March 18, 2019

FINMA is consulting on the new FINMA Accounting Ordinance and the new Circular 20/xx titled “Accounting – banks," which sets out the current position of FINMA on certain accounting issues. The new ordinance contains the fundamental provisions on valuation and recognition. These documents replace the existing Circular 15/1 “Accounting – banks” and the associated frequently asked questions. FINMA is also consulting on revisions to Circular 2013/1 titled "Eligible equity capital – banks." The consultation will end on June 18, 2019. The new ordinance and circular are scheduled to enter into force on January 01, 2020, although the proposal provides for long transitional provisions.

FINMA is making changes to content in the area of value adjustments. It is introducing a new approach for the creation of value adjustments for default risks, which takes into account the principle of proportionality based on the categorization of banks. FINMA is choosing a proportional, lean, and intentionally principles-based approach for the creation of value adjustments for default risks, which minimizes the weaknesses of the current system, in particular the procyclical effect caused by the late creation of value adjustments.

This topic has also been dealt with in the international accounting standards: the new approach has already been applied in the IFRS provisions since 2018 and will be introduced in the U.S. GAAP from 2020. This affects banks that use these international standards for their accounting. The new body of rules for Switzerland applies to all banks and accounts that do not use such international accounting standards, however, and is significantly simpler and more principles-based by comparison.

The rules are also proportional, which is to say that they take into account the categorization of institutions. In keeping with the international standards, systemically important banks (categories 1 and 2) must now apply an approach for expected losses and must form corresponding value adjustments. Medium-size banks (category 3), which operate primarily in the interest rate business, are now required to apply a simple, principles-based approach for quantifying inherent default risks in their credit portfolios and to create the corresponding value adjustments. The remaining banks and securities dealers can continue to apply the existing approach. The banks in categories 3, 4, and 5 as well as securities dealers may optionally apply an approach to form value adjustments for default risks of a higher category.

 

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Comment Due Date: June 18, 2019

Effective Date: January 01, 2020

Keywords: Europe, Switzerland, Banking, Securities, Accounting, Value Adjustments, Proportionality, SIB, Credit Risk, Expected Credit Loss, FINMA

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