Parliament can definitely decide on state default guarantees when rescuing systemically important banks. The Federal Council has passed a corresponding message to Parliament. The aim is to anchor the so-called “Public Liquidity Backstop” (PLB) in law.
The instrument is to be used when a bank no longer has sufficient liquid funds and the Swiss National Bank’s (SNB) options for securing liquidity have also been exhausted.
In Switzerland, the PLB applies to four banks or banking groups: UBS, Zürcher Kantonalbank, Raiffeisen and Postfinance.
What is PLB?
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The “Public Liquidity Backstop” (PLB) is a government liquidity protection and is part of the standard international set of instruments in banking crises.
On the one hand, it is used when the bank’s own liquid funds are no longer sufficient to meet financial obligations. On the other hand, if the central bank’s ability to provide extraordinary liquidity support against sufficient collateral has been exhausted.
The PLB also allows the central bank to provide further liquidity, which is guaranteed by the state, as part of a restructuring of the affected bank. The amount of the guarantee is determined on a case-by-case basis and depending on the constellation.
When UBS took over Credit Suisse in an emergency, the Federal Council applied emergency law in March 2023 and put the PLB into effect by ordinance. This gave the federal government the opportunity to secure further aid from the National Bank.
Caption: In connection with the takeover of Credit Suisse by UBS, the Federal Council used a state default guarantee by emergency law. Now this instrument is definitely to be introduced. KEYSTONE/Michael Buholzer
Now, with the present draft, those parts of the emergency ordinance of March 2023 that are still relevant are to be converted into law. This does not include the federal government’s loss guarantees for certain CS securities. This is because UBS has in the meantime terminated the relevant guarantee agreement.
equality with other countries
In principle, the Federal Council had already decided in 2022 to create a legal basis for the PLB – but it had initially postponed the project in view of the CS crisis.
With the planned change in the law, Switzerland would be put on an equal footing with other countries, argues the Federal Council in the statement. According to the information, the UK, US, EU, Japan and Canada, among others, have already introduced the PLB or a similar instrument.