Federal Council adopts amendment of Capital Adequacy Ordinance

Bern, 23.11.2016 - During its meeting on 23 November 2016, the Federal Council adopted an amendment of the Capital Adequacy Ordinance. Two additions to the international framework agreement Basel III will be implemented with the revision. The capital adequacy requirements for derivatives and fund units held in the banking book will be made more sensitive to risk with the additions. The changes will enter into force on 1 January 2017.

The revision was prepared by a national working group and it has already been partly tested on a trial basis with individual banks in an impact study carried out by the Swiss Financial Market Supervisory Authority (FINMA). It will implement two additions to the Basel III international framework.

Derivatives

The calculation methods for the capital adequacy requirements for derivatives are outdated, particularly because they do not distinguish between secured and unsecured derivatives. Moreover, despite its name, the current standardised method is not used by any institution in Switzerland. Consequently, the Basel Committee on Banking Supervision published a new standardised approach for measuring counterparty credit risk exposures (SA-CCR) in March 2014. Unlike the current methods, this takes account of the degree of contract hedging in terms of capital adequacy requirements. The loading for contingencies and replacement values are likewise calibrated in a manner that is more sensitive to risk.

Fund units

It was noted in the case of fund units held in the banking book that very high securitisation positions to be underpinned with equity capital were packed into "funds" in order to apply the lower capital rules applicable for fund units. The international consistency of the capital adequacy requirements originating from Basel II should be improved with the new rules of December 2013 issued by the Basel Committee on Banking Supervision, and possibilities for circumvention should be prevented. In general, a precise analysis of the underlying positions will now be required for fund units held in the banking book.

Simplifications

The technical implementation of the new international approaches will entail additional work. This work and the repercussions for the resulting capital should be offset by simplifications that were developed by FINMA for small and medium-sized institutions. The simplifications are available to banks in supervisory categories 4 and 5, as well as to banks in supervisory category 3 in the case of insignificant derivatives activities and fund investments. These institutions account for over 90% of the entire bank population. The changes should enter into force on 1 January 2017, and a 12-month period is envisaged before complete implementation from 1 January 2018.

Address for enquiries

Beat Werder, Communications, State Secretariat for International Financial Matters SIF
Tel. +41 58 469 79 47, beat.werder@sif.admin.ch