Banking Ordinance – Deposit protection for Swiss bank clients

Is the Swiss model of deposit protection safe and sensible?

The Swiss model of deposit protection is both secure and sensible. It is based on a robust system that is organized and monitored by the Swiss Bankers Association esisuisse.

All banks and securities dealers that are regulated by FINMA and have their registered office in Switzerland are members of this association. The security of this model lies in its structure and the mechanisms that take effect in the event of bank insolvency.

The model makes sense because it strengthens the confidence of bank customers and promotes the stability of the financial system. Reliable deposit protection prevents panic withdrawals in times of crisis and helps to ensure the stability of the banks. This is particularly important in a country like Switzerland, which is known for its financial stability and strong banking system.

Deposit protection strengthens customer confidence in banks, which in turn supports overall economic stability. Deposit protection can also prevent borrowers from having to top up an existing loan müssen, um den finanziellen Verlust zu überbrücken.

100,000 francs upper limit

According to the Swiss Banking Act, these institutions are obliged to provide special protection for certain customer deposits. In the event of bank insolvency, other Swiss banks step in to guarantee secured deposits of up to CHF 100,000 per customer, whereby the payout should be made within one month.

This cover applies per bank customer, not per account, and also includes joint accounts such as household accounts.

The total amount of secured deposits is currently limited to CHF 8 billion, which corresponds to around 1.6 percent of all secured bank deposits in Switzerland. Secured deposits include data such as medium-term notes in the holder’s name as well as balances in Swiss private, savings, numbered, and corporate accounts.

The collective financing of the Deposit Protection Fund, to which all participating banks contribute, ensures that sufficient funds are available to protect customers’ deposits up to a fixed amount.

Although there is a large difference between the officially guaranteed deposits and the funds available to esisuisse, such an upper limit is essential. The purpose of setting this upper limit is to limit the risk for the deposit guarantee scheme.

Too high a coverage amount could overburden the financing of the system, while too low a sum would undermine customer confidence. The CHF 100,000 upper limit therefore represents a sensible compromise that ensures both the protection of customers and the financial sustainability of the deposit guarantee scheme.

Private association instead of public authority

In Switzerland, deposit protection is not organized by a state authority, but by a private association called esisuisse.

Originally, esisuisse was directly affiliated with the Swiss Bankers Association, which is no longer the case following changes. Nevertheless, the current version of esisuisse is still based on the principle of self-regulation by the banks.

This structure has both advantages and disadvantages. One advantage is the association’s proximity to the banks and its in-depth knowledge of the banking sector, which enables effective management and the ability to react quickly in the event of a crisis.

One disadvantage could be that a private association may not have the same authority and enforcement power as a state authority. This means that state organizations can be integrated more easily in times of crisis, for example in cooperation with the National Bank and banking supervision.

State organizations can be integrated more easily in times of crisis, for example in cooperation with the National Bank and banking supervision.

Nevertheless, esisuisse has so far established itself as a reliable and competent player that is able to manage the Deposit Protection Fund effectively and act quickly in the event of an emergency. Close cooperation with the banks and continuous monitoring of the system also contribute to the security and stability of deposit protection.

No cash reserve

The Swiss deposit protection system is not based on a physical reserve of funds, but operates according to the so-called “pay-box principle”. This means that the sole purpose of deposit protection is to pay out deposits if a bank is liquidated. Nevertheless, it is the banks’ duty to provide funds quickly in the event of insolvency.

This means that banks are obliged to pay money into the protection fund immediately in the event of an emergency in order to protect customers’ deposits. If this is not the case, a loan for couples could be the solution.

However, this model could face challenges in extreme crisis situations, for example, if several banks get into difficulties at the same time. The ability of banks to provide liquid funds quickly is crucial to the effectiveness of the system.

Strict regulatory requirements and continuous monitoring are necessary to ensure that these funds are actually available in an emergency.

Relatively narrow powers

The powers of the Swiss deposit guarantee scheme are relatively narrow. Its main task is to protect customers’ deposits up to the specified upper limit.

Furthermore, the system has no far-reaching powers to restructure or reorganize banks. This means that the Deposit Guarantee Scheme primarily serves as a protection mechanism for customers and not as an instrument for rescuing banks.

This narrow focus can be seen as an advantage as it increases the efficiency and clarity of the system. However, there may be a lack of flexibility in complex crisis situations where more comprehensive intervention is required.

Necessary addition: Emergency Liquidity Assistance

Emergency Liquidity Assistance (ELA+) is a crucial addition to the Swiss deposit protection system due to its insufficient powers. While the deposit guarantee scheme ensures the protection of customer deposits in the event of bank insolvency, the ELA+ offers banks short-term liquidity assistance in crisis situations.

This support is provided by the Swiss National Bank (SNB) and aims to bridge liquidity bottlenecks and ensure the stability of the financial system. The combination of deposit guarantee and ELA thus offers a comprehensive protection mechanism that ensures both the security of customer deposits and the stability of the banking sector as a whole.