Questions and answers on financial stability
What is financial stability, exactly?
A financial system is stable if its individual components - banks, financial markets and financial market infrastructures - perform their individual functions and are resilient to potential shocks. Financial stability is an important prerequisite for economic development. The SNB, too, depends on well-functioning financial markets to be able to implement its monetary policy (Questions and answers on monetary policy implementation).
What are the tasks of the SNB in the area of financial stability?
In accordance with the National Bank Act, the SNB contributes to the stability of the financial system. It fulfils this mandate by analysing sources of risk to the financial system and identifying areas where action may be needed. The SNB also participates at international level, in particular in connection with the efforts of the Basel Committee on Banking Supervision to create and implement a regulatory framework for the financial centre. In addition, the SNB designates systemically important banks and performs further tasks in the macroprudential area. Macroprudential measures strengthen the resilience of the financial system to shocks and counter the build-up of systemic risk. The SNB also oversees systemically important financial market infrastructures which can pose a risk for financial stability. In a crisis, it fulfils its mandate by acting as lender of last resort where necessary. The SNB is not, however, responsible for banking supervision. This power lies with the Swiss Financial Market Supervisory Authority (FINMA, www.finma.ch).
Where can I find the SNB's analyses and assessments on developments in the area of financial stability?
The SNB publishes its assessment of the stability of Switzerland's banking sector in its annual Financial Stability Report. In this report, the SNB focuses on trends that are observable at the levels of the banking system, the financial markets and the macroeconomic environment. The main purpose of the report for the SNB is to draw attention to tensions or vulnerabilities which could pose a threat to the stability of the system in the short or longer term. In addition, it identifies areas where action may be needed to reduce this risk. In the report, the SNB analyses the situation at both the globally active Swiss banks and the domestically focused commercial banks. It also frequently comments on current developments in the area of financial stability in its speeches.
What are macroprudential measures?
The objective of macroprudential measures is to increase the stability of the financial system. First, they strengthen the resilience of the financial system to shocks. Second, they counter the build-up of systemic risk. Macroprudential measures target not only individual financial market participants but also the Swiss banking sector as a whole. The countercyclical capital buffer is an important example of a macroprudential measure, as are the special requirements for systemically important banks.
Who decides on the use of the countercyclical capital buffer and how does it work?
If the SNB comes to the conclusion that an activation, adjustment or deactivation of the buffer is required, it makes a proposal to the Federal Council after consultation with the Swiss Financial Market Supervisory Authority (FINMA, www.finma.ch). The Federal Council makes the final decision. The countercyclical capital buffer is an instrument by means of which the Federal Council can require the banks to hold additional capital as a precaution. The capital buffer is set at a maximum level of 2.5% of a bank’s risk-weighted exposures in Switzerland. If it is activated, banks are required to gradually and temporarily increase their capital. On the one hand, the capital buffer is intended to strengthen the banks' resilience to cyclical risks on the credit market. On the other hand, it can help to counter the accumulation of these risks. The capital buffer can be targeted at the entire credit market or just parts thereof, e.g. the mortgage market. The measure has been available in Switzerland since July 2012.
How has the countercyclical capital buffer been used until now?
In February 2013, at the proposal of the SNB, the Federal Council decided to activate the sectoral countercyclical capital buffer (CCyB) on mortgage lending to finance residential property in Switzerland for the first time (press release). In January 2014, the Federal Council approved the SNB's proposal to increase the capital buffer (press release). At the end of March 2020, the Federal Council approved the SNB's proposal that the capital buffer be deactivated to give banks maximum latitude for lending in connection with the coronavirus crisis (press release). In January 2022, the Federal Council reactivated the sectoral CCyB at the proposal of the SNB. It did so because the reasons that had led to it being deactivated no longer existed and because the vulnerabilities on the mortgage and residential real estate markets had also increased since the deactivation (press release).
What does the mortgage market have to do with financial stability?
Domestically focused banks in particular have a high proportion of mortgage loans in their balance sheet. Therefore, excesses on the real estate market can present not only borrowers but also banks with considerable problems. Against this background, the mortgage and real estate markets constitute a potential source of risk for financial stability. Indeed, experience in Switzerland and abroad has shown that real estate crises can have a very detrimental impact on the financial system and ultimately the entire economy. This is why the SNB monitors developments in the mortgage and real estate markets closely and also participates in regulatory measures aimed at reducing the associated risks.
Other than the countercyclical capital buffer, what regulatory measures serve to contain risks on the mortgage and real estate markets?
To reduce the risks on the Swiss mortgage and real estate markets, the capital requirements on banks for mortgage lending with a high loan-to-value ratio have been tightened and the banks' self-regulation guidelines for granting mortgage loans revised on various occasions. The most recent amendment to these guidelines came into effect at the beginning of 2020. In view of the development of the residential investment property segment in recent years, the Swiss Bankers Association has tightened its requirements in respect of the loan-to-value ratio and amortisation period for new mortgages on residential investment property.
What does the Basel Capital Adequacy Framework (Basel I, II and III) do?
Issued by the Basel Committee on Banking Supervision, a permanent committee of the Bank for International Settlements (BIS, www.bis.org), the Basel Capital Adequacy Framework has the purpose of increasing the stability of the international financial system and promoting a level playing field in competition among banks. The original Basel Capital Framework (Basel I), which focused on the provision of minimum cover for credit risks, was issued in 1988. In 1996, capital requirements for market risk were added.
The first revised framework (Basel II) was adopted in 2004. On the one hand, capital adequacy requirements were extended to include operational risks and were made more sensitive to risk in general. On the other hand, the minimum capital requirements were supplemented by two further pillars, one relating to the supervisory review process and the other to disclosure obligations for the purpose of strengthening market discipline.
The second revised framework (Basel III) was adopted in the wake of the global financial crisis of 2008 and implemented in two stages. In a first step, stricter, countercyclical, risk-based capital requirements as well as limits on leverage (unweighted capital ratios, leverage ratio) were approved in 2010. In addition, internationally harmonised minimum liquidity requirements were introduced, consisting of the short-term liquidity coverage ratio and the net stable funding ratio (structural liquidity ratio).
The Basel Committee finalised the second stage in 2017. The principal aim of these more recent measures is to enhance the credibility of risk-weighted requirements. To this end, the Committee restricted the use of internal bank models and improved the risk sensitivity of the prescribed standardised approaches. In addition, it recalibrated the floor for model-based requirements, setting it at 72.5% of the requirements under the standardised approaches. The changes will enter into force on 1 January 2023, with a five-year transition period before the floor for the model-based requirements applies in full. However, national implementation of the agreed measures has been delayed in the various jurisdictions. In Switzerland, the measures are planned to come into force on 1 January 2025.
What are the criteria for determining whether a bank is to be designated as systemically important?
Under the terms of the Federal Act on Banks and Savings Banks (Banking Act, www.admin.ch, in German, French and Italian), a bank or group of banks is systemically important if its failure would cause serious damage to the Swiss economy and the Swiss financial system. In assessing the systemic importance of banks or bank groups, their market share in domestic loan and deposit-taking business is an important criterion. Other criteria, such as size, risk profile and interconnectedness, are also taken into consideration when deciding on systemic importance. The Banking Act gives the SNB the authority, in the context of the implementation of 'too big to fail' regulations, to designate banks and bank functions as systemically important. FINMA and the systemically important bank concerned must be consulted in advance. As at the end of 2022, Credit Suisse, UBS, Zürcher Kantonalbank (ZKB), the Raiffeisen Group and PostFinance were considered systemically important (press releases, decrees issued by the SNB). Since its acquisition by UBS in June 2023, Credit Suisse is no longer included in this list.
What are the 'too big to fail' regulations, exactly?
The 'too big to fail' regulations impose special requirements on systemically important banks. They are laid down in the Banking Act, the Ordinance on Banks and Savings Banks (Banking Ordinance, www.admin.ch, in German, French and Italian) the Ordinance on Capital Adequacy and Risk Diversification for Banks and Securities Firms (Capital Adequacy Ordinance, CAO, www.admin.ch, in German, French and Italian) and the Ordinance on the Liquidity of Banks and Securities Firms (Liquidity Ordinance, www.admin.ch, in German, French and Italian). The regulations are designed to mitigate the 'too big to fail' issue in Switzerland and thereby reduce the likelihood of systemically important banks having to be bailed out with taxpayers' money in the event of a crisis. The TBTF regulations include provisions in the areas of capital, liquidity, risk diversification and organisation. The latter comprise measures to facilitate the resolution of a systemically important bank in a crisis. The Swiss regulations are in line with international requirements by the Financial Stability Board (FSB, www.fsb.org) - an international body which brings together finance ministries, regulatory authorities and central banks - and the Basel Committee on Banking Supervision.
What is meant by measures to facilitate the resolution of a bank? Wouldn't it be better not to let it get that far in the first place?
Many of the TBTF regulations deal with going-concern requirements to be fulfilled by banks, and thus aim at preventing a crisis. Since crises can never be entirely ruled out, however, measures to facilitate recovery or orderly wind-down (resolution) are also necessary for cases in which a bank can no longer continue to operate as a going concern (and is thus a 'gone-concern'). FINMA is responsible for bank resolution planning and implementation. Key measures in the area of resolution address loss-absorbing capacity, funding in resolution and emergency plans.
What does 'lender of last resort' mean specifically?
In the event of a crisis, the SNB can act as lender of last resort. Under the emergency liquidity assistance arrangements it can provide one or more domestic banks with liquidity if they are no longer able to refinance their operations on the market. Emergency liquidity assistance is provided only if the bank or group of banks seeking credit is of importance for the stability of the financial system and is solvent. Furthermore, the liquidity assistance must be fully covered by sufficient collateral at all times.
At the height of the financial crisis in October 2008, the Federal Council, the Swiss Federal Banking Commission (SFBC; now FINMA) and the SNB adopted measures to stabilise UBS, thereby strengthening the Swiss financial system. The SNB participated in this package of measures by establishing a stabilisation fund (StabFund). In so doing, it assumed its role as lender of last resort. (Guidelines on monetary policy instruments, Dossier: "The SNB's role as lender of last resort").
In connection with the crisis at Credit Suisse, the SNB supported the acquisition of Credit Suisse by UBS through the provision of ample liquidity assistance in March 2023 (press release of 19 March 2023). In addition to its existing liquidity facilities, the SNB deployed two new instruments based on emergency law: ELA+ and the public liquidity backstop (PLB).
What is ELA?
ELA stands for emergency liquidity assistance, which the SNB can grant in exceptional situations in its role as lender of last resort. In this function, it can provide emergency liquidity assistance to a domestic bank if it is no longer able to refinance its operations on the market. ELA can only be granted to banks which are of importance for the stability of the financial system. The bank seeking credit must be solvent and the liquidity assistance must be fully covered by sufficient collateral at all times. The SNB determines what collateral is sufficient. To assess the solvency of a bank or group of banks, the SNB obtains an opinion from FINMA.
In addition to its existing liquidity facilities, the SNB deployed two new instruments based on emergency law – ELA+ and the public liquidity backstop (PLB) – in connection with the crisis at Credit Suisse in March 2023. ELA+ is a liquidity assistance loan secured by means of preferential rights in bankruptcy proceedings. The PLB is also a liquidity assistance loan secured by means of preferential rights in bankruptcy proceedings and additionally by a federal default guarantee.
What is meant by the public liquidity backstop (PLB)?
The public liquidity backstop (PLB) comes into play when, first, the bank’s own liquid assets are no longer sufficient to meet its financial obligations and, second, the option for the central bank to provide emergency liquidity assistance against sufficient collateral has been exhausted. In such circumstances, the PLB makes it possible for the SNB to provide additional liquidity which is guaranteed by the federal government.
In connection with the crisis at Credit Suisse, the Federal Council created the basis for the PLB based on emergency law on 16 March 2023. This basis is now to be anchored in the Banking Act.
What was the purpose of the stabilisation fund?
The stabilisation fund was a special purpose vehicle to which the illiquid assets of UBS were transferred. The SNB granted the stabilisation fund a loan to take over these assets. In November 2013, UBS repurchased the stabilisation fund from the SNB (press release).
Can fintech and digitalisation be relevant for financial stability?
The fintech area is highly dynamic. Developments in this area primarily relate to how financial services are delivered. Against this backdrop, fintech and digitalisation can be relevant for financial stability in various respects, e.g. in connection with the entry of new market players (digital banks, big tech companies), the emergence of new platform-based business models (crowdfunding, robo-advisory services), digital currencies or central bank digital currencies (CBDCs). The SNB monitors these developments very closely in order to identify at an early stage the key developments from the perspective of its mandate. To this end, it also participates in national and international committees and working groups. At the present time, fintech has no direct impact on financial stability.
Which financial market infrastructures are considered systemically important?
The financial market infrastructures (FMI) that could harbour risks for the stability of the financial system include the Swiss Interbank Clearing (SIC) payment system, the central securities depository SIX SIS and the central counterparty SIX x-clear. These are operated by SIX Interbank Clearing Ltd, SIX SIS Ltd and SIX x-clear Ltd respectively, which are subsidiaries of SIX Group Ltd (www.six-group.com). Other FMIs that are important for the stability of the Swiss financial system are the Continuous Linked Settlement (CLS) foreign exchange settlement system and the central counterparties Eurex Clearing and London Clearing House (LCH). The operators of these FMIs are domiciled in the US, Germany and the UK respectively.
Why does the SNB monitor systemically important financial market infrastructures?
The National Bank Act requires the SNB to oversee such financial market infrastructures (FMIs). The SNB promotes the security of FMIs operated by the private sector by overseeing their compliance with the special requirements set out in the National Bank Ordinance. In so doing, it gives priority to reducing systemic risk. First, it is important to ensure that neither technical system failure, due for example to cyberattacks, nor financial difficulties on the part of FMI operators give rise to major credit or liquidity problems for financial intermediaries, or that these result in severe disruption on financial markets. Second, the legal framework, and, in particular, the rules and procedures for the different systems should be formulated such that payment or delivery difficulties of individual participants in these FMIs do not spill over to other financial intermediaries, linked financial market infrastructures or the financial markets. To this end, the SNB cooperates with FINMA as well as with foreign supervisory and oversight authorities.
Could cyberattacks endanger the stability of the entire financial system as well? What is the SNB doing to prevent this?
IT system outages and disruptions resulting from cyberincidents can severely jeopardise the availability, integrity and confidentiality of data as well as critical services and functions within the financial system. It is first and foremost the responsibility of the individual financial institutions to protect themselves against cyber risks. However, due to the highly interconnected nature of the financial system and the various cross-institutional processes, sector-wide precautions and measures are also necessary. This calls for close cooperation between the private stakeholders. In addition, the authorities - notably the federal government, FINMA and the SNB - contribute to the cybersecurity of the financial sector within the scope of their respective mandates.
In Switzerland, the National Cyber Security Centre (NCSC), which is attached to the Federal Department of Finance (FDF), is responsible for the coordinated implementation of the national strategy for the protection of Switzerland against cyber risks. Since 2020, the authorities (FDF, FINMA and SNB), working together with the private sector (banks, insurance companies, financial market infrastructures and industry associations) and under the direction of the NCSC, have been developing the basis for the Swiss Financial Sector Cyber Security Centre (Swiss FS-CSC) association. This was founded in April 2022. The Swiss FS-CSC association facilitates a better exchange of information on the threat situation and specific incidents. Furthermore, it supports the identification as well as the implementation of sector-wide prevention and protection measures. In addition, it supports financial sector participants in managing systemic cyberincidents and conducts strategic and operational crisis simulation exercises on a regular basis. The SNB is a member of the association and participates in its committees.
It also monitors (or takes part in) additional projects aimed at improving cybersecurity, particularly in the area of cashless payments via the SIC payment system.