to successfully restructure the bank. Finma will initiate
liquidation proceedings if a restructuring appears unlikely to
succeed or has already failed. In this event, FINMA revokes the
bank's banking licence, orders its liquidation, publicly
announces the opening of liquidation proceedings and appoints a
There are no requirements to hold eligible liabilities for
bail-in, yet. Switzerland is awaiting guidance from
international bodies in this respect.
T: +41 43 222 15 40
René Bösch heads the financial services
practice team. He advises on banking law and financial
services regulation and specialises in offerings of
debt and equity-linked securities, regulatory capital
instruments for banks, as well as hybrid financial
T: +41 43 222 12 96
Benjamin Leisinger’s practice focuses
on banking, finance and capital markets law. His areas
of expertise also include corporate and commercial