The Federal Department of Finance (FDF) launched a consultation to amend the Capital Adequacy Ordinance to implement the final Basel III standards in Switzerland. In addition, the Swiss Financial Market Supervisory Authority (FINMA) proposed five draft ordinances to implement the final Basel III standards in Switzerland. The draft ordinances cover trading and banking book and eligible own funds, leverage ratio and operational risk, credit risk, market risk, and disclosure of risks, capital, and principles of corporate governance. Both the consultations are open until October 25, 2022. The Capital Adequacy Ordinance and the FINMA Ordinances are scheduled to enter into force on July 01, 2024.
With the proposed amendments to the Capital Adequacy Ordinance, in line with the final Basel III standards, higher-risk transactions shall be backed with more capital than lower-risk ones. This differentiation according to risk can affect banks in different ways. Overall, the capital adequacy requirements for the banking sector—with the exception of the big banks—will not change significantly from the current capital requirements. However, the interaction of standardized and internal measurement methods has been adjusted in such a way that it results in a transparent and internationally comparable calculation of the capital requirements. The five new FINMA ordinances encompass the previous regulatory content of the following circulars, taking into account the changes introduced by the final Basel III standards:
- The Ordinance on the trading book and banking book and eligible capital encompasses FINMA Circular 2013/1 on eligible capital for banks. The Ordinance now regulates in particular technical aspects of the initial allocation of positions to the trading and banking book, the modalities for changes in the allocation—which is possible in exceptional cases—and for the transfer of risks between the two books, and the impact of this on the minimum capital requirements.
- The Ordinance on the leverage ratio and operational risks encompasses FINMA Circular 2015/3 on leverage ratio for banks and parts of FINMA Circular 2008/ 21 on operational risks for banks. The Ordinance now regulates technical aspects in the context of the new provisions for the minimum capital requirements for operational risks, such as detailed definitions of income from interest, dividends, services and other financial income; these serve as the assessment basis for the minimum capital requirements. It also sets out which losses are recorded how and aggregated to form a loss component and what is used for loss-dependent adjustment of the minimum capital requirements. In addition, there are minor changes in the calculation of the total exposure, which is the assessment basis for the leverage ratio.
- The Ordinance on credit risks encompasses FINMA Circular 2017/7 on credit risks for banks. The Ordinance now regulates the calculation methods for the three new approaches to determining the minimum capital requirements for credit valuation adjustment (CVA) risks, a revised version of the previous market value method designed for small banks (now called market value approach) for calculating the credit equivalent of derivatives, and the more restrictive requirements of the approach based on internal ratings (IRB approach). The Ordinance also regulates a lower limit for securities financing transactions with non-banks for reducing leverage in the non-banking sector as well as various technical details, such as the definition of exposures in default, the due diligence review of external ratings, the information to be obtained about foreign covered bonds or the requirements for high-value project finance.
- The Ordinance on market risks encompasses FINMA Circular 2008/20 on market risks for banks. The Ordinance now regulates the calculation methods for both new approaches to determining the minimum capital requirements for market risks—that is, the standardized approach and the internal approach. Minor changes have been made to the calculation method for the current standardized approach, which is now known as the simplified market risk standardized approach.
- The Ordinance on the disclosure of risks and capital requirements and the principles of corporate governance encompasses FINMA Circular 2016/1 on banking disclosures. The Ordinance regulates new or substantially revised disclosure tables in the context of the new approaches to calculating the minimum capital requirements for CVA risks, market risks, operational risks, and the output floors for banks with internal approaches.
Related Links (in German and English)
- Federal Council Press Release
- Capital Adequacy Ordinance (PDF)
- Explanatory Report on Amendments to Capital Adequacy Ordinance (PDF)
- FINMA Press Release
- Ordinance on Trading and Banking Book (PDF)
- Ordinance on Leverage Ratio and Operational Risks (PDF)
- Ordinance on Credit Risks (PDF)
- Ordinance on Market Risks (PDF)
- Ordinance on Disclosure of Risks and Own Funds (PDF)
Keywords: Europe, Switzerland, Banking, Basel, Regulatory Capital, Capital Adequacy Ordinance, Credit Risk, Market Risk, Operational Risk, Leverage Ratio, Disclosures, Swiss Federal Council, FINMA
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