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New capital adequacy rules for Swiss banks

Andreas Moll

Switzerland intends to implement the capital adequacy rules of the international Basel III framework for all banks registered in Switzerland. The Swiss Federal Department of Finance (FDF) has released the amended Capital Adequacy Ordinance for consultation, and the Swiss Financial Market Supervisory Authority (Finma) has done likewise with its adapted circulars.

During the course of the past three years, the new Basel III regulatory framework was drawn up under the leadership of the Group of Central Bank Governors and Heads of Supervision and the Basel Committee on Banking Supervision (BCBS), requiring banks to hold significantly more equity capital of a better quality with a view to absorbing losses more effectively.

Finma and the FDF intend to adopt the international Basel III standards and complement them with transparent capital buffers which are specific to the situation in Switzerland. By amending the relevant ordinance and circulars, respectively, the authorities plan the implementation of the new capital requirements.

These comprise the minimum requirements determined under the international regulatory framework, the capital buffer and the anticyclical buffer (the so-called Basel pure), as well as additional capital requirements which Finma prescribes depending on the size of the bank (known as the Swiss additions).

The authorities are convinced that the new rules will result in more clarity and transparency and eventually allow better risk control. In addition, by replacing special Swiss rules (like additions and discounts) with clearer and more straightforward international standards, Swiss banks will no longer be required to justify compliance with the Basel minimum standards with respect to international supervisory committees in order to legitimise the special Swiss approach.

Although most Swiss institutions already hold sufficient high-quality equity capital to comply with the implementation in Switzerland of the new international capital adequacy requirements, it is expected that substantial switching costs will occur to the banks, depending on their size.

It is not expected that the new rules will result in a general credit squeeze in Switzerland. The model calculations made by the Macroeconomic Assessment Group for the BCBS predict a maximum GDP decline of less than 0.2% after four-and-a-half years. The values for Switzerland are likely to be lower as the volume of loans directly relevant to growth (for SMEs, for example) is considerably lower in Switzerland than in most other countries.

The addressees of the consultation now have until January 16 2012 to submit their comments. Most of these addressees are organisations which represent the interests of the financial industry (or similar interests), such as economiesuisse, Swiss Bankers Association and SwissHoldings. Most likely, these organisations will not agree with all amendments to the capital adequacy rules as announced by Finma and the FDF.

However, in Switzerland, as in many other countries since the outbreak of the financial crisis, establishing stronger regulations for financial institutions is supported by a large part of the political spectrum and the population. Considering the most recent events (not least Dexia and Unicredit), it is rather unlikely that the authorities will abstain from implementing the new regulations after the consultation.

Andreas Moll

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