Featured Product

    FINMA Adjusts Market Risk Model Approach to Address Procyclicality

    April 14, 2020

    In context of the COVID-19 outbreak, FINMA has published guidance granting simplifications in the market risk model approach to weaken the volatility-related procyclicality. This relief affects the number of backtesting exceptions that are relevant for the calculation of own funds and are limited until July 01, 2020. In line with the recent announcement by BCBS and IOSCO, FINMA also extended the deadline for completing the final two implementation phases of the margin requirements for non-centrally cleared OTC derivatives by one year. In addition, FINMA welcomed the announcement of UBS Group AG and Credit Suisse Group AG to postpone half of their planned dividend distributions for 2019, despite their position of capital strength.

    Driven by the abrupt increase in volatility due to the COVID-19 pandemic, institutions that apply a model approach to market risk are recording an increased number of backtesting exceptions. Such an exception occurs if the loss incurred on a single day is greater than the loss indicated by the model. Above a certain number of exceptions, an increasing supplement is added to the bank-specific multiplier, resulting in an immediate and substantial increase to the minimum capital requirements for market risks. Most exceptions are not due to shortcomings of the model, but due to the increase in volatility. To mitigate this volatility-related heightened procyclicality, FINMA is introducing the following exemptions for institutions authorized to apply the model approach to market risk, pursuant to Articles 82 and 88 of the Capital Adequacy Ordinance:

    • The number of exceptions that result in an increase in the bank-specific multiplier pursuant to margin no. 332 of FINMA Circular 2008/20 on "Market risks – banks” and consequently to the minimum capital requirements for market risks pursuant to Article 88 of Capital Adequacy Ordinance will be frozen at the level of February 01, 2020 until July 01, 2020.
    • Exceptions must continue to be reported in accordance with margin no. 333 of FINMA Circular 2008/20. Within one month of new exceptions occurring, the bank must submit an analysis of their causes. It must investigate whether the exceptions remain even after the re-calibrations of the value-at-risk model conducted regularly in accordance with the defined process. Based on this analysis, FINMA reserves the right to demand that new exceptions be considered in the bank-specific multiplier in exceptional cases. This exemption is based on Article 4 of the Banking Act and Article 88 of Capital Adequacy Ordinance. It applies until July 01, 2020 and will be extended by FINMA if necessary.

     

    Related Links 

    Keywords: Europe, Switzerland, Banking, COVID-19, Dividend Distribution, Capital Adequacy Ordinance, Market Risk, Regulatory Capital, Initial Margin, Derivatives, FINMA

    Featured Experts
    Related Articles
    News

    PRA Consults on Implementation of Certain Provisions of CRD5

    PRA, via the consultation paper CP12/20, proposed changes to its rules, supervisory statements, and statements of policy to implement certain elements of the Capital Requirements Directive (CRD5).

    July 31, 2020 WebPage Regulatory News
    News

    EIOPA Report Identifies Key Financial Stability Risks for Insurers

    EIOPA published the financial stability report that provides detailed quantitative and qualitative assessment of the key risks identified for the insurance and occupational pensions sectors in the European Economic Area.

    July 30, 2020 WebPage Regulatory News
    News

    EBA Publishes Risk Dashboard for First Quarter of 2020

    EBA published its risk dashboard for the first quarter of 2020 together with the results of the risk assessment questionnaire.

    July 30, 2020 WebPage Regulatory News
    News

    EBA Issues Updates on Stress Test Exercise for Banks in EU

    EBA announced that the next stress testing exercise is expected to be launched at the end of January 2021 and its results are to be published at the end of July 2021.

    July 30, 2020 WebPage Regulatory News
    News

    PRA Proposes Guidance Related to Matching Adjustment under Solvency II

    PRA published the consultation paper CP11/20 that sets out its expectations and guidance related to auditors’ work on the matching adjustment under Solvency II.

    July 30, 2020 WebPage Regulatory News
    News

    MAS Issues Guidance on Dividend Distributions by Banks

    MAS published a statement guidance on dividend distribution by banks.

    July 30, 2020 WebPage Regulatory News
    News

    APRA Updates Guidance on Capital Management for Banks

    APRA updated its capital management guidance for banks, particularly easing restrictions around paying dividends as institutions continue to manage the disruption caused by COVID-19 pandemic.

    July 29, 2020 WebPage Regulatory News
    News

    FSB Report Reviews Macro-Prudential Framework and Tools in Germany

    FSB published a report that reviews the progress on data collection for macro-prudential analysis and the availability and use of macro-prudential tools in Germany.

    July 29, 2020 WebPage Regulatory News
    News

    EBA Urges Firms to Finalize Preparations for End of Brexit Transition

    EBA issued a statement reminding financial institutions that the transition period between EU and UK will expire on December 31, 2020; this will end the possibility for the UK-based financial institutions to offer financial services to EU customers on a cross-border basis via passporting.

    July 29, 2020 WebPage Regulatory News
    News

    SRB on Operational Continuity in Resolution and FMI Contingency Plans

    SRB published guidance on operational continuity in resolution and financial market infrastructure (FMI) contingency plans.

    July 29, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5604