CET1 and AT1 rather than Common Equity Tier 1 alone
The starting point is the Federal Council’s proposed revision of the Banking Act. Under the proposal, systemically important banks would have to fully back the book value of their holdings in foreign subsidiaries at Swiss parent-bank level with Common Equity Tier 1, or CET1.
The WAK-S wishes to retain full backing but proposes a different capital mix: at least 50 per cent of foreign holdings would be deducted from CET1 capital. For the portion above that level, the bank would be able to use Additional Tier 1, or AT1. In designing eligible AT1 instruments, the Federal Council would follow European market standards.
The proposal was adopted in the final committee vote by 10 votes to 2, with one abstention. The Council of States will consider the bill in the 2026 autumn session. The outcome of the parliamentary process therefore remains open.
A multi-stage stabilisation mechanism
The key innovation lies in the proposed AT1 mechanism. Additional Tier 1 capital is intended to contribute at an earlier stabilisation stage, rather than only at the point of resolution.
If a bank falls below the relevant CET1 requirement, the first stage would involve, in particular, the following measures:
- Repayments and repurchases of AT1 instruments are halted
- Interest payments to holders of AT1 instruments are suspended
- Dividend payments and share buybacks are stopped
- Other economically comparable distributions are prohibited
- Variable remuneration for the current year is reduced
If the bank fails to restore compliance with the CET1 requirement within six months, further stabilisation measures are envisaged. These may include a capital increase and an offer to exchange or convert AT1 instruments. The necessary preparations should already be incorporated in the recovery plan and supported by sufficient reserve capital in the articles of association.
This creates a closer link between capital planning, distribution policy, remuneration and recovery planning.
Effectiveness remains disputed
The committee majority regards its proposal as a marketable compromise compatible with international practice. It is intended to allow full capital backing without relying exclusively on CET1.
FINMA, by contrast, is critical of the proposed solution. In its assessment, even redesigned AT1 instruments may absorb losses too late during the stabilisation phase. Rigid triggers, automatic distribution stops and complex conversion procedures could create additional market uncertainty in a stress situation. FINMA also sees risks to international comparability, the marketability of the instruments and legally robust implementation.
The Federal Department of Finance also considers full CET1 backing the more effective solution. It maintains that only Common Equity Tier 1 ensures that losses in the value of foreign subsidiaries do not directly affect the capital ratios of the Swiss parent bank.
The political debate therefore concerns more than the amount of capital required. At its centre is the question of which quality of capital can actually absorb losses in a crisis promptly, with legal certainty and without further destabilisation.
Four success factors
If the proposed model is to combine financial stability and competitiveness convincingly, four factors are particularly important:
- Clear triggers: the relevant CET1 thresholds and calculation bases must be unambiguously defined. Banks, supervisors and investors must be able to determine when each measure is triggered.
- Predictable legal consequences: stops on interest and dividends, remuneration measures and possible conversion of AT1 instruments affect different stakeholder groups. Ranking, procedures and legal remedies must therefore be regulated with legal certainty.
- International compatibility: the instruments must remain comparable from a regulatory perspective and marketable in international capital markets. Special Swiss rules must not lead to legal or economic treatment that is difficult to predict.
- Robust governance: capital planning, recovery planning, remuneration systems and the contractual terms of AT1 instruments must be designed as a coherent management framework.
Action areas for boards and executive management
Although the legislative process is still ongoing, the institutions concerned can already assess the possible implications. These include, in particular:
- Scenario analyses for different proportions of CET1 and AT1
- Alignment of capital and recovery planning
- Review of distribution and buyback programmes
- Adjustment of variable remuneration models
- Analysis of existing and future AT1 contractual terms
- Preparation of the required reserve capital
- Clarification of decision-making, escalation and communication channels
- Alignment of the data used by management, supervisors and investors
A consistent data and documentation base is essential. Capital ratios, investment values, contractual triggers and possible stabilisation measures must be understandable internally and convincingly explainable to FINMA, investors and other stakeholders.
Outlook
The WAK-S proposal opens an important debate on the future role of AT1 capital in the Swiss too-big-to-fail regime. It seeks to combine greater resilience with an internationally competitive capital structure.
Whether a viable model emerges depends largely on further parliamentary deliberation and the detailed legal framework. The decisive issue will be whether AT1 instruments genuinely stabilise the bank at an early stage without unduly restricting the options available to the bank and supervisor in a crisis.
Switzerland has an opportunity to combine financial stability and competitiveness in a modern capital regime. This requires clear rules, reliable instruments and governance that works before a crisis occurs.