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.
Keywords: Europe, Switzerland, Banking, COVID-19, Dividend Distribution, Capital Adequacy Ordinance, Market Risk, Regulatory Capital, Initial Margin, Derivatives, FINMA
Previous ArticleECB Publishes Results of Financial Stability Review in May 2020
The European Banking Authority (EBA) has published the final templates, and the associated guidance, for collecting climate-related data for the one-off Fit-for-55 climate risk scenario analysis.
The European Banking Authority (EBA) recently published a report that recommends enhancements to the Pillar 1 framework, under the prudential rules, to capture environmental and social risks.
As a follow on from its prudential standard on the treatment of crypto-asset exposures, the Basel Committee on Banking Supervision (BCBS) proposed disclosure requirements for crypto-asset exposures of banks.
The Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) have published results of the Basel III monitoring exercise.
The Prudential Regulation Authority (PRA) recently issued a few regulatory updates for banks, with the updated Basel implementation timelines being the key among them.
The U.S. Department of the Treasury has recently set out the principles for net-zero financing and investment.
The European Commission (EC) launched a stakeholder survey on the draft International Guiding Principles for organizations developing advanced artificial intelligence (AI) systems.
The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.
Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.
The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.