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

    EBA Publishes Regulatory Standards to Identify Shadow Banking Entities

    The European Banking Authority (EBA) published the final draft regulatory technical standards specifying the criteria to identify shadow banking entities for the purposes of reporting large exposures.

    May 23, 2022 WebPage Regulatory News
    News

    EU Agencies Update LCR Rule and Macro-Prudential Policy Recommendation

    The European Commission (EC) published the Delegated Regulation 2022/786 with regard to the liquidity coverage requirements for credit institutions under the Capital Requirements Regulation (CRR).

    May 23, 2022 WebPage Regulatory News
    News

    OSFI Discusses Benchmark Rate Transition, Sets Out Work Priorities

    The Office of the Superintendent of Financial Institutions (OSFI) published the strategic plan for 2022-2025 and the departmental plan for 2022-23.

    May 17, 2022 WebPage Regulatory News
    News

    EBA Proposes Standards to Support Secondary NPL Markets

    The European Banking Authority (EBA) is consulting, until August 31, 2022, on the draft implementing technical standards specifying requirements for the information that sellers of non-performing loans (NPLs) shall provide to prospective buyers.

    May 17, 2022 WebPage Regulatory News
    News

    EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution

    The European Council and the Parliament reached an agreement on the revised Directive on security of network and information systems (NIS2 Directive).

    May 13, 2022 WebPage Regulatory News
    News

    EBA Issues Standards for Crowdfunding Service Providers Under ECSPR

    The European Banking Authority (EBA) published the final draft regulatory technical standards specifying information that crowdfunding service providers shall provide to investors on the calculation of credit scores and prices of crowdfunding offers.

    May 13, 2022 WebPage Regulatory News
    News

    EU to Amend Credit Risk Adjustment Rules; ESAs Submit Queries on SFDR

    The European Council published a draft Commission Delegated Regulation to amend the regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.

    May 13, 2022 WebPage Regulatory News
    News

    EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution

    The European Securities and Markets Authority (ESMA) published a paper that examines the systemic risk posed by increasing use of cloud services, along with the potential policy options to mitigate this risk.

    May 12, 2022 WebPage Regulatory News
    News

    MAS Amends Notice 635 and Issues Second Proposal on Green Taxonomy

    The Monetary Authority of Singapore (MAS) published amendments to Notice 635, which sets out requirements that a bank in Singapore has to comply with when granting an unsecured non-card credit facility to individuals.

    May 12, 2022 WebPage Regulatory News
    News

    EC Consults on PSD2 and Open Finance; EU Reaches Agreement on DORA

    The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.

    May 11, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8201