Investor protection for Swiss Pfandbriefe

Swiss Pfandbriefe are issued under the Swiss Mortgage Bond Act and covered by additional collateral. Only two special mortgage bond institutions are admitted as issuers of Swiss Pfandbriefe: Pfandbriefzentrale der schweizerischen Kantonalbanken AG and Pfandbriefbank schweizerischer Hypothekarinstitute AG.

Collateralisation

In return for the granting of a registered lien on first-class mortgage loans, the respective member banks are granted Pfandbrief loans in the same amount and with the same terms (equilibrium principle). The loans granted by the Pfandbrief institutions to their member banks, together with the interest outstanding on these loans, are secured by a statutory lien on all claims of the respective member bank against its mortgage debtors entered in a register. The cover must always be at least equal to the loans and interest (cover principle). The Pfandbrief loans granted by the Pfandbrief institutions are themselves encumbered with a registered lien in favour of the Pfandbrief investors.

FINMA is responsible for supervising the Pfandbrief system and consequently Pfandbrief institutions. It is also charged with supervising the Pfandbrief and statutory banking regulations of the affiliated member banks, all of which have Swiss banking licences. In addition, FINMA is tasked with implementing recovery and resolution procedures. In this context, it can order protective measures for banks and/or mortgage bond institutions. It is also responsible for initiating and implementing restructuring and bankruptcy proceedings.

The Swiss Pfandbrief’s chain of protective measures

If bankruptcy proceedings are initiated against a member bank, the cover pool is intended to protect the Pfandbrief institutions and thus indirectly the Pfandbrief investors against default. Accordingly, the Mortgage Bond Act and the Pfandbrief Banks’ Valuation Rules to be approved by the Federal Council impose high requirements on the admissibility, valuation and safekeeping of cover pool assets and on managing the register of liens. Secured mortgage bonds bring advantages to the beneficiaries over creditors whose claims are not secured by a lien.

Special rules for recovery and resolution

Swiss law protects the principle of equilibrium and cover of the Pfandbrief system for member banks in distress or facing bankruptcy.

While FINMA can order a deferral and a postponement of maturity for normal claims by applying protective measures, the claims of mortgage bond institutions’ covered by Pfandbriefe are explicitly excluded from this. Similarly, covered Pfandbrief loans are also protected against bail-ins in the context of restructuring.

If confidence in a member bank is seriously impaired, FINMA may appoint an investigating agent to ensure that the register of liens is properly kept or order the cover assets to be surrendered. The investigating agent must ensure that the statutory and regulatory requirements for the cover assets are complied with at all times.

If bankruptcy proceedings are initiated against a member bank, the Pfandbrief loans are not affected and therefore do not fall due (bankruptcy remoteness). Instead, FINMA orders the segregation of loans and their collateralisation, including incoming interest and repayments, and appoints an agent to manage them. The latter must take all necessary measures to fulfil the obligations arising from the loans, including interest and repayments, in full and on time and ensure that the assets in the cover pool continue to be managed. The bankruptcy remoteness of the Pfandbrief loans in conjunction with the continued servicing from the cover pool maintains the cover and equilibrium principle and thus the chain of protective measures in the entire Pfandbrief system.