Revision of the Swiss Capital Adequacy Ordinance – Amendment adopted
On 27 November 2019, the Federal Council adopted the amendment of the Capital Adequacy Ordinance (the CAO) concerning the implementation of reduced regulatory burden on capital adequacy requirements for smaller banks which enjoy high liquidity and are well capitalised. At the same time, specific requirements for systemic relevant banks have been included. The intended amendment of risk weighting for mortgages on residential investment properties was abolished. The amended CAO will enter into force as of 1 January 2020.
1 Reduced regulatory burden on capital adequacy requirements
Resulting from the increase of international regulation aiming to enhance the resilience of banks, the regulatory scheme for banks and securities firms also in Switzerland has grown in complexity and has become very burdensome in particular for small banks and securities firms.
In order to ease such burden, the Federal Council has adopted a small bank regime which will be available for opt-in by small (i.e. category 4 and 5), particularly liquid and well-capitalised banks and account keeping securities firms (hereafter all references to banks are references to account keeping securities firms as well). Banks admitted by FINMA to such regime will be exempted from the calculation of adequate capital according to articles 41-46 CAO. They will no longer have to compute risk-weighted assets. In return, they will be required to meet at all times a simplified leverage ratio of at least 8%, an average liquidity ratio of at least 110% and a refinancing ratio of at least 100%. Consequently, the regime does not necessarily ease the capital requirements itself but rather the burden arising from the calculation of capital requirements by way of providing simplified rules for their calculation. Accordingly, in the explanations (Erläuterungen) on the amendment of the CAO it is mentioned that the capital requirements according to articles 41-46 CAO will be implicitly fulfilled if the required simplified leverage ratio is met.
The amendment of the CAO concerning the small bank regime is accompanied by an adjustment of FINMA circulars. The following circulars will be amended as of 1 January 2020: Circular 18/3 “Outsourcing – banks and insurers”, 08/21 “Operational risks – banks”, 17/1 “Corporate governance – banks”, 16/1 “Disclosure – banks”, 19/1 “Risk diversification – banks”, 17/7 “Credit risks – banks”, 11/2 “Capital buffer and capital planning – banks” and 15/2 “Liquidity risks – banks”.
FINMA announced to contact banks from the eligible categories in writing over the next days and inform them about the registration process for the small banks regime.
2 Specific requirements for systemically relevant banks
Gone-concern requirements are supposed to ensure that a bank in distress can be restructured or wound up without financial assistance from the state. In order to ensure that sufficient gone-concern capital is available in the event of a crisis, the amendment of the CAO provides that not only the systemically relevant banks but also certain other group entities (in particular but not only parent banks) need to fulfil, both on group level and on a stand-alone basis, the specific requirements that systemically relevant banks have to comply with. Furthermore, gone-concern requirements for several entities within a bank group are specified, the chronological order of bail-in instruments is amended and the requirements for the internal gone-concern loss absorbing capacity are determined.
Finally, applying to all banks, certain facilitations are adopted from international standards (“Total Loss Absorbing (TLAC) Holding Standards”) with regard to TLAC instruments: Subject to certain thresholds, banks may invest in bail in instruments of other banks without having to deduct them from their own capital components.
3 Amendment of risk weighting for mortgages on residential investment properties
As expected, the Federal Council has abolished the discussed amendment of risk weighting for mortgages on residential investment properties in favour of the self-regulation regime suggested by the Swiss Bankers Association.
Judith RaijmakersPartner Attorney at law
Judith Raijmakers, attorney at law, is a partner in our Zurich and Luxembourg offices. She focuses on finance transactions including acquisition financing, asset financing, real estate and transportation financing, debt (re)structuring and debt issuances.T: +41 43 434 67 24 M: +41 79 870 91 03 E: email@example.com
Stéphanie HagmannAssociate Attorney at law
Stephanie Hagmann, attorney at law, is an associate in our Zurich office. She focusses on finance transactions including acquisition financing, asset financing, debt (re)structuring and debt issuances. Furthermore, she is focusing on corporate law and M&A transactions.T: +41 43 434 67 38 M: +41 79 890 10 11 E: Stephanie.Hagmann@loyensloeff.com
Diana LafitaAssociate Attorney at law
Diana Lafita, attorney at law, is a member of the Banking and Finance practice group in our Zurich office. She focuses on banking, insurance and capital markets regulatory and private matters.T: +41 43 434 67 49 M: +41 79 368 25 59 E: firstname.lastname@example.org