Why does my bank's name now include "Switzerland"?
The two Swiss major banks have changed their legal structure. Towards the end of 2016, Credit Suisse launched its new subsidiary Credit Suisse (Schweiz) AG, which comprises the universal bank's business for Swiss customers. UBS already spun off the areas retail & corporate and wealth management booked in Switzerland into UBS Switzerland AG in June 2015. What is the background of these structural changes? And what do they mean for the two major banks' customers?
Background of the structural changes The reorganisations serve to implement new regulations which have been adopted to strengthen the stability of the Swiss financial sector following the financial crisis. The new rules aim, among other things, to ensure the continuity of economically important functions in times of stress and to avoid the need for state aid ("too big to fail"). They apply to banks which have been declared systemically important by the Swiss National Bank (SNB) because their default would substantially harm the Swiss economy and the Swiss financial system. This includes the two major banks UBS and Credit Suisse in particular.
Improved resolvability Whether a bank can be successfully turned around or liquidated without impairing systemically important functions depends, among other things, on its structure and organisation. A restructuring must be implemented very quickly (ideally over the weekend when the markets are closed) to offer the prospect of a lasting stabilisation.
Systemically important banks are therefore asked to proactively improve their resolvability. The Swiss Banking Ordinance envisages possible measures in three areas:
Structural improvements and unbundling (e.g. by aligning legal structures with business units, by establishing legally independent service units, and by establishing independent governance structures).
Financial unbundling to reduce the risk of contagion (e.g. by limiting unsecured funding and guarantees between legal entities within the group).
Operational unbundling for the protection of data and the continuation of important operational services (e.g. by access to and continued use of operationally critical systems).
So why these structural changes? The two major banks have decided to improve their resolvability by (among other things) spinning off certain business areas into separate subsidiaries. Banking regulation can be seen to have prompted this for two reasons:
Improving their own resolvability is part of the systemically im-portant banks' contingency planning. The contingency plans describe the measures necessary to ensure that the systemically important functions continue to operate independently of the other areas of the bank and without interruption in times of crisis. The banks must demonstrate to the Swiss Financial Market Supervisory Authority FINMA their capacity to do so. The systemically important functions include the domestic deposit-taking and lending business and payment transactions in particular. FINMA tests whether the contingency plan's measures are effective in times of crisis and, if necessary, requires the bank to make improvements.
The systemically important banks have an economic incentive to improve their resolvability beyond the necessary minimum. In this case FINMA grants them a discount on their capital adequacy requirements. The goal pursuant to the standards of the Financial Stability Board (FSB) is that it is possible and credible for the supervisory authority to resolve the bank in a manner that protects the systemically important functions, does not cause severe disruptions to the financial system, and does not expose the taxpayer to risks. The amount of the discount is thus a function of the restructuring-effectiveness of the measures taken.
What do bank customers have to do? Generally speaking there is no need for action on the part of the customers of the two major banks as a result of these reorganisations. We nevertheless recommend customers to check which legal entity is their counterparty under the potentially several contractual relationships with the relevant bank. There should at all times be certainty which entity e.g. has open credit lines, holds securities on deposit or enters into securities and foreign exchange transactions for the customer, and how the various contractual relationships interact with one another.
Finally, it should be noted that the structural changes mentioned above are just one of a variety of measures prompted by the new regulations that have an impact on the customer relationship. For instance, a recently enacted rule may require Swiss banks and securities dealers to modify certain contracts (potentially also with customers). You can find out all about that change in the Update (only in German) from our Banking and Finance Team.