Revision of the Swiss Capital Adequacy Ordinance – Lighter regime for small, solid institutions
The Federal Council initiated the consultation regarding the revision of the Swiss Capital Adequacy Ordinance (Eigenmittelverordnung; the CAO) on 5 April 2019. The draft legislation with regard to the amendment of the CAO includes three different independent sections: (i) the implementation of reduced capital adequacy requirements for smaller banks, (ii) the amendment of risk weighting for secured loans for Swiss residential investment properties and (iii) specific requirements for system-relevant banks. The consultation period ends on 12 July 2019 (expected implementation as of 1 January 2020).
1. Implementation of reduced capital adequacy requirements
Following the financial crises in 2007/2008 and as a result of the increase of international regulations for financial institutions, banks in Switzerland are, also on a national level, subject to more and more complex and burdensome rules. Compliance standards have been significantly increased in the past years. In particular smaller banks and securities firms are excessively affected by those rules and standards. The suggested amendments in the CAO aim to eliminate unnecessary administrative hurdles without threatening stability and safety margins and to increase the efficiency of regulation and supervision for small, solid institutions. Examples of suggested measures are the abolishment of the requirement for such institutions to calculate risk-weighted assets and the confirmation that such institutions will not need to comply with the net stable funding ratio that will be implemented in Switzerland.
Small, solid, institutions are securities firms (Wertpapierhäuser) and banks (Banks and securities firms of category 4 and 5 of annex 3 of the Banking Ordinance) that are extremely well capitalised and enjoy high liquidity.
The Swiss Financial Market Authority (the FINMA) has included further measures to implement a lighter regime for small, solid institutions and has updated its circulars accordingly. Drafts are available under the following link.
The Swiss approach is rather exceptional compared to the one of the European Union (the EU). The Capital Requirements Regulation (CRR II) published by the EU, that might be considered comparable, mainly covers reduced requirements that have already been implemented for small, solid Swiss institutions.
2. Amendment of risk weighting for secured loans for Swiss residential investment properties
Extraordinarily low interest rates, increasing investments in real estate and consequently increasing prices led to an oversupply, decreasing return rates and therefore a high risk of price adjustments in real estate investments in Switzerland. In addition, banks are exposed to the risk of increasing interest rates. In order to enhance the resistance of banks towards losses related to residential investment properties (i.e. property that is not predominantly used by the borrower itself) the risk weighting and thus the capital requirements for certain loans secured by mortgages with a loan-to-value of two thirds (2/3) of the market value shall be increased (by factor 2.15). The proposed amendments are in accordance with the revised Basel-III-standards.
Based on the above described increasing risks on the mortgage market, the Federal Department of Finance, the FINMA and the Swiss National Bank discussed several approaches to mitigate such risks together with the Swiss Bankers Association. The Federal institutions have a preference for self-regulation to be approved and enforced by FINMA instead of the above mentioned suggested amendments to the ordinance. If such self-regulation will be prepared by August 2019, the Federal Department of Finance recommends to the Federal Council not to implement the above mentioned amendments to the ordinance but to implement the self-regulation.
3. Specific requirements for system-relevant banks
System-relevant banks have to comply with specific requirements according to the Swiss Banking Act (Bankengesetz), including but not limited to capital adequacy requirements which needs to be complied with from a stand-alone as well as a group perspective. Both major Swiss banks moved their system-relevant business into newly incorporated Swiss entities. The suggested amendments to the CAO aim to clarify that the parent companies of system-relevant banks still need to satisfy the specific requirements due to the close ties among the group entities. Furthermore, the 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. The proposed amendments mainly affect the two major Swiss banks.