Looking back: the history of depositor protection
Deposit insurance and the preferential treatment of deposits in the event of bankruptcy have been features of the Swiss finance market since the 1930s. However, minimal use was made of deposit insurance until the bankruptcy and liquidation of Spar- und Leihkasse Thun in 1991.
This experience prompted a rethink and redesign of the deposit insurance scheme, broadening the definition and scope of preferential deposits. The changes included raising the limit on preferential deposits from CHF 10,000 to CHF 30,000 and assigning these deposits to the second creditor class pursuant to Article 219 para. 4 of the Federal Act on Debt Enforcement and Bankruptcy (DEBA). Protection which had previously applied only to private customers’ savings and salary accounts was extended to all deposits. The cap on total contributions was set at CHF 1 billion.
esisuisse is born
Under Article 37h of the Banking Act (BankA), the deposit insurance system is based on self-regulation. It was in this spirit that the esisuisse association was established in Basel in 2005, following approval by FINMA.
Depositor protection is revised
Just three years later, as an immediate response to the financial crisis, an urgent new act to strengthen depositor protection entered into force on 20 December 2008. This raised the protection to CHF 100,000 per customer (of a Swiss branch) and increased the cap on total contributions to CHF 6 billion. It also required banks to hold domestic assets worth 125% of their preferential deposits, to ensure that sufficient assets were available in Switzerland to satisfy customer claims. Another change was to make the rules on immediate payouts from liquid funds more flexible and more generous. Finally, deposits with pension foundations were ringfenced and treated as preferential in the event of bankruptcy (again up to CHF 100,000), in addition to the preferential bank deposits. These emergency measures were adopted on a time-limited basis at the height of the 2008 financial crisis. Parliament subsequently absorbed them into BankA in 2011.
Looking ahead: why is depositor protection being revised again?
- Even though the total volume of insured deposits has gone up, the cap has remained unchanged at CHF 6 billion (based on Article 37h para. 3(b) BankA). This figure now covers just 1.3% of insured deposits.
- In addition, other banks are only required to fund these deposits if a claim is made. This means that esisuisse does not currently have the CHF 6 billion ready to pay out.
- Experience has shown that under the present circumstances it can take several months for deposits to be disbursed. This damages confidence in the system and would not credibly prevent a run on a bank.
The Federal Council launched a consultation on the partial revision of BankA on 8 March 2019, which ran until 14 June 2019. The Federal Council adopted the dispatch on the partial revision of BankA on 19 June 2020, stating that its review had not revealed a need for a root-and-branch overhaul of depositor protection, but that the functioning of the system could be improved with a number of selective, pragmatic adjustments. This, they claimed, could be achieved via the following three amendments:
- Adjusting the contribution cap of CHF 6 billion in line with the increased deposits. This amount would in future be 1.6% of insured deposits, though at no point falling below CHF 6 billion.
- Replacing the current system, under which banks have to provide additional liquidity, with an obligation to deposit securities. Banks would in future be required to deposit, securely and on a long-term basis, half of their contribution obligation with a custodian in the form of high-quality liquid securities or Swiss francs in cash. Simplified rules would apply to smaller institutions, which might be able to provide equivalent security in the form of a cash loan. If a bank required to contribute were unable to meet its payment obligation when called upon, the deposit insurance scheme would use the assets already deposited.
- Bringing in two new deadlines for payouts. Once a chosen liquidator has been instructed via the bankruptcy order, the deposit insurance scheme would have seven days to pay the liquidator. The liquidator would also have seven days from receipt of a depositor’s payment instruction in which to disburse the funds. Banks would be required to have preparations in place for meeting this latter deadline, as the real difficulty in the payment process lies in matching up the insured deposits to the right depositors.
Parliament will probably debate this bill during the current quarter. It is expected that the partial revision of BankA would enter into force no earlier than the first quarter of 2022.