FINMA Adjusts Market Risk Model Approach to Address Procyclicality
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
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.
Previous Article
EBA Publishes Risk Dashboard for Fourth Quarter of 2019Next Article
FSB Chair Updates G20 on COVID-19 ResponseRelated Articles
HKMA on Fintech Adoption and Innovation by Banks in Hong Kong
HKMA announced the publication of a report on fintech adoption and innovation in the banking industry in Hong Kong.
BIS on Impact of Increasing Use of Cloud Technology on Cyber Risk
BIS published a working paper that examines the drivers of cyber risk, especially in context of the cloud services.
ECB Consults on Guide for Managing Climate and Environmental Risks
ECB launched consultation on a guide specifying how the Banking Supervision expects banks to consider climate-related and environmental risks in their governance and risk management frameworks and when formulating and implementing their business strategy.
ECB Issues Opinion on Revisions to CRR in Response to COVID Crisis
ECB published an opinion (CON/2020/16) on amendments to the prudential framework in EU in response to the COVID-19 pandemic.
EBA Assesses Interlinkages Between Recovery and Resolution Planning
EBA published a report that examines the interlinkages between recovery and resolution planning under the Bank Recovery and Resolution Directive (BRRD).
SRB Publishes Final MREL Policy Under the Banking Package
SRB published the final Minimum Requirements for Own Funds and Eligible Liabilities (MREL) policy under the Banking Package.
US Agencies Amend Interim Final Rule on Transition Period for CECL
US Agencies (FDIC, FED, and OCC) published a final rule that makes technical changes to the March 31, 2020 interim final rule that provides a five-year transition period for the impact of the current expected credit loss (CECL) methodology on regulatory capital.
ECB Releases Results of March Survey on Credit Terms and Conditions
ECB published results of the March 2020 survey on credit terms and conditions in euro-denominated securities financing and over-the-counter (OTC) derivatives markets.
FINMA Adjusts Deadlines for COVID-19 Relief Measures for Banks
FINMA published guidance (06/2020) on extending or discontinuing various exemptions that were granted due to the COVID-19 crisis.
SRB Consults on Standardized Data Set for Bank Valuation in Resolution
SRB launched a consultation on the minimum data needed for valuation of a bank in resolution.
