What is the state residency rate

regarding the total revision of the law on the Basler Kantonalbank of June 30, 1994

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1 Government Council of the Canton of Basel-Stadt To the Grand Council FD / P Basel, October 15, 2013 Government council resolution of October 14, 2013 Advice on the total revision of the law on the Basler Kantonalbank of June 30, 1994 and report on the motion by David Wüest-Rudin and consorts regarding amendment of the law on the Basler Kantonalbank to adapt to the government council guidelines on public corporate governance (P125019) to suit Aeneas Wanner and the like regarding owner strategy for Basler Kantonalbank (P125014) to suit Kerstin Wenk and consorts regarding changes to the Basler Kantonalbank law regarding clarification of the Responsibilities and competencies (P125018) for the written question from Dieter Werthemann regarding the question why the canton of Basel-Stadt needs the Basler Kantonalbank (P125077). October 2013

2 Government Council of the Canton of Basel-Stadt Page 2 Table of Contents 1. Legal form and purpose Company, legal form, registered office Purpose II. Business area Objective business area Geographical business area Subsidiaries, investments and cooperation III. Financing and state guarantee Own funds Borrowed funds State guarantee IV. Organization Bodies Bank Council Duties and Powers of the Bank Council Bank Council Committees Management Audit Firm Inspectorate V. Supervision and Supervision Federal Financial Market Authority ... 58

3 Government Council of the Canton of Basel-Stadt Page Supervisory and participation rights of the Government Council Owner strategy and mandating Supervision and participation rights of the Grand Council VI. Annual accounts and appropriation of profits Annual accounts of net profit and appropriation of profits VII. Responsibility and confidentiality confidentiality Reporting of grievances (whistleblowing) Liability VIII. Transitional and final provisions Bankrat Final provision Response to the four parliamentary proposals Motion David Wüest-Rudin and consorts Suit Aeneas Wanner and consorts Approach Kerstin Wenk and consorts Written request Dieter Werthemann Formal reviews and regulatory impact assessment Proposals Grand Council resolution Law on Basler Kantonalbank I. Legal form and purpose Company, legal form, registered office Purpose II. Business area Business area Geographical business area Subsidiaries, participations and cooperation III. Financing and state guarantee Own funds Borrowed funds IV. Organization Bodies Bank Council Duties and Powers of the Bank Council Committees of the Bank Council Management Audit Company Inspectorate V. Supervision and Supervision Federal Financial Market Supervision Supervisory and Participation Rights of the Government Council Owner Strategy and Mandating Supervision and Participation Rights of the Grand Council VI. Annual accounts and appropriation of profits Annual accounts of net profit and appropriation of profits VII. Responsibility and confidentiality Maintaining confidentiality The obligation of confidentiality is unlimited ... 88

4 Government Council of the Canton of Basel-Stadt Page Reporting of grievances (whistleblowing) Liability VIII. Transitional and final provisions Bankrat final provisions Appendix: Type and place of implementation of the Public Corporate Governance Guidelines ... 90

5 Government Council of the Canton of Basel-Stadt Page 5 1. Request With this advice we are submitting a completely revised law on the Basler Kantonalbank to the Grand Council. In addition, the government council is responding to various political initiatives in connection with the Basler Kantonalbank. 2. The template at a glance The law in force today, the law on Basler Kantonalbank (BKB), dates back to It is subject to a total revision for the following reasons: The law is partly in contradiction to the Public Corporate adopted by the government council in 2010 Governance guidelines (PCG guidelines) for investments of the Canton of Basel-Stadt and should be adapted accordingly. In particular, the election of the Bank Council by the Grand Council is incompatible with the guidelines. Likewise, there is no owner strategy or mandate for cantonal representatives to manage participation. Four political initiatives were submitted, some of which explicitly demand a change in the statutory basis of the BKB. In particular, the motion by David Wüest-Rudin and consorts regarding the amendment of the law on the BKB to adapt it to the government council guidelines on public corporate governance was referred to the government council for implementation. Since the law on BKB came into force, new legal and regulatory changes have come into force at the federal level and must be implemented. The draft revision briefly provides for the following: The existence of the BKB is assumed to be undisputed. The legal form as an independent, public-law institution is retained. Accordingly, the canton remains the majority owner of the BKB. The existing performance mandate will be retained and supplemented by a sustainability, equal opportunity and profit-sharing mandate. The unrestricted subsidiary state guarantee is retained. The compensation of the state guarantee, which has been agreed since 2003, is enshrined in law. The business group is divided into a factual and a geographical one. The business group formulated in the previous law or practiced in practice will be retained with the exception of subsidiaries abroad, which are no longer permitted. It is expressly anchored in law that the BKB should primarily operate in the economic region of northwestern Switzerland. In order to reduce risk, the white money strategy and cautious lending that the BKB has already pursued in practice is anchored in law. The law expressly states that trading on one's own account and in one's own name is permitted if it primarily serves to satisfy customer needs.

6 Government Council of the Canton of Basel-Stadt Page 6 The tasks of the body for management (management) and the tasks of the body for overall direction, supervision and control (Bankrat) are strictly separated. The board of directors is downsized. It now only has 7 to 9 members instead of 13 members. In order to de-politicize the bank, members of the government council and grand council as well as employees of the cantonal administration with legal or regulatory tasks in relation to the cantonal bank can no longer be elected to the bank council. The bank council is organized in committees in accordance with the applicable guidelines of the Swiss Financial Market Supervisory Authority and the public corporate governance of the canton of Basel-Stadt, which is why the previous bank council committee is no longer required. The auditor under banking law is now called an auditor in accordance with federal law. With regard to the inspectorate (internal audit), the tried and tested regulations will be retained. As before, the cantonal bank is subject to the comprehensive supervision of the Swiss Financial Market Authority (formerly the Swiss Federal Banking Commission) in accordance with the Federal Act on Banks and Savings Banks and the Federal Act on Federal Financial Market Supervision. The cantonal supervision and overall supervision will be regulated anew. The government council comprehensively fulfills the role of the owner in relation to the BKB. Due to the great resistance of the political parties in the consultation against a consistent implementation of the PCG guidelines at the BKB, the government council is not exclusively responsible for the election of the bank council compared to the consultation draft. Although the Government Council still regards this arrangement as the best, it proposes that in future only the members of the Bank Council be selected and that they be proposed to the Grand Council for election in globo. Contrary to the consultation draft, the Grand Council not only assumes its constitutional powers of supervision, but also elects the members of the Bank Council on the bound proposal of the Government Council. In the case of the appropriation of profits, the previously rigid regulation is replaced by a more flexible solution. In accordance with Basel III, the endowment capital no longer earns interest, but is compensated as part of the appropriation of profits. There is still no implementation ordinance issued. For this purpose, the current business regulations of the BKB are to be comprehensively revised and renamed into business and organizational regulations, which, as before, will have to be issued by the bank council, subject to the approval of the government council. The draft law was sent to the Swiss Financial Market Supervisory Authority for comment because the new law also requires approval from the Swiss Financial Market Authority before it comes into force. The Swiss Financial Market Supervisory Authority has received the present draft for an initial statement. She welcomes the revision of the law because it is an opportunity to make the essential adjustments to the regulatory developments that have taken place since the last revision. The draft advice raises the most important questions from the point of view of the Federal Financial Market Supervisory Authority and introduces the necessary considerations so that the draft law can be described as successful. In the following, it is limited to statements relating to paragraphs 3, 4, 10, 11, 13, 16-19, 22 and 23

7 Government Council of the Canton of Basel-Stadt Page 7 Your opinion is included in the comments on the individual paragraphs. 3. Initial situation 3.1 Banking environment: concentration process, competition, financial crisis In the 1990s, the Swiss banking sector experienced a phase of profound upheaval. In addition to isolated closings, numerous mergers and acquisitions led to a steady decline in the number of banks. This concentration process took place at both larger and smaller banks. The main reason for this is the increasing internationalization of the banking business thanks to technological changes combined with more intense competition. At least part of the banking business was and is becoming increasingly location-independent. The cantonal banks were and still are exposed to this increased competition. However, to this day, the service mandate has largely prevented the cantonal banks from expanding geographically. Nevertheless, the cantonal banks have survived the difficult years of upheaval in the Swiss banking system since 1990 better than the big and regional banks. The number of big banks halved from four to two and the number of regional banks fell from over 200 to less than 80 institutions. In contrast, 24 of the 26 cantonal banks in 1990 still exist today. Solothurn and Appenzell Ausserrhoden sold their financially troubled cantonal banks to large financial services companies. Other cantonal banks solved the financial problems of their cantonal banks on their own or with the help of other cantonal banks. To reorganize their cantonal banks, individual cantons had to go into debt, obtain the approval of their voters and seek support from taxpayers. During these years, the cantonal banks were able to maintain their market shares of around a third of domestic loans and deposits, but not increase them. In addition to the intensified competition that continues to this day, the global financial crisis that broke out in the USA in 2007 and is still ongoing has recently shaped the framework conditions for banks. This financial crisis, which began in the real estate market, led to the bankruptcy of a number of banks in the US and Europe. The big banks in Switzerland also recorded massive losses. The cantonal and regional banks were able to partially benefit from the loss of image and trust in the big banks and increase the inflow of customer funds. The current financial crisis shows that crises are to be expected again and again. The banking business is fraught with risks. The entire financial system is more fragile than was thought.

8 Government Council of the Canton of Basel-Stadt Page Brief profile of the Basler Kantonalbank The BKB was founded in 1899 in the legal form of an independent, public-law institution. At that time, it was supposed to provide the cantonal economy with cheap loans, create investment opportunities for small savers, promote home ownership and create a source of income for the state. In the course of time, the BKB opened numerous branches in the districts of Basel-Stadt. The BKB also developed well during the First and Second World Wars. The dominant position in the mortgage business, which the BKB has held since its foundation, could be maintained even in these difficult years. After prospering post-war years with at times very strong growth, growth slowed during the recession times of 1975/1976 and in the 1980s. Because of its traditionally heavy focus on the mortgage business, BKB was hit hard by the real estate crisis at the end of the 1980s. The need for value adjustments could, however, be covered by the release of hidden reserves. In order to reduce the vulnerability of BKB to the general economic conditions, a more balanced diversification of earnings was initiated. In particular, the trading and private banking activities were expanded. Today the BKB is a universal bank with 762 employees and 18 locations in the canton. Growth outside the canton is taking place because BKB is represented by private banking activities in Zurich and Bern and doing business with large corporate customers, institutional clients and banks throughout Switzerland. On the other hand, in 2000 BKB took a majority stake in Bank Coop, which operates throughout Switzerland, and in 2010 integrated AAM Privatbank AG. As a universal bank, the BKB offers banking services that are comparable to private banks. On the other hand, it is also an important niche player. It offers services that are offered by other banks with the exception of the big banks (and primarily UBS) by no other private bank in the canton of Basel-Stadt to the same extent. BKB's market share in the canton of Basel-Stadt is around 26%, as surveys by market research institutes show. Their market share is particularly important when it comes to financing SMEs and home ownership. The BKB guarantees that there is competition in the Basel-urban banking market and that there is another competitor of comparable size alongside the two big banks and, in particular, UBS. BKB's share capital is made up of endowment capital (80.3%) and participation certificate capital (19.7%). The canton of Basel-Stadt holds the entire endowment capital of BKB and has all voting rights. In addition to the endowment capital, the company capital of the BKB consists of the traded participation certificate capital, which represents joint ownership in the BKB with an entitlement to a share of the annual profit in the form of a dividend corresponding to the course of business. However, no participation rights are associated with the possession of participation certificates, in particular no voting rights.

9 Government Council of the Canton of Basel-Stadt Page 9 law and no related rights. Basel-Stadt grants the BKB a state guarantee and is liable for the bank's liabilities on a subsidiary basis. The total assets of the parent company of BKB amounted to around CHF 25.4 billion as of December 31, 2011. As of the same reporting date, equity amounted to CHF 3.1 billion. The gross profit amounts to millions of francs. In recent years, BKB has always been able to pay out dividends. The development of the participation certificates was also consistently positive for over ten years until autumn 2011. The profit transfer to the canton has declined slightly since the outbreak of the financial crisis, but at a consistently high level. The tax dispute with the USA was partly responsible for the deterioration in performance since autumn 2011. As a result, BKB is currently in a difficult position, although in the meantime it has taken various measures to reduce the risks associated with the conflict. In spring 2009, for example, she made the decision not to accept any new customers domiciled in the USA. In the summer of 2011, she also decided to part with all customers domiciled in the USA and therefore took e.g. in the first half of 2012 an outflow of assets of CHF 200 million. The BKB was also the first major Swiss bank to decide last year that it would focus on taxed money and will do everything in its power not to accept untaxed money from foreign or domestic customers (white money strategy). The tax dispute with the USA has not yet been resolved. As far as we know today, the BKB is able to carry a realistic fine without affecting the canton. Nevertheless, the bank's reputation is suffering. In addition to the tax dispute with the USA, the suspicion of fraud against ASE Investment also has a negative effect on the image of BKB. Around 500 investors are said to have lost a large part of their money, and the damage to investors could amount to over 100 million francs. The focus is on BKB because it served ASE Investment as one of the custodian banks. In March 2012, the BKB started investigations by the criminal authorities and the Federal Financial Market Supervisory Authority against the ASE and its organs with a criminal complaint, after an ASE customer had informed BKB shortly before of inconsistencies between the account statements sent by the ASE and the actual account balances would have.In May 2012, the BKB decided to have the events within the bank independently, unconditionally and comprehensively investigated by the law firm Bär & Karrer AG and to have them assessed from a banking regulatory perspective. The investigation report shows a harrowing picture of the activities of the ASE. The ASE has apparently systematically harmed its customers in a manner contrary to the contract and presumably in a criminal manner. In doing so, the ASE succeeded in covering up its actions in front of customers, the BKB and the Swiss Financial Market Supervisory Authority for years by means of a network of lies and lack of transparency. The investigation report confirms that the BKB has a good organizational structure, which is positive in the overall view. However, he also notes that individual BKB employees did not meet the requirements placed on them. Individual BKB employees at the Zurich location would have lacked the necessary vigilance and trusted the ASE too much.

10 Government Council of the Canton of Basel-Stadt Page 10 The management of Private Banking Zurich did not exercise enough of its supervisory and control responsibility towards the account manager responsible for ASE. The report also states that the measures taken by BKB in 2010 to control the legal and reputational risks arising from its business relationship with ASE were inadequate from a banking regulatory perspective. The BKB has decided to part with three employees of the Zurich branch. Written warnings were issued against four other employees. However, the BKB has no indications that its employees have violated criminal provisions in connection with the ASE. Furthermore, the CEO of BKB has resigned because, as CEO, he ultimately has overall responsibility for the bank's operational business. It is likely that neither the ASE nor its organs will be able to cover the losses they have caused. As an expression of the principle of being a fair business partner, the BKB will therefore be accommodating to requests for replacement by ASE customers. Any costs incurred by BKB for any damage participation will be covered from the reserves for general banking risks and will not affect the 2012 annual result. As part of the realignment of its private banking business, BKB took extensive measures as early as 2011: It introduced a more stringent admission and review procedure for external asset managers. As a result, the bank now parted with several external asset managers. In an industry comparison, the BKB implemented the strictest requirements for cooperation with external asset managers. The compensation system of Private Banking Zurich has been reorganized and aligned with that of the bank as a whole. The management of Private Banking Zurich has been newly appointed. 4. Reasons for the revision of the law on Basler Kantonalbank 4.1 Adaptation to the public corporate governance guidelines On September 7, 2010, the government council issued PCG guidelines for the canton's participations. The guidelines set out the principles of the government council with regard to the management, control and monitoring of participations and apply to the departments and their offices as internal directives. The guidelines are binding, regardless of how high the canton's participation is. They are to be used accordingly by the responsible departments and offices when drafting templates and contracts. Even then, an inventory of the degree of compliance with the PCG guidelines in the canton's major holdings revealed that there was a need for action at BKB. This was primarily located in the following areas: Division of roles between the Government Council and the Grand Council: According to the guidelines, the Government Council and not the Grand Council should exercise the canton's ownership rights. Likewise, the government council and not the grand council should elect the bank council.

11 Government Council of the Canton of Basel-Stadt page 11 In contrast, the Grand Council, in accordance with its constitutional competences, would exercise overall supervision over the Government Council and the BKB. This basically results in an incompatibility of overhead or supervisory and management functions in the BKB for members of the Grand Council. Risk management: According to the guidelines, the canton, as the owner, should set up a risk management and early warning system. The finance department should also carry out a risk assessment for BKB. Owner or owner strategy 1: According to the PCG guidelines, an owner strategy is to be drawn up for the BKB, which includes the owner's goals as well as the requirements for management, control, efficiency and transparency. Furthermore, according to the PCG guidelines, the reporting of the cantonal representations elected by the government council, the reporting of the participation itself and the mandating of the cantonal representations should be regulated by law or in the owner's strategy. The government council has therefore decided to completely revise the law on the BKB. The aim of the revision is at least to adapt the law to the PCG guidelines. 4.2 Implementation or answering of four parliamentary proposals In addition to the public corporate governance guidelines adopted by the government council, which make a review of the existing law necessary, four political proposals were submitted in connection with the tax dispute between the USA and the BKB, some of which were explicitly amended the statutory basis of the BKB. 1. Motion David Wüest-Rudin and consorts regarding amendment of the law on the BKB to adapt to the government council guidelines on public corporate governance: With a resolution of March 21, 2012, the Grand Council passed the motion David Wüest-Rudin and consorts to the government council regarding changes of the law on the BKB for adjustment to the government council guidelines on public corporate governance for comment. With a government council resolution of June 12, 2012, the Grand Council was requested to transfer the motion of David Wüest Rudin and consorts to the government council for implementation. On September 19, 2012, the Grand Council referred the motion to the government council for drafting a proposal. The government council is thus mandated to adapt the law on the BKB at least to the PCG guidelines. 1 These two terms are used synonymously in this report.

12 Government Council of the Canton of Basel-Stadt Page Suit Aeneas Wanner and consorts regarding the owner strategy for the BKB: This suit asks the government council to examine whether it would not be appropriate to define an owner strategy for the BKB. This suit will be answered by the government council together with the current revision of the law. 3. Suit of Kerstin Wenk and consorts regarding changes to the law on the BKB with regard to a clarification of responsibilities and competencies: This suit asks the government council to examine how the competencies and responsibilities in the supervision of the BKB can be regulated more clearly. The suit makers propose that all rights and obligations be assigned to the Grand Council. They demand that, in addition to the definition of responsibility and liability, the information and disclosure obligations to the authorities and the public should be laid down more clearly in a revised law. This suit will also be answered by the government council together with the current legal revision. 4. Written question from Dieter Werthemann regarding the question why the canton Basel-Stadt needs the BKB: This written question Dieter Werthemann would like answers to the following questions: What is the right to exist as a state bank for the BKB? What public tasks does it perform? Are there reasons for holding this stake? Does the sale of BKB represent a zero-sum game compared to holding this stake? Would a sale reduce the risk for the canton? In its answer to the Written Question of June 12, 2012, the Government Council announced that it would examine and answer the concerns of the Written Question in the context of the current revision of the law. 5. Main features of the draft revision The total revision of the law was taken as an opportunity to also revise the structure of the law. The law is now divided into eight instead of ten sections, namely in 1. Legal form and purpose, 2. Business area, 3. Financing and state guarantee, 4. Organization, 5. Supervision and overall supervision, 6. Annual financial statements and appropriation of profits, 7. Responsibility and confidentiality as well as 8. final provisions. Furthermore, wherever possible, attempts were made to tighten the law by avoiding duplication such as multiple mentions of competencies. The main features of the draft revision are set out below: 5.1 Adaptation to the public corporate governance guidelines The appendix to this advice provides detailed information on how the PCG guidelines issued by the government council are complied with under applicable law. It also shows how and at which regulatory level the provisions are to be met in the future: in the law on the BKB, in the business and organizational regulations of the BKB or in the owner strategy. In the following, the

13 Government Council of the Canton of Basel-Stadt Page 13 the most important changes in the law due to the implementation of the PCG guidelines are summarized: The implementation of the PCG guidelines requires various changes to the organization in relation to the BKB: on the one hand, this affects the participation and its committees themselves on the other hand, cantonal supervision and overall supervision. A core concern of corporate governance is the personal separation of the bodies responsible for overall management, supervision and control on the one hand and management on the other (5 (1) of the PCG guidelines). This clear separation of functions is also stipulated for banks by the federal banking regulation (Art. 3 Paragraph 2 Letter a of the Federal Banking Act and Art. 8 Paragraph 2 of the Federal Banking Ordinance). The reason for the separation is that several actors control each other in the exercise of power, thus reducing the risk of mistakes and improving the overall quality of the decisions. In addition, the role of the board of directors as an independent supervisory and control body is called into question if the same person takes on the role of chairman of the board of directors and the chairman of the executive board. A corresponding double mandate is therefore not permitted. The incompatibility rule should also be anchored explicitly in the law on the BKB. In order to avoid conflicts of interest, no member of the board of directors may belong to the executive board or work for the bank in any other capacity. In order to prevent any form of personal conflicts of interest, persons who are married to one another, live in a registered partnership, are related to the first or second degree or are related by marriage, are not allowed to belong to the bank organs at the same time. Furthermore, in accordance with the Swiss Federal Banking Act, the BKB must have an organizational structure analogous to that of a stock corporation. This forms the basis for the implementation of appropriate corporate governance in order to ensure transparency and a balanced relationship between management and control. In the law on the BKB, this means that the auditor (now referred to as the audit company) also has an organ function. The board of directors and the management are still organs of the BKB. In the following chapter 5.2 on the adjustments to the new federal legal provisions, it is also shown in detail what consequences this adjustment to the corporate structure of the stock corporation has. In its consultation draft, the government council stipulated that the similar organ function of the general assembly required by company law would no longer be performed by the grand council, but by the government council. In accordance with the PCG guidelines (Art. 7 Para. 2), all rights and obligations of the owner should be assigned to the government council in the bill. With this, the government council wanted to abolish the mixing of competences between the Grand Council and the government council with regard to the owner's role. The Grand Council should now exclusively exercise the role of overall supervision assigned to it in the cantonal constitution (see also Chapter 5.8 on changes to the rights of the Grand Council and the Government Council). The evaluation of the consultation has shown, however, that there is great resistance from the political parties to what the

14 Government Council of the Canton of Basel-Stadt Page 14 Government Council best regulation of the division of competencies. As a compromise, the government council therefore proposes that it select the bank council members. The Grand Council, on the other hand, elects the bank council members on the bound proposal of the government council. The government council selects the members of the bank council in accordance with the PCG guidelines (7 para. 4 and 25 para. 1) on the basis of a requirement profile. The law on the BKB therefore now contains a rough requirement profile. The government council issues a detailed catalog of requirements in the owner strategy. In order to depoliticize the Bank Council, members of the Grand Council and the Government Council as well as the employees of the Basel-Stadt administration with statutory or regulatory tasks are no longer eligible for election to the Bank Council. This fulfills a central concern of public corporate governance: Members of the Grand Council who are also on the board of directors or in the management of an investment can no longer perform their supervisory function due to a lack of independence (6 of the PCG guidelines). Since the disadvantages of representing the canton by administrative employees and members of the government council in the bank council outweigh the disadvantages, the possibility of an exception in accordance with paragraph 23 of the PCG guidelines is not used. The disadvantages include the role conflict depending on the staffing, the time required to perform such a mandate and the increase in liability risks. In addition to a change in the organization, the adaptation of the law on the BKB to the PCG guidelines also requires an adaptation of the control mechanisms at the BKB: As a central control instrument of the investment management, the law on the BKB now enshrines the adoption of an owner strategy by the government council (12 of the PCG guidelines). The most important element of the ownership strategy are the goals that the canton is pursuing with this participation. The strategic and political goals and directions are recorded in the owner strategy. There it will be defined what services have to be provided from a strategic point of view. The government council uses the owner goals as a basis for mandating the representatives it has elected in the bank council and, in an expanded form, directly as strategic guidelines for the BKB. The mandate of bank council members is now expressly regulated in accordance with the PCG guidelines (26 of the PCG guidelines). Another central control instrument in the BKB itself and for the government council is risk management. On the one hand, as the owner, the government council must implement a risk management system that monitors the risks from the owner's point of view (11 of the PCG guidelines). On the other hand, in accordance with Section 5 (7), the BKB must have an internal control system appropriate to the company's risks. The BKB has had adequate risk management in place for a long time, also in compliance with federal law. But the current cantonal law does not regulate risk management. In 19 there is only one inspectorate that performs the internal audit function. In the bill, the bank council is responsible for the regulation, establishment, maintenance, monitoring and regular review of the

15 Government Council of the Canton of Basel-Stadt Page 15 risk management and clearly laid down for BKB's risk policy. The business group is also expressly delimited on the basis of risk considerations. A factual and geographical diversification is permitted, but diversification is made dependent on the fact that the BKB and the canton do not incur excessive risks as a result. Good risk management at BKB also requires that the bank enables internal whistleblowers of legal or rule violations, in particular corruption, to report such irregularities (5 (8) of the PCG guidelines). This so-called whistleblowing is therefore now regulated in the law. 5.2 Adaptation to new federal legal provisions In accordance with Article 98, Paragraph 1 of the Federal Constitution, the federal government issues regulations on banking and the stock exchange system. In doing so, it takes account of the special task and position of the cantonal banks. This means that the cantonal banks still have a special status in the federal constitution. In contrast, the special status previously granted to the cantonal banks in the Swiss Federal Banking Act has been gradually phased out since the 1990s. For example, the former Swiss Federal Banking Act, in application of Art. 98 of the Federal Constitution, exempted the cantonal banks from complying with various provisions, such as obtaining a license, permanent compliance with the licensing requirements and the possibility of auditing by an external auditor under banking law. This special status of the cantonal banks was not significantly reduced until the 1990s in two stages, namely in 1994 and 1999.The last special regulation, namely the equity discount for cantonal banks, was abandoned in 2010, which means that the cantonal banks today no longer have any special status in relation to the private commercial banks. The cantonal banks have been fully subject to the Swiss Federal Banking Act since 1995. The canton of Basel-Stadt had already implemented the amendments to the law on the BKB required by this revision in 1994. As a result, the role of the government council in particular was severely reduced, for example by abolishing the government council control body. Since the revision of the Swiss Federal Banking Act in 1999, a bank has been defined as a cantonal bank if it was established as an institution or stock corporation on the basis of a cantonal legal decree and if the canton holds a stake of more than a third of the capital in the bank or more than a third of the votes. The canton can, but does not have to, assume full or partial liability for the liabilities of the cantonal bank. Since 1999, the state guarantee is no longer a constitutive feature of a cantonal bank.

16 Government Council of the Canton of Basel-Stadt Page 16 Cantonal banks are legal entities under cantonal law. The establishment, organization, structure, dissolution and liquidation as well as changes to all of these relationships are subject to cantonal law. But since the cantonal banks were fully subject to the Swiss Federal Banking Act and the Federal Financial Market Supervisory Authority (formerly the Federal Banking Commission), the cantons' leeway has been considerably limited: cantonal banks need a license from the Federal Financial Market Authority for their business activities, which the latter can withdraw from them . The licensing requirements according to Art. 3 of the Swiss Federal Banking Act also apply to cantonal banks. The basic structures of the organization are to be anchored in the cantonal decree (law). The federal regulations do not explicitly provide for the approval of the cantonal law by the Swiss Financial Market Supervisory Authority, but a formal approval is in fact required. Article 3, Paragraph 3 of the Swiss Federal Banking Act requires the approval of the Articles of Association by the Swiss Financial Market Supervisory Authority. The organizational and business regulations and all subsequent changes to them require approval by the Swiss Financial Market Supervisory Authority. Regardless of the legal form chosen, the cantonal banks have to orientate themselves towards the stock corporation law model with regard to their corporate structure. In addition to a body for overall direction, supervision and control, according to Art. 3 Para. a of the Swiss Federal Banking Act to also remove an executive body. The powers between these two bodies are to be strictly delimited in such a way that proper supervision of the management is guaranteed (separation of functions and powers). The commissioning of an audit company (formerly the auditor) to carry out an annual audit of the bank is stipulated in Article 18, Paragraph 1 of the Federal Banking Act. On the one hand, it carries out an audit of the accounts (analogous to the statutory auditors) and, on the other hand, as an extended arm of the Swiss Financial Market Supervisory Authority, has to check whether the bank complies with the supervisory regulations (supervisory audit). In accordance with Art. 9 Para. 4 of the Swiss Federal Banking Ordinance and the relevant circular from the Swiss Financial Market Supervisory Authority (2008/24 monitoring and internal control), the Kantonalbank ensures an effective internal control system. In particular, it appoints an internal audit (inspectorate) that is independent of the management. The Banking Act conclusively regulates federal supervision, so there is no competing cantonal jurisdiction. Additional cantonal supervision is possible, but should primarily be limited to the aspects of the state guarantee and the performance mandate. The supervision of the BKB is carried out on the basis of the respective competencies of the Federal Financial Market Supervisory Authority and the canton. The Federal

17 Government Council of the Canton of Basel-Stadt Page 17 Financial Market Supervision is solely responsible for banking-specific supervision in accordance with the Swiss Federal Banking Act and the Financial Market Supervision Act. It allows banking activities, so it exercises prudential supervision. It checks that the comprehensive authorization requirements are met before the authorization is granted to a bank and throughout its duration. Appropriate corporate governance is one of the requirements for approval, the guarantee requirement. The circulars of the Federal Financial Market Supervisory Authority must be observed by the BKB. The bank-specific control is carried out by a so-called dualistic supervision: The auditing company, as an extended arm of the Swiss Financial Market Authority, prepares the reports under banking law with findings and recommendations. These reports are evaluated by the Swiss Financial Market Supervisory Authority. The fulfillment of the service mandate and the information about the liability risks in connection with the state guarantee are part of the competencies of the canton and are set out in the law on the BKB. Accordingly, the canton also oversees these areas. Who exercises cantonal supervision, the government council or the grand council, is determined at the cantonal level analogously to the election of the bank council. Both the federal regulations and the PCG guidelines issued by the government council require that independent institutions have an organ structure analogous to that of a stock corporation. The alignment of the corporate structure to the stock corporation forms the basis for the implementation of appropriate corporate governance. This orientation to the stock corporation law model together with the other requirements of the Swiss Federal Banking Act has the following consequences: Stock corporation Bill of norms (necessary decrees) Articles of association in accordance with Art. 626 of the Swiss Code of Obligations Cantonal Bank Act according to Art. 3a and 3 of the Swiss Federal Banking Act Organizational regulations with rules of procedure according to Art. 716b Para. 2 of the Swiss Code of Obligations Business and organizational regulations according to Art. 3 of the Swiss Federal Banking Act Supreme body General assembly Government council Grand council in electing the Bank Council on the bound proposal of the Government Council Other organs, Board of Directors, Board of Directors, Auditors, Audit company

18 Government Council of the Canton of Basel-Stadt Page 18 Public Company Bills Management Management Internal Audit Internal Auditors Inspectorate Duties of the General Assembly / Government Council Non-transferable powers according to Art. 698 Para. 2 of the Code of Obligations Analogous adoption of the provisions of stock corporation law Duties of the Board of Directors / Bank Council Non-transferable and inalienable duties according to Art. 716a of the Code of Obligations Analogous adoption of the provisions of stock corporation law Duties of the auditor / audit company In accordance with Art. 727 of the Code of Obligations Analogous adoption of the provisions of stock corporation law as well as Art. 18 of the Swiss Federal Banking Act Task of the inspectorate Implicit in accordance with Art. 716a para Management In accordance with Art. 716b of the Swiss Code of Obligations, analogous adoption of the provisions of stock corporation law and in accordance with Art. 9, Paragraph 4 of the Swiss Federal Banking Ordinance Adoption of the stock corporation law and according to Art. 3 Para. 2 let. a of the Federal Banking Act In addition, the Federal Act on the Federal Financial Market Supervisory Authority, which came into force in 2009, introduces various new terms. These primarily editorial changes have been adopted in the present revision: Swiss Financial Market Supervisory Authority (FINMA) instead of the Swiss Federal Banking Commission; Examination instead of revision; Audit company instead of statutory auditors; Test report instead of audit report; Audit work instead of revision work.

19 Government Council of the Canton of Basel-Stadt Page Retention of the legal form and the ownership structure The PCG guidelines provide in 4 that for independent units that fulfill cantonal tasks, the public-law organizational form of the independent establishment is to be provided. The BKB is an independent public law institution. Due to this legal form, it is characterized by the fact that the establishment, structure, organization and business activities are determined by cantonal law. The fulfillment of a state task can best be guaranteed with this form of organization, because the sponsorship of the public service institution, which is elected by the political authorities of the canton, can also be influenced by them. As a public company, the establishment also always fulfills tasks that are in the public interest. With the choice of the institution as a form of company outside the central administration of the canton, the independent state institution is granted a certain entrepreneurial freedom and flexibility. Nevertheless, their activity has to be oriented towards the public interest. If the public sector transfers an economic service that is strongly influenced by state interests to an outsourced legal entity, the legal form of an independent public-law institution is best suited for this; it ensures the state the influence and control that corresponds to the public purpose of its participation. Since the BKB still fulfills a public task with its service mandate, the legal form of the public-law corporation is best tailored to it. The legal form can also be assessed according to whether it can meet the future requirements determined by the market. As an institution under public law, the BKB can now meet the requirements of the market, which is why there is currently no reason to deviate from the principle of the public-law organizational form of the independent institution in accordance with the PCG guidelines. In connection with the difficulties in the cantonal banking sector at the beginning of the 1990s, a fundamental discussion about the meaning and purpose of the cantonal institutions broke out. The discussion finally led to the revision of the Banking Act in 1999: In addition to the abolition of the mandatory state guarantee as mentioned above, majority state ownership is no longer necessary since then. So far, however, no cantons have made use of the federal law option of reducing the level of participation to over a third. Since the revision of the law, the cantons only have to hold a stake of more than a third of the capital and have more than a third of the votes. Only the canton of St. Gallen had a proposal under consultation in the summer of 2012, which provides for precisely this reduction in the canton's participation level to one third together with a reduction in the state guarantee as an option. The results of the consultation have not yet been made public. The Lucerne Cantonal Council, on the other hand, does not believe in the idea of ​​a parliamentary initiative that the canton should sell its majority stake in the Cantonal Bank and has clearly rejected the postulate. Since the BKB continues to perform a public task with its service mandate, the ownership structure with majority cantonal ownership is to be retained.