SWITZERLAND: An Introduction to Banking & Finance
Introduction
Switzerland continues to be a highly attractive banking market. It counts 280 banks and securities firms licensed by the Swiss Financial Market Supervisory Authority FINMA (FINMA), 220 Raiffeisen banks as well as 73 representative offices of foreign banks. In other words, Switzerland remains an intensely banked country, irrespective of the subdued economic outlook.
The Swiss National Bank expects weak economic growth in the coming quarters and inflation will remain elevated for the time being. Against this background, the Swiss National Bank expects GDP growth of around 2% for 2022 and around 0.5% for 2023. Annual CPI inflation remains above the range consistent with price stability but showed a decline quarter-on-quarter and stood at about 3% at the end of 2022, which is considerably lower than in other European countries. Furthermore, the Swiss franc depreciated against the euro, but appreciated against the US dollar. Bond yields fluctuated significantly, while equities posted marked gains in value.
Lending growth, however, remained robust. According to the Swiss National Bank, as per the end of 2022, bank loans to households as well as to financial and non-financial companies continued to grow. At the end of October 2022, loans to households recorded a year-on-year increase of CHF24.8 billion (2.9%) and loans to non-financial companies a rise of CHF10.8 billion (3.2%). Loans to financial companies rose in the same period by CHF11.2 billion (14.8%).
Business cycle signals are mildly optimistic. Various export-oriented companies have been feeling the cooling in global economic activity. Developments in domestic demand for consumer goods have been weak. Most companies are anticipating increases in turnover in the coming quarter. However, the prospects are clouded by many uncertainties. While concerns around the onset of energy shortages have diminished, uncertainty about the global economic situation has increased. There are signs that the situation regarding the procurement of intermediate goods is easing. Supply bottlenecks are increasingly confined to specific electronic components. Companies expect growth in purchase prices, which has been strong to date, to weaken slightly. At the same time companies intend to continue raising their sales prices significantly, primarily to cushion the pressure that past cost developments are putting on margins.
The liquidity situation remains unproblematic for most companies. However, the proportion of companies that see their liquidity situation as tight has increased slightly. The reasons given for liquidity squeezes are the capital tied up in increased inventory, higher purchase prices and more expensive financing conditions.
Hot Topics
Sustainable finance
Under the 2015 Paris Climate Convention, Switzerland has committed to reduce its greenhouse gas emissions by 50%. until 2030 (compared to 1990). The financial sector plays an important role in this context. Consequently, on 16 December 2022, the Swiss government, the Federal Council, issued its financial sustainability report which lays the groundwork for further action and constitutes the strategic basis to reinforce Switzerland's leading role in this respect. In particular, it sets forth 15 measures which are envisaged to be implemented until 2025 (such as the promotion of transparency and avoidance of greenwashing).
On 24 January 2023, FINMA published a guidance on management of climate risks calling upon banks and financial institutions to scrutinize their instruments and processes and, where necessary, to further develop these in a forward-looking manner. Already, FINMA had integrated climate-related financial risks into its supervisory activity in a strategic, proportionate and risk-based manner.
As far as the transactional side is concerned, Switzerland has seen a considerable increase of "sustainable" and/or "sustainability-linke" debt instrument issuances in the past years. "Sustainable" debt instruments are any kind of debt where the proceeds will be exclusively applied to finance or re-finance eligible sustainable projects in accordance with certain principles, which are, in Switzerland, mainly common for bonds. On the other hand, "sustainability-linked" debt instruments merely incentivise the borrower’s achievement of ambitious, predetermined sustainability performance objectives mainly through an increase or decrease of the financing costs in case certain objectives are (not) met. Such "sustainability-linke" debt has become more and more popular in the Swiss syndicated debt market for large Swiss corporates. The trend for such debt instruments is generally expected to intensify in the upcoming years.
Sanctions
On 28 February 2022, in view of Russia's military intervention in Ukraine, the Federal Council took the decision to adopt the packages of sanctions previously imposed against Russia by the European Union. This decision marked a turning point in Switzerland's sanctions policy, which historically – due to the country's constitutional neutrality – merely aimed at preventing circumvention of international sanctions or at implementing the United Nations' sanctions packages (which are legally binding on Switzerland as a member state of the United Nations). Subject to minor exceptions, the Swiss Federal Council has so far consistently revised the Swiss sanctions regime to substantially reflect additional European Union sanctions packages enacted in the meantime. The Swiss sanctions provide in particular for restrictive measures relating to the import and export of certain goods, individual and financial measures and location-specific measures.
Even though the relevant Swiss sanctions were enacted in coordination with the European Union and are designed to substantially mirror the European Union's sanctions packages, certain substantive deviations remain. Notably, the territorial scope differs. Unlike the European Union's sanctions, which are not only applicable to facts occurring within the European Union but also to the worldwide conduct of European citizens, Swiss sanctions generally apply the principle of territoriality. Insofar, Swiss sanctions are – from a territorial perspective – only applicable to actions occurring in Switzerland.
Such deviations, a certain lack of predictability and resources as well as the pace of legislative changes have proved to be challenging for Swiss banks and other financial institutions. Nonetheless, the Swiss financial sector has been pivotal as far as the impact and effectiveness of such sanctions measures are concerned. According to the Swiss State Secretariat of Economic Affairs (SECO), assets worth approximately CHF7.5 billion have been frozen, while deposits of approximately CHF46.1 billion held with Swiss banks and financial institutions are subject to restrictions on Russian-origin deposits.
Crypto assets
There is no regulatory moratorium with respect to crypto assets in place under Swiss law. To the contrary, Switzerland is very crypto friendly, and the legislator and regulators try to be ahead of the curve in addressing the challenges and questions the new blockchain technology brings with it. A new Distributed Ledger Technology (DLT) legislation aiming to further increase legal certainty for the custody of crypto assets and the tokenization of financial instruments in Switzerland entered into effect in August 2021. Notwithstanding this, certain Swiss banks in part still maintain a self-imposed crypto restriction/moratorium. That said, a number of banks have recently increased their offering in the field of digital assets (including custody of native token such as cryptocurrencies but also tokenization of "traditional" assets such as shares).
Under Swiss banking laws, the acceptance of deposits from the public is reserved to licensed banks (and, up a limited amount, licensed fintech companies). As a general rule, whether or not crypto-based assets (kryptobasierten Vermögenswerte) qualify as deposits depends on whether they may, in an insolvency of the custodian, be segregated for the benefit of the relevant customer. This, in turn, varies according to the way they are stored. Specifically, crypto-based assets held in collective custody are only subject to segregation in the case of bankruptcy of the bank if (i) the custodian has undertaken to keep them available for the custody account client at all times and (ii) they are either individually allocated to the custody account client or are allocated to a community and it is evident which share of the community assets is attributable to the specific custody account client.
In addition, for crypto-based assets held by the bank as custody assets for custody clients, FINMA may set a maximum amount on a case-by-case basis if this appears to be advisable due to the risks associated with the transaction. In particular, FINMA shall take into account the function of the crypto-based assets, their underlying technologies and risk-mitigating factors.
Until today, FINMA has not published generally applicable standards on the treatment of crypto assets for purposes of capital requirements. According to the currently prevailing practice, crypto assets are attributed a risk weighting of 800%. This 800% requirement is deemed to serve as a general risk weight indicator that covers both credit and market risks and applies to any type of crypto assets. Therefore, a bank must add 800% of the crypto assets it holds to its risk-weighted assets, irrespective of (i) whether the assets are held in the bank’s trading or banking book and (ii) their individual characteristics and risk profile. In addition to the 800% risk weighting requirement for crypto assets, FINMA’s practice is reported to include a requirement for banks to notify FINMA if the amount of crypto assets held on their trading book exceeds 4% of their total capital.
On 16 December 2022, the Basel Committee on Banking Supervision (BCBS) published its final report on the prudential treatment of banks' exposure to crypto assets (the BCBS Report). The BCBS Report is the result of two consultation rounds initiated by the BCBS in June 2021 and June 2022, respectively, and introduces international standards for the treatment of crypto assets under the capital requirements set out under the Basel Framework (the BCBS Standard). The BCBS Standard will in a next step be incorporated into the consolidated Basel Framework. According to the BCBS Report, the BCBS Standard should be implemented into national law by 1 January 2025. The national legislators and regulators will therefore need to assess if and how they incorporate the BCBS Standard into their existing regulatory capital framework. In Switzerland, it is generally expected that FINMA will review its current practice in light of the BCBS Report. However, it remains to be seen whether the Swiss legislator will follow the requirements set forth by the BCBS Standard in their entirety or will apply a separate Swiss approach that deviates in certain respects from these requirements.
Overview on Particular Issues
Finance
Sources of Financing
Many companies are still recovering from the Corona pandemic. While Swiss companies received COVID-19 loans in an aggregate amount of about CHF16.9 billion, about CHF9.5 billion of these loans remain to be repaid. Companies facing financial difficulties are increasingly looking for alternative funding sources, such as, for instance, sale of non-operative assets, sale and lease-back of operative assets, group-wide physical cash pooling or factoring arrangements, be it on a recourse or non-recourse basis.
Factoring arrangements require a close alignment with existing financing arrangements, such as credit facility agreements. While recourse factoring transactions qualify as financial indebtedness and, therefore, need to be able to be allocated to a permitted financial indebtedness carve-out or basket, non-recourse factoring transactions can be viewed as asset disposal which generally does not trigger mandatory early repayment obligations under any credit facility agreement.
Swiss companies participating in a group-internal physical cash pooling arrangement are not only subject to financial assistance limitations in case of up-stream or cross-stream lending (see "Financial assistance"), but the board of directors of such Swiss companies also needs to mitigate the risk of becoming personally liable due to a participation in such physical cash pooling arrangement. One of the mitigants can be that Swiss companies remain allowed to build their own liquidity reserves aside from the cash pool. Such reserve could be built independently from the cash pool or the right to build such a reserved could be dependent on certain financial covenants or other financial parameters no longer being met within the group.
Legal issues
Financial assistance
Unlike other countries, Switzerland's does not have any specific rules on financial assistance. However, Switzerland's corporate law capital maintenance provisions protecting the nominal capital as well as the reserves of Swiss companies have a similar effect in practice. Such rules apply if a Swiss company grants loans, security interests or guarantees or assumes other obligations (such as subordination, waiver of set-off rights, etc) for the benefit of either a direct or indirect parent company (up-stream) or another group member which is not wholly-owned by the relevant Swiss company (cross-stream), to the extent they do not provide for terms equivalent to those that could be obtained in comparable third party transactions (at arm's length-test). Under Swiss corporate law, such up-stream or cross-stream benefits are essentially limited to the amount the relevant Swiss company could freely distribute to its shareholders as a dividend at the time the relevant security interest, guarantee or other obligation is enforced. Also, in that case, Swiss withholding tax of currently 35% may be levied. In order to mitigate the inherent risks of such arrangements, it is standard market practice to broaden the relevant Swiss company's purpose clause in its constitutional documents, to obtain proper approvals by the competent corporate bodies (including the shareholder(s)) and to include the so-called "Swiss limitation language" in the relevant finance agreements which provides that any up-stream or cross-stream benefit will be limited to the freely distributable shareholder equity.
Swiss withholding tax
In financing transactions involving a Swiss nexus withholding tax considerations may apply. No Swiss withholding tax applies to interest payments made by a Swiss company if the "non-bank rules" are complied with. The relevant test is twofold: First, the number of creditors which hold a (sub-)participation in the relevant credit arrangement and which do not qualify as banks in their jurisdiction of incorporation must not exceed ten (the "10 non-bank rule") and, second, the total number of all creditors of the relevant Swiss company which do not qualify as banks in their jurisdiction of incorporation must not exceed twenty (the "20 non-bank rule"). If the "non-bank rules" are not complied with, application of Swiss withholding tax (currently 35%) may be triggered on any payment relating to interest under a loan (subject to full or partial recovery under any applicable double tax treaty). The partial abolishment of the 'non-bank rules' was rejected in a public referendum held in Switzerland on 25 September 2022, which is why they will remain applicable for an unforeseeable time.
In addition, Switzerland levies an interest-withholding tax on interest that is secured by a mortgage on Swiss real estate. The combined rate of the tax varies between 13% and 33%, depending on the canton in which the relevant real estate is located. This interest-withholding tax is reduced to zero under many double tax treaties (eg, USA, UK, Luxembourg, Germany and France).
Swiss security package
The common types of security granted in finance transactions in Switzerland are the following: Guarantees, pledges over shares, bank accounts and intellectual property rights, security assignments of receivables and security transfer of mortgage certificates. In all cases, financial assistance considerations may apply (see "Financial assistance"). The relevant perfection requirements depend on the form of the security and the type of asset which is made subject to the security interest.
Swiss law does neither recognize nor accept the concept of a floating or fixed charge. Moreover, from a Swiss law perspective, taking security over movable assets requires the security provider to give up exclusive control of, and for the secured party to obtain physical possession over, the relevant movable assets. In practice, this means that security interests over inventory are rarely put into place due to practical constraints such as the inevitable disruption of the ongoing business operations of the relevant security provider. However, having said that, certain movable assets (such as aircraft and ships) are subject to specific rules allowing for the grant and perfection of a security interest in those movable assets by registration in the relevant registry rather than by taking control/possession thereof. Subject to the aforesaid and specific rules regarding mortgages on real estate, Swiss law generally does not require any approval, filing, registration whatsoever for the creation and perfection of any security. Also, generally speaking, there are no stamp taxes payable as a result of the grant of a guarantee or a security interest over movable assets.
Overview on Swiss regulatory framework
In Switzerland, the primary regulator for supervising the financial market and its participants as well as certain products is FINMA. FINMA also acts as rule maker with respect to technical implementing provisions where federal acts or their implementing ordinances delegate such power to FINMA, and acts as resolution authority in restructuring or liquidation proceedings of Swiss banks, securities firms, fund management companies and central mortgage bond institutions. The Swiss National Bank (SNB) is entrusted with the task to ensure the stability of the Swiss financial market – including the task commonly referred to as the macro-prudential supervision.
The most common type of authorisation granted by FINMA is a licence to engage in a given financial-market activity. Banks, certain financial institutions (including securities firms, fund management companies, managers of collective assets), insurers, collective investment schemes and financial-market infrastructures must comply with stringent organisational, financial and risk-minimisation requirements. They are also subject to prudential supervision by FINMA. FINMA also licenses portfolio managers and trustees. However, in these cases, compliance with licensing requirements is not monitored directly by FINMA but by a supervisory organisation (SO). FINMA licenses and supervises the SOs.