What Changed
- FINMA defined four structural cornerstones for financial resilience: early intervention powers, capital and liquidity buffers, flexible resolution options, and contingent liquidity backstops.
- FINMA called for the rapid implementation of proposed Too Big To Fail (TBTF) regulatory reforms by the Swiss legislator.
- FINMA detailed internal organizational restructuring to enhance direct supervisory oversight and increase on-site reviews.
Background
Speaking at the annual meeting at Centro Studi Villa Negroni, Stefan Walter, Chief Executive Officer of the Swiss Financial Market Supervisory Authority (FINMA), detailed the evolving risk landscape confronting Swiss financial market supervision and set out FINMA's strategy to maintain financial sector resilience. Under Swiss law, FINMA's primary mandate is to protect creditors, investors, and policyholders, as well as to ensure the effective functioning of financial markets.
The financial sector is central to Switzerland's open, medium-sized economy, accounting for just over 9% of gross value added nationally and around 7% in recent years in the canton of Ticino. Switzerland remains a global leader in cross-border wealth management, supported by its economic, monetary, fiscal policies, and legal certainty. However, FINMA highlights that the risk environment has intensified in both financial and non-financial domains. Global trade conflicts have increased appreciation pressure and volatility on the Swiss franc, government debt is rising in major economies, and geopolitical tensions remain elevated. Furthermore, compliance with international sanctions poses ongoing risks, specifically secondary sanctions linked to sanctions on Russia and challenges regarding goods restrictions.
In addition to macroeconomic and geopolitical pressures, financial institutions face escalating digital IT risks. Systems are becoming increasingly complex, while risks related to cyberattacks and outsourcing have grown. Both banks and insurance companies increasingly outsource core services, such as investments and central IT, to cloud providers and a small selection of third-party vendors, creating concentrated vulnerabilities.
Four Cornerstones of Robust Financial Supervision and TBTF Reforms
FINMA emphasizes that the primary responsibility for maintaining resilience rests with financial institutions themselves through sound governance, strong risk culture, and sustainable business models. FINMA intervenes only when institutions fail to fulfill these obligations, acting in a targeted, effective, proportionate, and technology-neutral manner. While political decisions and legislative frameworks are established by the legislator, FINMA provides risk evaluations based on its supervisory mandate.
To establish a resilient regulatory structure, FINMA identifies four essential cornerstones:
1. Early Intervention Toolkit: FINMA advocates for effective preventive powers during the going-concern phase—before an institution reaches a stabilization phase or point of non-viability. Early intervention instruments allow FINMA to address corporate governance and remuneration defects, require capital and liquidity enhancements, restrict unmanaged business activities, and mandate improvements to recovery and resolution plans.
2. Adequate Capital and Liquidity Buffers: Solid minimum capital and liquidity requirements are necessary, including the deduction of banks' foreign participations. FINMA requires clear supervisory authority to impose Pillar 2 buffers based on forward-looking stress tests and qualitative adjustments addressing risk-measurement weaknesses.
3. Flexible Recovery and Resolution Plans: Legislative reforms must provide expanded execution options during crises involving systemic institutions. Resolution options include (1) restructuring and continuation of the bank, (2) solvent market exit, or (3) sale of the bank or parts thereof. To address inadequate crisis preparations during normal business periods, FINMA requires powers to enforce structural and business model adjustments alongside capital surcharges.
4. Contingent Liquidity Assistance: Crisis liquidity relies on a three-tier structure. The first line of defense consists of going-concern liquidity buffers maintained by banks. The second line comprises emergency liquidity assistance provided by the central bank under appropriate conditions. The third line is a Public Liquidity Backstop (PLB), which must accompany all resolution strategies for systemically important institutions.
FINMA urges that planned reforms to Too Big To Fail (TBTF) rules incorporating these key elements be enacted and implemented as quickly as possible.
Practical Implications for Supervised Institutions and Proportionality
FINMA is strengthening its internal supervisory practices through organizational restructuring. The authority created a new division for integrated risk expertise and merged the supervisory departments for markets and asset management. These updates aim to facilitate direct, intensified supervision, including an increased frequency of on-site supervisory reviews focused on risk culture, governance, business model sustainability, and recovery planning.
FINMA applies regulatory requirements under the principle of proportionality. Smaller institutions with lower risk profiles receive greater regulatory relief. However, FINMA maintains strict baseline expectations across all financial market participants regarding anti-money laundering (AML) compliance, cross-border business risk management, rules of conduct in high-risk financial product distribution, and client protection.
Frequently Asked Questions
Question 1: What is the statutory mandate of FINMA?
Answer: FINMA's mandate is to protect creditors, investors, and policyholders, and to ensure the effective functioning of financial markets.
Question 2: What three lines of defense exist for liquidity during a banking crisis?
Answer: The first line of defense is the bank's own going-concern liquidity buffers. The second line is emergency liquidity assistance granted by the central bank. The third line is a Public Liquidity Backstop accompanying resolution options for systemically important institutions.
Question 3: What resolution options does FINMA outline for systemic financial institutions?
Answer: FINMA outlines three resolution options: (1) restructuring and continuation of the bank, (2) solvent market exit, and (3) sale of the bank or parts of it.
Question 4: How does FINMA apply proportionality in its supervisory oversight?
Answer: FINMA accords greater regulatory relief to smaller institutions with lower risk profiles, while requiring all institutions to comply with core standards such as anti-money laundering rules, cross-border risk management, and client protection.
Question 5: Which specific non-financial and digital risks were highlighted by FINMA?
Answer: FINMA highlighted risks related to sanctions on Russia (including secondary sanctions and goods restrictions), cyberattacks, and outsourcing dependencies on cloud and third-party service providers.
Who May Be Affected
Banks, insurance companies, asset managers, and financial service providers operating in or cross-border with Switzerland.
Cross-Border Context
Applies to cross-border wealth management, international sanctions compliance (including Russia secondary sanctions), and cooperation agreements with foreign partner authorities based on equivalent standards.
What to check next
- Monitor legislative progress on Swiss Too Big To Fail (TBTF) regulatory reforms and Public Liquidity Backstop provisions.
- Track FINMA regulatory announcements regarding Pillar 2 capital buffer requirements and risk culture supervision.
This article provides general information and does not constitute legal advice. Consult the official text and obtain advice appropriate to your circumstances where needed.