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Switzerland Adopts Bank Regulation Package

by Ulrika Lomas, Tax-News.com, Brussels

13 June 2012


Switzerland’s Federal Council has recently adopted a package of measures designed to strengthen the Confederation’s banking centre.

As a result of the total revision of the Capital Adequacy Ordinance, banks will have to comply with the new rules (Basel III) of the Basel Committee on Banking Supervision from January 1, 2013.

Furthermore, big banks whose failure would do considerable harm to the Swiss economy will have to comply with supplementary capital and risk diversification requirements in the future, as well as present an effective emergency plan to the supervisory authority.

The package also contains two immediate measures that will introduce a mechanism for activating a countercyclical buffer and impose more risk-oriented requirements for the capital underpinning mortgage lending.

The regulatory framework referred to as Basel III, which was developed by the Basel Committee on Banking Supervision, will be written into Swiss law with the rewrite of the Capital Adequacy Ordinance.

Banks will have to hold better quality capital. They will have to hold minimum capital representing 8% of risk-weighted assets (RWA) as well as an additional capital buffer of 2.5% of RWA, whereby 7% must be comprised of common equity Tier 1 (essentially share capital and reserves). This will improve their ability to bear losses during difficult times. Moreover, the new risk diversification rules should limit interconnectedness within the banking sector and reduce dependence among banks, particularly systemically important banks.

At the same time, the revision implements the supplementary requirements for systemically important banks resulting from the amendment of the Banking Act of September 30, 2011 ("too big to fail").

The higher capital requirements apply in parallel to the Basel III requirements. They consist of a basic component representing 4.5% of RWA and a capital buffer of 8.5% of RWA. Each bank has to fulfil both components with at least 10% common equity Tier 1. 3% can be in the form of contingent convertible bonds (CoCos), that is debt capital that is converted into equity capital in the event of the bank experiencing a crisis or which the creditor has to forgo without receiving any compensation.

Then, as an additional requirement, systemically important banks must hold a progressive component that depends on the total assets and market share of the bank in question.

Alongside the risk-based capital requirements, banks must also meet the leverage ratio requirements. In this regard, a bank's equity may not fall below 4.56% of total exposure, consisting of the balance sheet total and certain off-balance sheet items (capitalization as at year-end 2009). It is planned that the supplementary requirements will be phased-in up to 2018.

Finally, systemically important banks also have to use an emergency plan to demonstrate to the Swiss financial market supervisory authority FINMA how they can ensure that functions that are systemically important for Switzerland are maintained in the event of threatened insolvency. These rules are set out in the amended Banking Ordinance, which should enter into force together with the new Capital Adequacy Ordinance on January 1, 2013.

The ordinance provisions for systemically important banks still have to be approved by parliament beforehand.

The adopted banking package also contains two measures to be implemented immediately in the currently applicable Capital Adequacy Ordinance.

One of the measures will establish the basis for the so-called countercyclical buffer with which banks can be required to hold a higher amount of capital of up to 2.5% of RWA in order to boost their resilience in the event of excessively strong credit growth or to counter excess credit growth. When the conditions are met, the Swiss National Bank consults FINMA and then instructs the Federal Council to activate the buffer.

The other measure requires banks to hold more capital for underpinning residential mortgage lending if the borrower does not contribute a minimum sum from a source other than occupational benefits provision (second pillar) and does not repay the mortgage principal in an appropriate manner. Banks define the minimum requirements for mortgage lending in their self-regulation provisions, which are to be recognized by FINMA as a minimum standard.

FINMA has also recognized the banks' corresponding self-regulation provisions. Accordingly, the minimum sum from a source other than occupational benefits provision (second pillar) is 10% of the collateral value. Similarly, the mortgage debt on residential properties is to be repaid such that it amounts to no more than two-thirds of the collateral value after 20 years.

TAGS: law | banking | offshore | offshore banking | Switzerland | regulation

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