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
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Previous ArticleNBB Issues Reporting and Accounting Guidance to Ease COVID-19 Impact
Next ArticleFSB Chair Updates G20 on COVID-19 Response
In a letter addressed to the industry, the Australian Prudential Regulation Authority (APRA) set out an updated schedule of policy priorities for the banking, insurance, and superannuation industries.
The European Commission (EC) adopted a comprehensive review package of Solvency II rules in the European Union.
The Office of the Comptroller of the Currency (OCC) issued Versions 1.0 of the "Earnings" and "Regulatory Reporting" booklets of the Comptroller's Handbook.
The European Central Bank (ECB) published results of its economy-wide climate stress test, which aimed to assess the resilience of non-financial corporates and euro area banks to climate risks.
The European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in European Union.
The Hong Kong Monetary Authority (HKMA) published updates on the policy measures that were announced in context of the ongoing pandemic.
The International Swaps and Derivatives Association (ISDA), along with several other associations, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on preliminary proposals for the prudential treatment of cryptoasset exposures.
BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.
The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards
The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.