The deposit insurance scheme relies on two pillars: banking regulation and deposit insurance.
One of the main provisions of the banking regulation is that banks need to have sufficient capital and liquidity at all times. If a bank is closed down, a deposit insurance’s role is to ensure that its clients will get their money back fast.
Switzerland’s parliament passed a partial amendment of the Swiss Federal Banking Act (Bundesgesetz über die Banken und Sparkassen) on December 17, 2021. These changes are made to ensure the stability of the financial markets and to protect customers’ bank deposits.
There are three main areas of investment protection addressed by this recent partial revision, which was first proposed by the Federal Council and has now been approved by the Swiss Parliament:
- Payment of deposit insurance;
- Deposit insurance scheme; and
- Improvement of financial market stability.
Insured Deposit Payments (Einlagensicherung)
Per the bankruptcy liquidator’s promise, insured deposits will be paid out (up to CHF 100,000 per customer and bank within seven working days.
Insurance for Deposits
Deposit insurance’s maximum contribution will increase from 6 billion Swiss francs to 1.6% of the insured deposit total (which currently amounts to around CHF 7.4 billion). Six billion Swiss francs is the absolute minimum.
Stability in the financial markets
Permanently depositing high-quality assets or Swiss francs with an independent custodian will safeguard the other half of the banks’ commitment to the deposit insurance program.
This new Swiss Banking Act also includes changes related to bank insolvency and the segregation of securities implemented in the Swiss Federal Act on Intermediated Securities.
What is the goal of deposit insurance, and what advantages does it bring to the bank’s clients?
The purpose of deposit insurance is to offer a bank’s clients sufficient money to cover all their day-to-day living costs within a short period of time in case their bank goes bankrupt. This certainty increases banks’ level of trust and stops a “run on the bank” and its negative impact on society.
Why should the legislation be revised?
Measures like more stringent capital adequacy and liquidity directions and the undertaking of “too big to fail” protocols have further enhanced the stability of the financial sector and the overall security of banks.
As an added security feature, during the 2008 financial crisis, deposit insurance was considerably improved. From that moment, Switzerland’s deposit insurance scheme has had efficacious tools at its disposal that are not available anywhere else. Two of these instruments are
- The payment of deposits from the bank’s available liquidity and
- The 125% rule which demands banks to hold liquid assets in Switzerland. These assets serve as additional collateral to ensure the payment of their protected and preferential deposits.
How will the proposal affect banks?
Diminishing the time accepted to payout will lead to higher expenditures for banks. Still, these costs should be regarded as one-off implementation costs of around CHF 90 million, followed by expenses of roughly CHF 22 million per year, which will increase the financial sector’s reputation.
The planned correction is practical, and it would further improve the financial market stability, the security of the banks, and the reputation of the Swiss banking industry.