Is CRR mandatory for NBFC

Comment on the amendment to the Banking Ordinance and the Capital Adequacy Ordinance

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1 FDF June 20, 2012 Commentary on the amendment to the Banking Ordinance and the Capital Adequacy Ordinance Implementation of the amendment to the Banking Act of September 30, 2011 (strengthening the stability in the financial sector; too big to fail)

2 Contents 1 Key points Objectives and addressees of the audit Key changes and effects at a glance Entry into force Special capital adequacy requirements Special risk diversification regulations Organizational measures Implementation of further special regulations on liquidity International principles and legal comparison Changes to the Banking Ordinance (6a. And 6b Liquidity Emergency planning for systemically important banks (6a. Section) Emergency plan (Art. 21 E-BankO) Examination of the emergency plan (Art. 21a E-BankO) Correction of deficiencies and ordering of measures (Art. 21b E-BankO) Triggering of the emergency plan (Art. 21c E-BankV) Improvement of the restructuring and liquidation (6b. Section) Stabilization and resolution plan (Art. 22 E-BankO) Easing the progressive capital component (Art. 22a E-BankV) Measures to improve the restructuring and liquidation (Art 22b E-BankV) Transitional provisions mung (Art. 62c E-BankV) Changes to the Capital Adequacy Ordinance (Title 5) Clarification of the intervention threshold (Art. 42 Para. 4 E-CAO) General provisions (Chapter 1) Principle (Art. 124) Financial group and individual institution (Art. 125) / 2 / 31

3 6.3 Eligible conversion capital (Chapter 2) Description and issue (Art. 126) Eligibility (Art. 127) Risk-weighted capital requirements (Chapter 3) Basics of the basic requirement (Art. 128) Capital buffer (Art. 129) Progressive component (Art. 130) Progression rate (Art. 131) Countercyclical buffer (Art. 132) Summary overview in international comparison Unweighted capital adequacy requirements (Leverage Ratio) (Chapter 4) Basic principles (Art. 133) Calculation (Art. 134) Overall exposure (Art. 135) Special rules on risk distribution (Chapter 5, Art. 136) Final provisions (Title 6) Structure of the special capital requirements for systemically important banks (Art) Applicability of previous law for systemically important banks (Art. 148) Approval Glossary / 3/31

4 1 Key points The aim of the drafts presented to amend the Banking Ordinance 1 (E-BankV) and the Capital Adequacy Ordinance 2 (E-ERV) is to reduce the too big to fail (TBTF) problem. They implement the requirements of the revision of the Banking Act of September 30th (strengthening stability in the financial sector; too big to fail) and the Financial Stability Board (FSB) for global systemically important banks of October 2011 insofar as they relate to the own funds that Relate risk distribution and the organization of systemically important banks. The special capital adequacy requirements for systemically important banks act as a parallel regime to the general requirements that apply to all banks. The basic component of 4.5% of the risk-weighted positions (RWA) must be met with core tier 1 capital (CET1). The buffer component of 8.5% of the RWA must generally be met with CET1, but conversion capital (CoCos), which converts at a CET1 level of 7% of the RWA, can also be taken into account for up to 3% of the RWA. Furthermore, a progressive component must be fulfilled with CoCos, which convert at the latest when the CET1 level reaches 5% of the RWA. The amount of this component is at least 1% of the RWA and depends on the overall exposure, consisting of total assets and certain off-balance sheet items, as well as the domestic market share of the bank. In addition to the risk-dependent capital ratios, a maximum leverage ratio will be introduced for systemically important banks. With the exception of the countercyclical buffer, it consists of the same three components as the RWA requirement concept. The capital adequacy requirements based on the leverage ratio amount to around 4.56% of the unweighted total exposure according to the key figures of the two big banks used as a basis by the commission of experts, without taking any relief into account. This corresponds to 24% of the risk-weighted capital requirements totaling 19% of the RWA. Furthermore, a cluster risk from systemically important banks may not exceed 25% of Common Equity Tier 1 capital (instead of 25% of total capital as is currently the case for all other banks). In the area of ​​organization, banks are required to draw up an emergency plan to continue the functions that are systemically important for Switzerland in the event of impending insolvency. It must be implemented by FINMA as part of a restructuring plan at the latest when the convertible capital (Contingent Convertible Capital, CoCos) of the progressive component converts and no equivalent measures have been taken to ensure systemically important functions. In accordance with the requirements of the FSB, banks must also submit stabilization plans and information to FINMA, on the basis of which FINMA can draw up a resolution plan. If the banks improve their ability to be restructured and liquidated in Switzerland and abroad beyond the minimum requirements in the emergency plan, FINMA grants relief for the progressive component. The special requirements for liquidity are regulated in a separate ordinance that is expected to be included in the hearing in 2012. 2 Objectives and addressees of the revision The imbalance of a major Swiss bank in 2008 clearly demonstrated that it could threaten the functioning of the Swiss financial system. This is accompanied by an immediate threat to all areas of the real economy. The state cannot and will not let an institute go under in the event of a crisis if the continuation of systemically important functions is not ensured: the institute is too big to fail, i.e. too big to be dropped by the state, and thus enjoys an implicit state guarantee. This state guarantee favors risk-increasing false incentives (moral hazard) and, due to its indirect subsidy character, has a competitive effect on SR SR SR 952.0; Change in AS; Entry into force on March 1, 2012 / 4/31

5 tugging out. If used, it burdens the state budget and causes economic costs. Ultimately, however, the implicit state guarantee will only lapse when an orderly exit from the market is possible again for a systemically important bank. By passing the amendment to the Banking Act (BankG), Parliament created an effective legal basis for eliminating this problem as far as possible. It followed the message of the Federal Council, which for its part largely adhered to the final report of the expert commission set up by the Federal Council on the limitation of economic risks by large companies of 30 September. The amendments to the Banking Ordinance and the ERV presented here implement these legal requirements, whereby in addition to the wording of the law, the aforementioned message and the final report were also used to a large extent for the design. The changes to the ordinance were drafted in consultation with the Swiss National Bank and FINMA and developed further in parallel with the legislative process of the Banking Act. As far as they concern the CAO, they are coordinated with the implementation of Basel III presented in a separate hearing and are to come into force on January 1, 2013 at the same time. Due to the economic importance for the situation of the banks and the Swiss banking center, the Federal Council submitted an administrative draft of the ordinances to the preliminary advisory commissions at the end of August 2011. This enabled them to get an idea of ​​the implementation of the revision of the banking law to be decided by them. The draft law was finally amended to the effect that the Federal Council regulations must be submitted to the Federal Assembly for approval, insofar as they are based on Article 10, Paragraph 4 of the revised Banking Act. 3 Overview of major changes and effects 3.1 Coming into force Subject to approval by the Federal Assembly, the amended rules will come into force on January 1, 2013, parallel to the national implementation of Basel III. 3.2 Special own funds requirements In the area of ​​own funds, a comprehensive concept is presented for systemically important banks. This consists of an independent system of own funds and is in addition to the rules applicable to all banks under Basel III. For systemically important banks, on the one hand, the mechanisms of the special buffer component and the convertible capital are effective, while, on the other hand, they must also always be Basel III-compliant. In the transitional period, the dispositions vis-à-vis the two big banks of November 20, 2008 with regard to additional equity capital until the end of 2018 at the latest form a further lower limit at the individual institution level and at the consolidated level. The core of the future special requirements for systemically important banks are the following own funds components, which include a significant strengthening of the liability base: The basic requirement corresponds to the minimum requirements of Basel III for CET1. The additional capital buffer allows the banks to absorb losses without falling below the basic requirement and without having to cease normal business activities. Finally, the additional progressive component ensures that banks with increasing systemic importance have a stronger capitalization. This creates the financial leeway for overcoming a crisis by implementing the prepared emergency plan. In addition, there may be a countercyclical capital buffer, as applies to all banks. The concept applies both to the risk-weighted equity ratio and, with the exception of the countercyclical buffer, to the minimum ratio of equity to total exposure (so-called leverage ratio). 4 reference: / 5/31

6 3.3 Special risk diversification regulations The measures in the area of ​​risk diversification are primarily aimed at reducing the interdependence within the banking sector and thus reducing the dependence of other banks on systemically important banks. They therefore have a direct risk-reducing effect. The provisions to reduce the concentration of claims of systemically important banks against a single counterparty as well as to reduce the systemic risks and operational dependencies between the systemically important and the other banks have already been included in the draft to amend the CAO for the implementation of Basel III. The risk distribution regulations for systemically important banks will be changed insofar as the reference value is now CET1 and no longer in total capital. This promotes diversification and limits the room for maneuver in a responsible manner. 3.4 Organizational measures The organizational measures are intended to ensure the continuation of system-relevant functions in a crisis situation. But they are just as important when it comes to reducing the global systemic risks emanating from the entire financial group. By enabling the forced restructuring and orderly resolution of systemically important banks, they contribute to a better distribution of risk between shareholders, creditors and bank managers. Due to the complexity of the TBTF problem, the interaction of the measures relating to own funds and organization plays a central role: At the latest when the bank falls below a certain own funds ratio, FINMA checks the need to implement the emergency planning, which is intended to ensure the continuation of systemically important functions. At the same time, the CoCos are converted, which are to be kept within the framework of the progressive component. This ensures that the implementation of the protective and insolvency measures can take place with sufficient equity capital. If a bank exceeds the minimum organizational requirements placed on it and thus improves its ability to reorganize or resolve itself, this is rewarded by easing the progressive equity component. 3.5 Implementation of further special regulations on liquidity The special requirements for liquidity in accordance with Art. 9 Para. 2 let. b BankG are not the subject of these implementing provisions. In April 2010, FINMA reached an agreement with the two big banks on a special liquidity regime that has been in effect at a consolidated level since June 30, 2010. According to current planning, the new liquidity regime, which essentially corresponds to the current one, will be transferred to a separate liquidity ordinance to be issued by the Federal Council in the course of 2012, which will then apply both at the consolidated level and at the level of the individual institution. Until this Liquidity Ordinance comes into force, the two big banks will have to comply with the current liquidity regulations applicable to all banks in accordance with Articles 16 to 20 BankV in addition to the requirements at the consolidated level at the individual institution level. 4 International principles and comparison of laws The aim of the submitted drafts to amend the Banking Ordinance 5 (E-BankV) and the Capital Adequacy Ordinance 6 (E-ERV) is to reduce the too big to fail (TBTF) problem. They set the requirements of the revision of the Banking Act of September 30 (strengthening stability in the financial sector; too big to fail) and the Financial Stability Board (FSB) for global systemically important banks 7 SR 952.0; Change in referendum draft BBl; The amendment came into effect on March 1, 2012 / 6/31

7 from October 2011. According to the approach for global systemically important financial institutions (G-SIFI) developed by the FSB together with the Basel Committee and adopted on November 4, 2011 at the G-20 summit in Cannes, banks that were listed as G- SIFI apply from January 2016 with a transition period up to January 2019 have a higher loss-bearing capacity. The amount is based on the bank's degree of systemic importance. It amounts to between 1% and 3.5% of the RWA, with a maximum of 2.5% being required so far. Only hard core capital (CET1) is eligible. In the meantime, the Basel Committee has committed itself to further examining the eligibility of conditional capital and to support its use in the context of more extensive national requirements for loss-bearing capital. In addition to 27 foreign institutions, the two major Swiss banks are currently G-SIFIs. The ongoing super-equivalence of the Swiss TBTF regime with its special capital adequacy requirements relative to the FSB requirements for G-SIFIs will have to be reviewed periodically. The measures provided for in the present draft ordinances with regard to increased prudential requirements and organizational regulations correspond conceptually to the recommendations of the FSB. The Swiss capital adequacy requirements will go beyond the international minimum requirements, including those for G-SIFIs, insofar as a higher total capital ratio and proportionately more CET1 as well as better capital quality than Tier 2 in the form of conversion capital must be maintained. 8 Following the example of individual member states (Sweden, Germany), the EU is planning to simplify the resolution of large and complex financial institutions by setting up an ex ante restructuring fund financed by the banks. The European Banking Authority (EBA) is working on the development of stabilization and resolution plans. The supervisory framework should also provide for early intervention powers of the supervisory authorities and an expanded range of resolution instruments that include personnel and organizational interventions, such as the separation and separate continuation of business or business areas. In light of the considerable increase in systemic risk triggered by the sovereign credit crisis in the euro area, at the request of the EU Commission and in addition to the increased liquidity facilities of the European Central Bank (ECB), the EBA has set additional capital adequacy requirements. Banks are urged to increase their capitalization by building a temporary buffer to cover the risks of government borrowers' debt by the end of June 2012, in line with current market prices. In the same period, they have to build up a loss-absorbing buffer so that their core capital ratio reaches a total of 9% of RWA according to the currently applicable Basel requirements. In the report of the Independent Commission on Banking of the United Kingdom (ICB) published in September 2011, two measures in particular are proposed which are of particular interest in a legal comparison with Switzerland. British banks within banking groups that operate certain services and banking transactions that are essential for the national economy and the financial system are financially and organizationally isolated from the other units of the banking group (so-called ring fencing). Only these units are allowed to conduct the deposit business and short-term lending to private customers and to small and medium-sized enterprises (SMEs), with business being limited to customers in the European Economic Area. Ancillary services are also permitted as non-independent accompanying transactions. On the other hand, isolated banks are prohibited from conducting business that complicates the bank's processing, increases the risk position vis-à-vis the global financial markets or creates risks that are not related to payment transactions with customers or the intermediation function for the real sector.With a view to increased loss-bearing capacity, the banks concerned must hold hard core capital between 7% and 10% of the RWA in accordance with the ratio of their RWA to the gross domestic product of Great Britain (on a scale of 1% to 3%). In order to increase the primary loss absorption, G-SIFI and the isolated banks in Great Britain should 8 See the graphic overview at the end of Chapter / 7/31 on Swiss capital adequacy requirements in an international comparison

8 reserve additional own funds in the form of further capital components and so-called bail-in bonds, so that the total capital requirements reach between 10.5% and 17% RWA. For G-SIFI, the amount is based on the degree of their systemic importance and for the isolated banks, in turn, on the proportion of their risk-weighted positions in the UK gross domestic product. In addition, the same banks are to build up a capital buffer for settlement purposes, the amount of which can be up to a further 3% of the RWA. The supervisory authority determines the amount according to, among other things, how high the risks of a resolution are for the state treasury. It also determines which capital qualities can be taken into account, for which group units the requirement should apply and whether it should apply on a consolidated basis or also at the level of the individual institution. A maximum leverage ratio of 3% is proposed for all banks, which must be met with Tier 1. For the isolated banks, the maximum debt ratio ranges from 3% to 4.06%, depending on their RWA to British gross domestic product. The ICB's proposals are incorporated into a standard-setting process which, among other things, specifies the stabilization and resolution planning provided for by the Financial Services Act 2010. 9 With the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the United States regulated the TBTF problem at the legislative level, with contingency planning now being laid down in executive acts of the Federal Deposit Insurance Corporation and the Federal Reserve Board and other elements still need to be defined. The Dodd-Frank Act creates the Financial Stability Risk Oversight Council (Council). The Council has to determine the systemically important financial companies without a banking license (nonbank financial companies, NBFCs) and thus subject them to increased supervisory requirements. Large, interconnected banking groups will generally have to meet higher prudential requirements with assets above a threshold of USD 50 billion. The Council can submit proposals to the Federal Reserve Board (Fed), which is set up by the Dodd-Frank Act as the supervisory authority for systemically important institutions. However, the Fed is primarily responsible for defining the increased prudential requirements for systemically important financial companies without a banking license and large, interconnected banking groups. From an organizational point of view, the regulators are provided with an instrument that allows them to influence the size, growth and individual activities of financial institutions that are considered to be systemically important. The possible measures go very far. Companies can be obliged to withdraw from certain business areas. Growth through merger or acquisition may be prohibited under certain circumstances. If an institute does not provide a conclusive plan for how it can be dissolved in a crisis situation, higher demands can be made in the organizational area. 5 Changes to the Banking Ordinance (6a. And 6b. Sections) 5.1 Overview The provisions relating to emergency planning and the improvement of the restructuring and liquidation of systemically important banks are divided into the following two areas: Emergency planning In 6a. Section regulates the emergency planning for the continuation of the system-relevant functions to be determined by the Swiss National Bank (SNB). The primary aim of emergency planning is to ensure the uninterrupted continuation of functions that are indispensable for the Swiss economy in the event of impending insolvency. The Banking Act requires systemically important banks to design their structure, infrastructure, management and control as well as intra-group liquidity and capital flows in such a way that the emergency plan can be implemented immediately in the event of impending insolvency and that their systemically important functions can be continued 9 see Financial Services Authority , Consultation Paper cp11_16 from August / 8/31

9 is guaranteed (Art. 9 Paragraph 2 Letter d of the Banking Act according to referendum proposal 10; hereinafter Banking Act). Systemically important banks must provide FINMA with evidence that the aforementioned conditions are met at all times. The legally compliant emergency planning is a minimum requirement, and if it is not complied with, FINMA will order the necessary measures (Art. 10 Para. 4 in conjunction with Art. 9 Para. 2 Letter d and Art. 10 Para. 2 BankG). and liquidity subject of 6b. Section is to improve the ability to reorganize and liquidate the entire financial group in Switzerland and abroad. The financial crisis of 2008/2009 showed that global financial groups are not only closely linked externally, for example with other market participants (interbank and derivatives business), but above all that internal structures are so complex and difficult to understand that restructuring is in place or orderly processing under high time pressure is almost impossible. To make matters worse, these financial groups often do not have a central overview in the area of ​​information systems. It is therefore not surprising that individual business lines or business activities carried out in independent legal entities have so far not been able to be separated from one another within a short period of time. The clear delimitation of transactions would have been a prerequisite for the nationally competent authorities to be able to effectively carry out a restructuring or liquidation. In the known applications, the circumstances described inevitably led to high individual restructuring and processing costs, to the disadvantage of the creditors. Sometimes the lack of resolvability prompted states to take preventive rescue measures, so to speak, in order to prevent these feared consequences from occurring. Cases like UBS, Fortis, Lehman and the like must therefore be avoided in the future and resolvability improved accordingly. The financial groups also showed a high level of dependency on individual service providers such as IT service providers as well as payment, securities and other transaction processing systems. There is a real risk that these providers will no longer provide their system-critical services precisely when they are urgently needed. This affects the system-relevant functions on the one hand and the renovation on the other. It is therefore important to prevent the system providers from exercising their right to prematurely terminate the contract and thus omit essential prerequisites for continued operation. The special capital requirements for systemically important banks are based on the basic assumption that the improvement in resolvability has not yet taken place. The requirements are calibrated accordingly. Improvements that have actually occurred are to be rewarded by means of an incentive system: Accordingly, FINMA grants relief (discounts) on the progressive equity component up to a base of 1% of RWA. The financial group receives an incentive to use reduced burdens in the capital requirements of the ratio legis to improve resolvability. The rebates are therefore also intended to reduce the costs of the restructuring. On the one hand, the problems mentioned are intended to be reduced by the fact that, in accordance with the proposals of the FSB 11, the financial group takes measures to overcome this situation in consultation with the supervisory authority to stabilize the bank in the event of high capital losses ( Recovery). On the other hand, the financial group provides the supervisory authority with suitable information and data so that a reorganization or orderly processing is possible in the event of impending insolvency (resolution). The corresponding requirements are based on Art. 9 Para. 1 Clause 3 BankG, where express reference is made to compliance with international standards. In this respect, the relevant provisions of the Financial Stability Board, on which one relies in advance, BBl FSB, Key Attributes of Effective Resolution Regimes for Financial Institutions October 2011, pages 16 ff. / 9/31, have priority

10 and other measures must be taken. If a financial group decides against improving its ability to be restructured and liquidated, the progressive component will have correspondingly more own funds available in order to take into account the expected increased costs. The corresponding provisions of the ordinance specify Art. 10 para. 4 let. a i. V. m. Para. 3 BankG. 5.2 Emergency planning for systemically important banks (Section 6a) Emergency plan (Art. 21 E-Banking Ordinance) The emergency plan is the instrument with which the systemically important bank has to prove to FINMA that its systemically important functions are independent of the other parts of the bank in the event of impending insolvency and can be continued without interruption. An impending insolvency exists when the requirements of Art. 25 Para. 1 BankG, which is specified in Art. 21c Para. 2 E-BankV, are met. By referring to Art. 8 of the Banking Act, Art. 21 Para. 1 E-BankV, it is made clear that the subject of the emergency plan is only the systemically important functions in Switzerland. In principle, the banks are free to choose the methods of achieving the goal themselves, depending on their operational structure. This is particularly expressed in the fact that a variant such as the outsourcing of systemically important functions to an independent legal entity is not specified, but that it is up to the bank to decide how it wants to meet the legal requirements. However, according to Paragraph 2, the banks must name those measures which are intended to ensure the continuation of systemically important functions in the event of impending insolvency. In doing so, the bank essentially has the choice between three options without wishing to make any final specifications: It can set up an independent, functional legal entity domiciled in Switzerland with a license to conduct banking business, on which the system-relevant functions in the event of impending insolvency be transmitted. Alternatively, it can merge the system-relevant functions in advance, i.e. within the framework of the existing business model, in a legal entity domiciled in Switzerland. 12 In the latter case, this has the advantage that the system-relevant functions have already proven themselves in day-to-day business and there is thus the certainty that their continuation will work if necessary. Finally, the bank can enter into bankruptcy-resistant agreements with a third party, according to which it transfers the system-relevant functions to the third party in the event of impending insolvency. As part of the review of the emergency plan (Art. 21a E-Banking Ordinance), FINMA will examine the options presented with regard to their effectiveness in fulfilling the purpose of the law. In this context, reference should be made in particular to the case law of the Federal Supreme Court on the standard of evidence for forecasts. In those cases in which strict evidence is not only possible or unreasonable due to the nature of the matter and in which there is a certain “need for evidence” (cf. for example BGE 128 III 271 at 2b / aa p . 275 with further evidence), the evidence has already been provided if the bank can show that the measures taken, based on the current state of knowledge 13, will most likely bring the desired success. This is reflected in the chosen formulation of Paragraph 2. Due to FINMA's previous experience with crisis situations and crisis prevention, there are doubts as to whether pure planning in the sense of the first variant described above can have an effect in the event of a crisis without prior implementation of certain elements of the emergency planning. In various parliamentary motions, with reference to the regulations of the Dodd Frank Act and the proposals of the ICB, doubts in a similar direction were raised and the introduction of a separate banking system or the separation of systemically important functions from investment banking were requested. The implementation of the emergency planning is, however, a significantly higher priority 14 This corresponds to the model of the ring fencing concept proposed by the ICB for Great Britain. Final report of the expert commission on the limitation of economic risks by large companies from September 30, 2010, pages 40 and 82. Motionen,,,, / 10/31

11 if the systemically important functions under the umbrella of the universal bank are operated together with risky business such as investment banking. Even if no (complete) separation of business areas can be required in the context of the emergency plan, it is an essential element of the concept of system-relevant functions that no contagion can occur through the remaining bank. In other words, preparatory measures only meet the legal requirements if the bank proves separately in the emergency plan that the (planning) measures it has proposed can be implemented immediately. Immediately means that FINMA must be convinced that the system-relevant functions will be transferred to another legal entity over a weekend and that immediate functionality is guaranteed. The bank’s duty to update the contingency plan annually is a fair balance between limiting the bank’s burden and the fast pace of today's business developments. The fulfillment of the obligation falls at the end of the second quarter because verified business figures are then available. In addition, FINMA is free to request an unscheduled update, for example due to restructuring or a financial crisis at the bank. During the year and without being asked, the bank must report events to FINMA that could have a significant impact on the emergency plan. This enables FINMA to request appropriate updates. As far as the relationship between the emergency plan and autonomous private redevelopment 15 is concerned, this is also possible up to a certain point according to the conception of the law. In the stabilization plan (recovery plan), the bank must use various scenarios to show FINMA how it intends to remedy a fall below the capital requirements or other (legal) requirements. If this does not succeed and there is a further reduction in capital that the CET1 level drops to 5% of the RWA, the low-triggering CoCos convert at the latest and initiate the resolution phase, in which FINMA, based on the emergency plan, deals with this Take protective and insolvency measures that prove necessary at the time. In this phase, privately autonomous reorganizations have generally failed and if the continuation of the systemically important functions cannot be guaranteed otherwise, a state reorganization or liquidation with outsourcing of the systemically important functions will come about. In this situation, the market exit of the remaining bank while continuing the system-relevant functions according to the basic concept of the expert report must be accepted. Examination of the emergency plan (Art. 21a E-BankV) Art implementation of the measures mentioned in the emergency plan with regard to the impending bankruptcy of the bank. The criteria are derived directly from Article 9, Paragraph 2, Letter d of the Act, according to which the structure, infrastructure, management and control as well as the Group's internal liquidity and capital flows are named as audit objects. The list is not exhaustive, which is expressed by the word by name. It always relates to the continuation of the systemically important functions in Switzerland and the necessary measures. Otherwise, however, measures to improve the restructuring and liquidation at home and abroad are the subject of Section 6b., According to which, if the relevant requirements are met, relief for the progressive component is granted. The emergency plan must show that, taking into account time, effort, legal obstacles and the resources required for this, the continuation of the system-relevant functions technically (for example with IT infrastructure and ATMs) and organizationally (with a privately autonomous renovation can be carried out until the intervention threshold according to Art. 25 para. 1 BankG, which is specified in Art. 21c para. 2E BankV See the final report of the Expert Commission on Limiting Economic Risks by Large Companies from September 30, 2010, page 5: The bankruptcy of a systemically important bank becomes a real possibility and the distorting effect of an implicit state guarantee does not apply. / 11/31

12 corresponding management structure, business structure and operational processes) is ensured. The measures provided for in the plan must be designed so that they can come into operation over a weekend outside of global stock exchange trading hours. According to Art. 30 BankG (continuation of banking services), FINMA can intervene in existing contractual relationships, in particular to transfer the system-relevant functions of a bank to other legal entities.In order for this to be possible at all (short-term) at a systemically important bank, the legal and economic relationships within the financial group as well as with customers and other third parties must be designed in advance in such a way that they do not prevent the continuation of systemically important functions. This requires, in particular, a guaranteed standardized transferability of the contracts without the agreement of the contracting party having to be obtained in each individual case. FINMA is aware that the implementation of new contractual concepts is likely to be time-consuming and that it will take a certain period of time, taking into account the legitimate interests of the bank. The contingency planning must provide sufficient equity and liquidity for the continuation of the systemically important functions. The general exclusion of support from central banks or the state is intended to make the emergency plan more robust, although the maintenance of the systemically important functions will continue to be in the interest of the state even after the emergency plan has been triggered. This consistent approach is derived directly from the report of the expert commission, according to which systemically important banks in particular can no longer count on state support. These must explain how the equity capital arising from the conversion or waiver of the conversion capital of the progressive component can be distributed within the group. The own funds must be sufficient, on the one hand, to capitalize on organizational units that are taking on the systemically important functions or already accommodate them, and, on the other hand, to absorb the loss of the bank as a whole during the implementation of the emergency plan. With regard to the liquidity situation, it can be assumed that both the units that operate the systemically important functions and the rest of the bank will experience a high outflow of funds and difficulties in refinancing. This must be taken into account when calculating the liquidity requirement. Suitable processes, the necessary infrastructure and access to external systems and market infrastructure at all times must be provided for the operability of the system-relevant functions. The system-relevant functions must have access to the required resources at all times and independently of the other parts of the bank. The management and control functions as well as the human resources are also included. In order to ensure that the resources are available with certainty, it should be ruled out as far as possible that providers of financial market infrastructure, personnel, etc. can use the triggering of the emergency plan as an opportunity to terminate the contract. Furthermore, the providers of payment traffic and other important infrastructures in particular must be sufficiently diversified in such a way that they have several banks as customers and are therefore not so dependent on this bank and would therefore be immediately infected if this bank got into a crisis . Conversely, sufficient diversification of the bank with its providers is also desirable. A major deficiency so far has been the lack of a comprehensive information concept in a crisis that would allow a quick overview of the entire banking business and the organization of the bank. Therefore, among other things, the contracts within the financial group related to the continuation of the system-relevant functions, such as in particular intra-group guarantees and financing, as well as with customers and other third parties, must be fully recorded and regularly updated with the associated business documents. This obligation also includes the companies and branches of the bank, insofar as they are relevant to the intended purpose. The emergency plan must be compatible with the main foreign laws and supervisory requirements. This is intended to reduce the risk of retaliatory and security measures (ring fencing) by foreign supervisory authorities and courts as a reaction to the triggering of the emergency plan in Switzerland. Due to their experience and their proximity to the regulatory Um- / 12/31

13 field, the bank is predestined to provide an assessment of the compatibility of the emergency plan with foreign law. Correction of deficiencies and ordering of measures (Art. 21b E-BankV) If the emergency plan does not meet the requirements for proof, FINMA will set the bank an appropriate one Deadline for remedying the deficiencies identified. FINMA can already set specific requirements at this point. These can consist in specifying the deficiencies, asking relevant questions and requesting further documents. As far as the duration of the period is concerned, no general, abstract indication of a period can be made. However, sufficient time must be allowed to receive solid answers, depending on the scope of the need for improvement. If the bank does not remedy the deficiencies within the set deadline, FINMA will set a grace period. If the deficiencies are not remedied within this grace period, FINMA can issue three measures in particular. 17 First of all, it can order the formation of an independent legal entity in Switzerland. In accordance with the FSB's proposal for the establishment of bridge institutions, the independent legal entity serves to take over and continue system-relevant functions through individual or universal succession. 18 FINMA can also order the unbundling of the group, according to which the legal and operational structures of the bank are to be designed in such a way that the systemically important functions can be outsourced at short notice or they are already separated. Finally, it can order the outsourcing of the infrastructures and services required to continue the systemically important functions to a centrally managed company within the financial group or to a unit outside the financial group. This list is not exhaustive. FINMA must be able to take measures adapted to the situation. Triggering of the emergency plan (Art. 21c E-Banking Ordinance) The emergency plan is the basis for protective and insolvency measures in accordance with Art. 26 et seq. BankG that FINMA can take. 19 The measures based on the emergency plan relate to the systemically important functions in Switzerland. In addition, FINMA can order restructuring measures to rescue the remaining bank - at the same time or at different times. The prerequisites for triggering protective and insolvency measures result from Paragraph 1 from Art. 25 Paragraph 1 BankG: well-founded concern that a bank is over-indebted; has serious liquidity problems; or it does not comply with the capital adequacy requirements after a period set by FINMA has expired. The new own funds concept provides that the buffer can be used up temporarily (Art. 129 E-CAO). Accordingly, it must be made clear when the capital adequacy requirements are no longer met and intervention is required. This also clarifies the interaction between the measures that may be ordered by FINMA in accordance with Art. 129 Para. 4 E-CAO due to the depletion of the buffer and the impending insolvency. This intervention threshold is reached at the latest and the emergency plan is usually implemented when the CoCos issued for the progressive component change. The triggering of protective and insolvency measures depends on the conversion of the CoCos with a low trigger point. See also the final report of the Expert Commission on Limiting Economic Risks by Large Companies from September 30, 2010, page 83 (letter d). FSB, Key Attributes of Effective Resolution Regimes for Financial Institutions October 2011, page 8 (section 3.4) and page 16 (section 10.5). See message on the amendment to the Banking Act (strengthening stability in the financial sector; too big to fail) of April 20, 2011, BBl, 4764 (section 2.1.7). / 13/31

14 together, so that the capital created as a result is to be used for the implementation of the emergency plan and the restructuring or orderly liquidation of the remaining bank. This link is necessary in order to give the emergency plan credibility and to give FINMA unequivocal legal instructions so that it can intervene in a threatening crisis without causing a dispute about the scope of its discretion. FINMA will only be able to refrain from implementing the emergency plan if equivalent measures can be taken to ensure systemically important functions. If a higher conversion point than a CET1 rate of 5% RWA is selected for the CoCos of the progressive component in accordance with Art. 130 Para. 2 E-CAO, the protection and insolvency measures are triggered according to this trigger. If the progressive component is fulfilled with CET1 instead of CoCos, it will be triggered at a CET1 rate of 5% RWA at the latest. When calculating the CET1 ratio, it should be noted that the CET1 used to meet the progressive component cannot be counted as such, but only as Tier 2 (Art. 130 Para. 3 E-CAO). The point in time of the impending insolvency (risk of insolvency) is also reached according to the general capital adequacy regulations if the systemically important bank falls below the Basel minimum requirements, which are implemented in Art. 42 E-CAO and also apply to them. This is expressly stated (in this submission) in Art. 42 Para. 4 E-CAO. Finally, FINMA can intervene before these capital adequacy requirements are not met, in particular if there are serious liquidity problems (cf. Art. 25 para. 1 Banking Act). 5.3 Improvement of the restructuring and liquidation (6b. Section) Stabilization and resolution plan (Art. 22 E-BankV) The plans of the bank and the supervisory authorities must include the stabilization or resolution of the entire bank in addition to the Swiss emergency plan. Two plans are required for this: a private, autonomous stabilization plan (recovery plan) and a sovereign resolution plan (resolution plan). The stabilization plan serves to prepare the systemically important bank for stabilization with the aim of continuing it outside of government intervention. It must be submitted by the systemically important bank to FINMA. This reviews and approves it, provided the bank shows possibilities of sustainable stabilization in the event of a crisis. It is intended to show how the systemically important bank can regain the necessary financial strength in the event of system-wide or institution-related capital or liquidity problems. The basis is a scenario in which the bank has used up the equity buffer and is heading towards the conversion of the convertible capital it may contain, but business activities can still be continued (going concern view). The stabilization plan must provide for measures that reduce the bank's risk profile and maintain or build up capital again. The assumptions underlying the stabilization plan must be disclosed to the authorities. It must also be shown which general emergency measures with regard to IT, infrastructure and internal processes are based on the stabilization plan. The stabilization plan must set out those scenarios in which the bank is examining the implementation of independent stabilization measures. It must provide such scenarios for both market-wide and institution-related capital and liquidity stress situations. The stabilization plan must contain a selection of stabilization measures to eliminate or contain the respective stress situation, from which the bank selects the most suitable in its opinion as soon as the triggering events to be determined quantitatively and qualitatively occur beforehand. The wind-up plan is used to prepare a reorganization or liquidation of the bank by FINMA. It is drawn up by FINMA; the systemically important bank must provide it with the information and data required for this. FINMA can already draw up the wind-up plan from / 14/31

15 not left to the banks for legal competence reasons, as they are solely responsible for the reorganization and liquidation of a bank. The wind-up plan is intended to show how a systemically important bank that is suffering from a massive financial market, industry-wide or institution-related crisis can be wound up in an orderly manner while maintaining its systemically important functions after any stabilization measures have failed. This, together with the dwindling customer confidence (risk of bank run) and the existing uncertainty on the refinancing markets as well as any rating downgrading, means that the previous business model must be abandoned. Accordingly, the measures in the wind-up plan are based on the premise that the bank's business operations can no longer be continued unchanged (gone-concern consideration) and contain strategies with which the bank can be restructured or wound up by the state, taking into account the emergency plan to continue the systemically important functions can. Both the stabilization plan and the resolution plan must take into account the requirements of foreign supervisory authorities and central banks on stabilization, restructuring and liquidation. At the same time, the supervisory authorities will expand and promote international coordination and cooperation. The systemically important bank submits the stabilization plan and the information required for the resolution plan to FINMA at the same frequency as the emergency plan pursuant to Art. 21 Paragraph 3, whereby it is expressly mentioned here that changes, in particular to the bank structure, may require revision. In implementing the requirements of FSB 20, FINMA has already developed a process for establishing stabilization and resolution plans in Switzerland. To this end, FINMA creates a catalog of requirements in exchange with the relevant partner regulators (including the SNB) and the systemically important banks. Separately from the planning requirements designed as a minimum requirement, the systemically important bank also describes on a voluntary basis which measures to improve restructuring and liquidity at home and abroad it has prepared or has already implemented in order to obtain relief for the progressive capital component 22a E-BankO) FINMA grants relief for the progressive component according to Art. 130 E-CAO, provided that the systemically important bank is very likely to improve its resolvability at home and abroad with measures under Art. 22b. As with emergency planning, it is questionable to what extent pure planning can lead to the goal in the event of a crisis. Therefore, the creation of stabilization and resolution plans meets a minimum requirement, which in itself is not enough to obtain relief. However, FINMA takes into account the implementation of the measures in Switzerland and abroad. In addition, it is clarified here once again that no relief is granted for securing the system-relevant functions in the context of emergency planning (cf. also Art. 131 Para. 4 E-CAO). The discounts must not jeopardize the implementation of the emergency plan. Even though the wording of Art. 10 Para. 3 BankG does not give FINMA any discretion when granting relief, it still has a margin of appreciation with regard to resolvability. The discount system is currently being developed by FINMA. The basic principles are already in place. According to the FSB criteria 21, a systemically important bank is resolvable if it is possible and credible for the supervisory authorities to run it in a way that protects the systemically important functions, does not cause serious disruption to the financial system and does not expose the taxpayer to risk. The ability to reorganize and liquidate a systemically important bank can only be determined retrospectively with a certain degree of certainty. The criteria for proof of effectiveness will naturally be qualitative and rule-based, while an FSB, Key Attributes of Effective Resolution Regimes for Financial Institutions October 2011, pages 16 ff. FSB, Key Attributes of Effective Resolution Regimes for Financial Institutions October 2011, page 27 . / 15/31