SWITZERLAND: An Introduction to Banking & Finance

Banking & Finance in Switzerland: an Introduction  

Switzerland continues to be a highly attractive banking market. It counts 278 banks and securities firms licensed by the Swiss Financial Market Supervisory Authority FINMA (FINMA), 219 Raiffeisen banks and 73 representative offices of foreign banks and securities firms. In other words, Switzerland remains an intensely banked country, irrespective of the recent turmoil surrounding Credit Suisse and the subdued economic outlook. The Swiss State Secretariat of Economic Affairs (SECO) expects economic growth of around 1.3% for 2023 and approximately 1.2% for 2024, which is below average; inflation will remain elevated for the time being, envisaged to stand at about 2.2% at the end of 2023 (2024: 1.9%), which is still considerably lower than in other European countries.

This article provides an introduction to banking and finance in Switzerland, outlining certain hot topics and particular issues.

Hot topics   

Credit Suisse's merger with UBS  

After Credit Suisse suffered a bank run of unprecedented extent, on 19 March 2023 UBS agreed to acquire Credit Suisse for CHF3 billion in an all-stock deal brokered by the Swiss government, FINMA and the Swiss National Bank (SNB). While the Swiss government supported the transaction with a guarantee to UBS up to CHF9 billion, SNB committed to provide up to CHF200 billion in liquidity. In addition, FINMA ordered the complete write-down of all outstanding CHF16 billion additional tier 1 write-down bonds issued by Credit Suisse based on the terms and conditions of such instruments and the Federal Council’s Emergency Ordinance. The transaction was closed on 12 June 2023 and resulted in a new Swiss banking giant, which will be a major player both domestically and internationally.

Sustainable finance  

Under the 2015 Paris Climate Convention, Switzerland has committed to reduce its greenhouse gas emissions by 50% by 2030 (compared to 1990). The financial sector plays an important role in this context. Consequently, on 16 December 2022, the Swiss government issued its financial sustainability report, which lays the groundwork and constitutes the strategic basis to reinforce Switzerland's leading role in this respect. In particular, it sets forth 15 measures that are expected to be implemented by 2025 (such as the promotion of transparency and the avoidance of greenwashing).

On 24 January 2023, FINMA published guidance on the management of climate risks, calling upon banks and financial institutions to scrutinise their instruments and processes and to further develop them in a forward-looking manner. FINMA has also integrated climate-related financial risks into its supervisory activity. Moreover, a legislative project on the prevention of greenwashing risks is currently in the making. The draft is expected to be published in August 2024, unless the financial sector pre-empts such regulation by enacting a satisfactory self-regulation beforehand.

Sanctions  

Switzerland has substantially adopted the packages of sanctions imposed by the European Union against Russia and Belarus. This marked a turning point in Switzerland's sanctions policy, which historically – due to the country's neutrality – merely aimed to prevent the circumvention of international sanctions or to implement United Nations sanctions.

Even though such Swiss sanctions were enacted in co-ordination with the European Union, certain deviations remain. Paired with a certain lack of predictability and the pace of legislative changes, this has proved to be challenging for the Swiss authorities and banks. Nonetheless, the Swiss financial sector has been pivotal for the effectiveness of such sanctions.

Crypto-assets 

No regulatory moratorium with respect to crypto-assets is in place under Swiss law. On the contrary, Switzerland is very crypto-friendly, and the legislature and regulators try to be ahead of the curve. New Distributed Ledger Technology (DLT) legislation aiming to further increase legal certainty for the custody of crypto-assets and the tokenisation of financial instruments in Switzerland entered into effect in August 2021. A number of Swiss banks have recently increased their offering in the field of digital assets (including custody of native tokens such as cryptocurrencies and asset management for crypto-assets, but also the tokenisation of “traditional” assets such as shares).

Under Swiss banking laws, the acceptance of deposits from the public is generally reserved to licensed banks. 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 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 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.

While reportedly advising regulated financial service providers to assign a flat risk weight of 800% to crypto-assets to cover market and credit risks, regardless of whether the positions are held in the banking or trading book, FINMA has not yet published generally applicable standards on the treatment of crypto-assets for purposes of capital requirements. This is, however, expected to be reviewed by the national legislators and regulators following the publication of the Basel Committee on Banking Supervision's final report on the prudential treatment of banks' exposure to crypto-assets on 16 December 2022 and the risk-weighting of up to 1250% proposed therein (depending on the classification of the relevant digital assets). According to this report, such standards for the treatment of crypto-assets should be implemented into national law by 1 January 2025.

Regulatory framework  

In Switzerland, FINMA is the primary regulator for supervising the financial market and its participants, as well as certain products. 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 embodies the resolution authority in the restructuring or liquidation proceedings of Swiss banks, securities firms, fund management companies and central mortgage bond institutions. SNB is entrusted with ensuring the stability of the Swiss financial market – including the task commonly referred to as 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 and managers of collective assets), insurers, collective investment schemes and financial market infrastructures must comply with organisational, financial and risk-minimisation requirements. They are also subject to prudential supervision by FINMA. FINMA furthermore 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.

Finance   

Financial assistance 

Switzerland does not have any specific rules on financial assistance but corporate capital maintenance provisions have a similar effect in practice. They apply if a Swiss company grants loans, security interests or guarantees or assumes other obligations (subordination, waiver of set-off rights, etc) for the benefit of a direct or indirect parent (up-stream) or sister (cross-stream) company, to the extent they do not provide for arm's length terms. Such up- or cross-stream benefits are limited to the amount the relevant Swiss company could freely distribute to its shareholders as a dividend. Also, Swiss withholding tax may be levied, currently at 35%. 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 approvals from the competent corporate bodies (including the shareholder(s)) and to include the so-called “Swiss limitation language” in the relevant agreements.

Swiss withholding tax  

In financing transactions, 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 that hold a (sub-)participation in the relevant credit arrangement and do not qualify as banks must not exceed ten (the “ten non-bank rule”); second, the total number of all creditors of the relevant Swiss company that do not qualify as banks must not exceed 20 (the “20 non-bank rule”). If such “non-bank rules” are not complied with, the 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).

In addition, Switzerland levies an interest withholding tax (13%–33%) on interest that is secured by a mortgage on Swiss real estate, but this 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 guarantees, pledges over shares, bank accounts and intellectual property rights, security assignments of receivables and security transfer of mortgage certificates. The relevant perfection requirements depend on the form of the security and the type of asset.

Swiss law does not recognise the general concept of a floating or fixed charge. Moreover, taking security over movable assets requires the security provider to give up exclusive control (which often proves to be impracticable). However, certain movable assets (such as aircraft and ships) are subject to specific rules, allowing for the taking of security by registration in lieu of taking control thereof. Subject to the aforesaid and specific rules regarding mortgages, no approval, filing or registration whatsoever is required.