Despite some deleveraging over the past 3 years, the very large size of the balance sheets of the two big banks represents a major potential risk for the economy and public finances. These risks are reinforced by the low level of loss-absorbing capital held by them. Legislation, approved by parliament in September 2011, will reduce these risks, notably by strengthening capital requirements, although the foreseen leverage ratio of about 5% implies only a modest capacity to absorb losses. A stricter leverage requirement would generate substantial benefits and little cost to the economy. Contingent convertible bonds can contribute about half to required capital, so it is crucial that they are designed to ensure that they provide effective cushions in a systemic crisis. The planned reform also requires banks to develop mechanisms for their own resolution in case of failure but credible mechanisms of this kind have yet to be developed and require international co-ordination. Bank regulation needs to consider system-wide risks more explicitly. Macro-prudential regulation would also help the authorities to prevent excessive mortgage lending growth in the context of exceptionally low interest rates. Cantonal banks have expanded mortgage lending particularly actively. Removing the explicit government guarantees for their liabilities would also help lower risks. A partially-funded deposit insurance scheme would provide further stability to the Swiss financial system. Significant improvements in the regulation of pension funds have been introduced, although further steps are desirable.