FINMA published Guidance 02/2020, which provides banks with clarifications on dealing with the COVID-19 credits with federal guarantees within the framework of the capital and liquidity requirements, on temporary exemptions related to the leverage ratio, and on risk-diversification requirements. FINMA is providing information about the expected credit loss (ECL) approach under IFRS 9 and its application in the context of the COVID-19 crisis. FINMA also notified that it supports the liquidity package adopted by the Swiss Federal Council.
The Swiss government, SNB, and FINMA have already taken various measures to limit the consequences for the economy and the financial system. These measures include COVID-19 ordinance of Swiss Federal Council on joint and several guarantees, the deactivation of the countercyclical capital buffer proposed by SNB and approved by the Swiss Federal Council, and the temporary exemption introduced by FINMA in relation to the leverage ratio. Furthermore, the Swiss Federal Council supported the recommendations made by FINMA and SNB, recommending a prudent distribution policy and welcoming the suspension of share buyback programs.
- Capital requirements for COVID-19 credits with federal guarantees—Credits granted under the COVID-19 ordinance on joint and several guarantees will be jointly and severally guaranteed by the loan guarantee cooperatives to 100% or 85% of their value respectively and will in turn be guaranteed by the Confederation.
- Liquidity Coverage Ratio (LCR) calculation taking into account the SNB COVID-19 refinancing facility—For credit facilities granted to companies within the scope of the COVID-19 program, no outflow should be entered for the part covered by the SNB COVID-19 refinancing facility. SNB refinancing facility can be considered as a collateral with Level 1 high-quality liquid assets (HQLA).
- Exemptions relating to the leverage ratio—The regulatory framework of the leverage ratio provides that all balance sheet items should be backed by capital, regardless of the risk. The leverage ratio thus serves as a complement to the risk-weighted approach. Unusually high cash deposits held at central banks, as in the current situation, can, therefore, lead to a reduction of the leverage ratio without increasing the banks’ risk. FINMA considers this pro-cyclical effect to be counterproductive in the present environment and will, therefore, temporarily allow banks to calculate the leverage ratio without central bank reserves. This measure initially applies until July 01, 2020 and can be extended, if necessary.
- Exemptions relating to risk diversification—Owing to market turbulence, increasing margin payments to counterparties have been necessary. This can lead to the upper limit of 25% or 100% of Tier 1 capital being exceeded in the context of the risk diversification requirements. To give banks more time to manage such increased positions if needed, the otherwise strict upper limit may be exceeded temporarily.
- IFRS 9 and COVID-19—FINMA expects the affected banks to continue to observe the requirements of IFRS 9. However, FINMA calls on the affected banks to take into account the document published by the IASB on March 27, 2020 related to IFRS 9 and COVID-19. FINMA further notes that the support measures taken by authorities and governments around the world in connection with COVID-19 are to be incorporated in their forward-looking considerations of expected credit loss, or ECL, estimates.
In this environment, a prudent distribution policy is a preventive measure to ensure that the current robustness remains, even in the event of an extended economic downturn. FINMA welcomed the decision of all Swiss financial institutions to suspend their share buyback programs. Moreover, FINMA reiterates that the capital freed up through relief in the leverage ratio calculation is not to be distributed. For banks whose shareholders approved, after March 25, 2020, dividends or other similar distributions related to 2019, or who plan to seek such shareholder approval, the capital relief will be reduced by the amount of the said distributions.
Keywords: Europe, Switzerland, Banking, COVID-19, LCR, Capital Requirements, HQLA, Leverage Ratio, Liquidity, ECL, IFRS 9, Risk Diversification, CCyB, Tier 1 Capital, Refinancing Facility, SNB, Swiss Federal Council, FINMA
Previous ArticleFED Announces Measures to Mitigate Impact of COVID-19 Crisis
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying and, where relevant, calibrating the minimum performance-related triggers for simple.
The European Central Bank (ECB) is undertaking the integrated reporting framework (IReF) project to integrate statistical requirements for banks into a standardized reporting framework that would be applicable across the euro area and adopted by authorities in other EU member states.
The European Banking Authority (EBA) has been awarded the top European Standard for its environmental performance under the European Eco-Management and Audit Scheme (EMAS).
The Monetary Authority of Singapore (MAS) set out the Financial Services Industry Transformation Map 2025 and, in collaboration with the SGX Group, launched ESGenome.
The Basel Committee on Banking Supervision met, shortly after a gathering of the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS.
The International Organization of Securities Commissions (IOSCO) welcomed the work of the international audit and assurance standard setters—the International Auditing and Assurance Standards Board (IAASB)
The Bank of England (BoE) published a Statistical Notice (2022/18), which informs that due to the Bank Holiday granted for Her Majesty Queen Elizabeth II’s State Funeral on Monday September 19, 2022.
The French Prudential Control and Resolution Authority (ACPR) announced that the European Banking Authority (EBA) has updated its filing rules and the implementation dates for certain modules of the EBA reporting framework 3.2.
The European Central Bank (ECB) published a paper that examines how credit rating agencies accepted by the Eurosystem, as part of the Eurosystem Credit Assessment Framework (ECAF)
The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility (CLF) for authorized deposit-taking entities to ~USD 33 billion on September 01, 2022.