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Basel III and Basel III Final: where does Switzerland stand?

bale III et bale III final point étape 2023

In the month of July 2022, the Federal Council and the Swiss Financial Market Supervisory Authority (FINMA) launched a consultation for the purpose of applying the latest Basel III measures in Switzerland. Do you know how the project progresses? Why is it now called Basel III Final in Switzerland (or “end game” in the US) rather than Basel III? What are “Basel IV” and “Basel consolidated”? What’s new for 2024? As Reg Tech specialists, we answer all your questions in this article and provide you with the essential documentary sources you need to know.

1 – Basel III final: what banks need to know

The Basel Committee on Banking Supervision (BCBS) aims to strengthen the global soundness of financial systems. It also aims to ensure efficient prudential supervision and good quality exchanges between banking regulators. It is managed by the central bank governors and banking supervisors of 28 countries, including Switzerland.

1.1 – Basel III and Basel III Final: strengthening banking supervision

The Basel Committee’s work resulted in the issue of rules known as standards, i.e. the minimum that banks and supervisors must apply. The reform known as Basel III is the latest standard in force. Since 2010, it has supplemented Basel II, following the global financial crisis of 2008. The member countries of the Basel Committee are committed to incorporating these measures into their national legislative frameworks.

Basel III strengthens the level of regulatory capital by raising the minimum solvency ratio to 10.5%, compared with 8% in Basel II. The reform also provides for a leverage ratio, which is the ratio between the total assets held by the bank and its equity capital. Finally, it defines the short-term liquidity ratio (LCR) and the long-term liquidity ratio (NSFR).

1.2 – Implementation of Basel III final in Switzerland

The introduction of Basel III final into law includes a revision of the Ordinance on Capital Requirements (OFR). It also includes a complete overhaul of the texts detailing the implementation of the OFR. Circulars 2013/01, 2015/03, 2008/21 (equity capital section), 2017/07, 2016/01 and 2008/20 are repealed. New ordinances of the Swiss Financial Market Supervisory Authority replace them (see below).

1.3 – When will Basel III come into force in Switzerland?

The consultation launched in July 2022 by the Federal Council and the Swiss Financial Market Supervisory Authority was completed in 2023. The amendment to the Capital Adequacy Ordinance, adopted by the Federal Council on 29 November 2023, will come into force on 1 January 2025.

FINMA’s press release of 27 March 2024 also announces the publication of the ordinances to implement Basel III final in Switzerland. These will come into force on 1 January 2025, at the same time as the corresponding changes to the Capital Adequacy Ordinance.

We list all these regulatory changes in a later part of the article, updated in April 2024.

2 – Why talk about Basel III final?

The Basel Committee on Banking Supervision refers to the Basel III reform. However, the second part of the package is actually called Basel III Final.

2.1 – The Basel Committee adopts an initial set of measures

In the wake of the 2008 financial crisis, the shortcomings of the Basel II standard came to light. In 2010, the Basel Committee quickly approved a new regulatory framework for banks and financial institutions. The first version, published in December 2010, was updated in June 2011. However, this is only the first part of the reform requirements. For Switzerland, these initial measures are detailed in the communication from the Federal Department of Finance (FDF) dated 1 June 2012.

2.2 – The other Basel III reforms will be incorporated into Basel III final

On 7 December 2017, the BCBS finally published the final applicable Basel standards. As a result, this section on strengthening banks’ capital according to risk is called Basel III final, as opposed to the first wave of reforms, which dates back several years.

The provisions of Basel III final include risk weightings with various ratios based on company ratings. The standards also incorporate a new approach to operational risk. In Switzerland, Basel III Final will lead to the July 2022 consultation launched by the FDF and FINMA.

2.3 – Basel IV or Basel III final: the Basel Committee has chosen

During the work to implement the Basel III measures, several years after the first series of reforms, two terms emerged: Basel IV and final Basel III. In the end, the BCBS chose Basel III final, as indicated in its 2017 publication.

3 – Regulatory texts and other information on the Basel III final reform in Switzerland

Here is some other useful information and in particular the new ordinances.

3.1 – Where can I find the key texts?

Are you looking for the key articles on this banking supervision reform? Take a look at the following sources:

3.2 – List of new ordinances

You will find all the documentation (draft ordinances, explanatory reports, information on the hearing, etc.) on the FINMA website. Go to the archive of hearings completed in 2022.

The following FINMA ordinances were published at the beginning of 2024:

  • TBEO-FINMA (the Ordinance on Trading book and Banking book and Eligible capital of banks and securities firms) relates to the trading book and the bank’s book, as well as the capital taken into account of banks and securities houses. It replaces FINMA Circular 2013/1 ‘Recognised own funds – banks’.
  • LROO-FINMA (the Leverage Ratio and Operational Risks of Banks and Securities Firms Ordinance) relates to the leverage ratio and operational risks of banks and securities firms. It replaces FINMA Circular 2015/3 ‘Leverage ratio-banks’ and the parts of FINMA Circular 2008/21 ‘Operational risks-banks’ that are still in force.
  • CreO-FINMA (the Ordinance on the Credit Risks of Banks and securities firms) deals with the credit risks of banks and securities firms, replacing the former FINMA circular 2017/7 ‘Credit risks-banks’.
  • MarO-FINMA (the Ordinance on the Market Risks of Banks and securities firms) deals with the market risks of banks and securities firms. It replaces FINMA Circular 2008/20 ‘Market Risks – Banks’.
  • Finally, DisO-FINMA (the Ordinance on the Disclosure Obligations of banks and securities firms) concerns the disclosure obligations of banks and securities firms. It replaces FINMA Circular 2016/1 ‘Publication – Banks’.

3.3 – What is the Basel consolidated format?

In April 2019, the Basel Committee on Banking Supervision (BCBS) brought together the various global standards for banking regulation and supervision. The aim of Basel Consolidated is to bring together all the regulatory provisions and to clarify and simplify the existing standards, without adding any new ones. The approach is explained in this document concerning Basel Consolidated.

4 – How can e-Reg help you with Basel III?

In the face of these ongoing regulatory changes, it is vital to keep up to date on a regular basis. As a financial services professional, you are looking for the right information, accurate and reliable, at all times. That’s where e-Reg can make your job a lot easier.

4.1 – e-Reg a RegTech solution for your search for regulatory documentation

Our aim at easyReg is to simplify your regulatory work. We offer you a service in SaaS mode (Service as a Software) so that, thanks to our search engine, you can access the exact information you need. Whether you are a Swiss financial institution, a law firm or a consultancy, this tool is specifically designed for you.

Instead of searching through Swiss regulations and Basel Committee documents, use e-Reg to obtain not only the precise text, but also its context. It’s a real lever for your analyses and the management of your documentary needs. We also provide you with all the other regulatory information relevant to your subject. You can also consult the comments of your colleagues on these same texts.

4.2 – Search examples for Swiss capital adequacy regulations

There’s no better way to understand our Reg Tech solution than to look at a few concrete cases.

Example 1: regulatory discount

Enter the expression ‘regulatory haircut’ (Sicherheitsabschläge) in our e-Reg search engine:

 

You will be taken directly to the table of current and future regulations:

Example 2: treatment of second homes in the calculation of equity capital

Do you have any doubts about how to calculate equity capital for second homes? Proceed in the same way by entering ‘second homes’ in the e-Reg engine.

You’ll get the following information:

Example 3: Basel III regulations

Our e-Reg platform includes a ‘changes’ module. Here you will find, for example, the item ‘Basel III final’ with access to :

  • an analysis of the main impacts of these new regulations applicable in 2025 ;
  • clickable references to key sources of regulatory information ;
  • the ability to drag reference files into the tool, along with notes and comments.

This example of evolving regulations shows how important it is to have up-to-date, reliable information at all times. At easyReg, this is our business. To find out more about how our platform can help you with your document searches, arrange an online demo of our e-Reg tool.

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Swiss banks : key regulatory ratios today… and tomorrow?

Regulatory ratios

Even though Swiss and international financial regulations have constantly evolved over the years, and are likely to continue to do so, it is possible to identify 5 key regulatory ratios that are most closely monitored in a Swiss bank. This article details each of these indicators, their objectives and their effectiveness. You will also find the acts and FINMA Circulars that currently govern them, as well as the potential impact of Basel III final.

0 – Change in regulatory ratios over time

This article will detail the five most important key indicators that Swiss banks must meet under current financial regulations. These ratios have changed several times. Smaller banking institutions have a number of simplification rules (“proportionality”) at their disposal.

0.1 – The work of the Basel Committee

Switzerland is a member of the Basel Committee on Banking Supervision (BCBS). Its aim is to strengthen the reliability and security of the international banking system. Since its creation in 1974, this institution has proposed numerous indicators or ratios, through its guidelines and standards, to measure and limit banks’ risk-taking.

However, despite this desire to standardize the financial approach to risk, it is sometimes complicated to cover all the realities of financial institutions with different business models and environments. Controlling risk through regulatory ratios while promoting growth and economic activity seems to be more an art than an exact science. 

0.2 – The impact of financial crises on regulatory ratios

After the major global crisis of 2008, the Basel Committee carried out a series of reforms known as Basel III to strengthen capital and liquidity controls. The publication of the final standards in 2017 completes the 2013 package of new measures. That’s why the name of these latest regulations is Basel III final. Implementation in Switzerland is scheduled for 2025.

Indicators evolve with each crisis, and hopefully gain in maturity with each change. However, these new approaches have not been enough to prevent the banking sector worldwide, in the USA or Switzerland, from experiencing difficulties in 2023. Further changes are likely to follow.

0.3 – A constant objective : risk sensitivity

The various regulatory ratios used by Swiss banks are designed to measure risk across various business activities. They are useful to estimate the risk taken, thanks to transparent and simple indicators. This is why the Basel Committee’s discussion paper published in July 2013 is entitled “The regulatory framework: balancing risk sensitivity, simplicity and comparability”.

1 – Capital ratio requirements at Swiss banks

Capital requirements are part of Pillar 1 of the Basel Capital Accord. It specifies the capital to be taken into account. It also sets out the methods for calculating minimum capital requirements for credit, operational and market risks.

1.1 – A risk-weighted regulatory ratio

This is the driving capital requirement in Switzerland. Banks’ assets are risk-weighted by different percentages. RWA means risk-weighted assets. These weighted assets are then related to the (adjusted) capital of the bank.

1.2 – Capital requirements under current regulatory texts

This regulatory requirement has evolved over time. Currently, regulatory requirements demand this calculation for credit risk, market risk and operational risk.

Note that the Basel Committee does not require the calculation of capital for interest-rate risk in Pillar 1. However, it is integrated into Pillar 2, which deals with capital adequacy and risk management. Switzerland has translated this into the capital planning regulation, in accordance with FINMA Circular 11/02. With the current global banking crisis, we are wondering about the absence of mandatory capital requirements for interest-rate risk.

1.3 – Introduction of the leverage ratio (LR), a ratio without risk weighting

The capital adequacy ratio as defined above has sometimes been misused in the past. Some banks had invested in AAA-rated assets, that means with a 0% risk weighting. Actually, the risk existed. As a result, regulators modified the requirements in two ways. On the one hand, they tightened the rules on the use of external ratings. 

On the other hand, they have implemented tougher regulations with the introduction of the “leverage ratio” (LR). This is an unweighted capital ratio. It’s a percentage of total commitments. This notion of maximum leverage corresponds to the ratio between assets and adjusted capital. It places an absolute limit on possible leverage.

1.4 – Capital requirement : Swiss regulatory sources

For these regulatory ratios relating to bank solvency, please refer to the Swiss Capital Adequacy Ordinance (CAO). Appendix 8 of the CAO defines the minimum total equity. FINMA Circulars complete the rules to be applied. Please note that these texts will be amended whit Basel III implementation.

2 – LCR or Liquidity Coverage Ratio

This regulatory ratio for bank liquidity was added after the 2008 financial crisis.

2.1 – Definition of LCR

The aim is to ensure that each bank always has sufficient liquidity to meet its payment obligations, even in the event of a crisis. Keeping sufficient liquidity in reserve should enable banking institutions to get through a difficult situation, in the event of sudden deterioration.

 

The Basel Committee has designed this indicator so that  high quality liquid assets (HQLA) secures the bank’s liquidity in the event of a crisis for 30 calendar days. It is a standardized liquidity stress test, based on outflows and inflows assumptions.

2.2 – Calculation of LCR ratio

In accordance with article 13 of the Swiss Liquidity Ordinance (LiqO), the LCR corresponds to the ratio between HQLA (high-quality liquid assets) outstanding and the net cash outflow expected at 30 days in a crisis situation. To comply with the LCR requirements, the bank must have a ratio greater than or equal to 1.

2.3 – Current limits of the Liquidity Coverage Ratio

Recent emergency takeovers to avoid bankruptcies have highlighted the need to change the LCR ratio. It is no longer fully adapted to our times, when money can leave a bank even faster than this indicator allows.

2.4 – Liquidity ratio : regulatory documents

In Switzerland, the Liquidity Ordinance (LiqO) defines the LCR in terms of both quantitative and qualitative requirements. FINMA Circular 15/02 sets out the rules of application. The implementation of Basel III in Switzerland will not modify these texts. In a way, this is good news for the simplification of financial regulation.

3 – The leverage ratio

This indicator introduces the notion of a maximum gearing ratio, in line with the requirements of the pillar 1 of the Basel regulations.

3.1 – Purpose of this banking ratio

This is an unweighted risk-adjusted capital ratio. This regulatory indicator restricts a bank’s maximum leverage effect. It places an absolute limit on the size of the bank’s balance sheet, as opposed to the risk-based capital ratio.

3.2 – Leverage ratio : information sources for Switzerland

In our country, the leverage ratio requirements are set out in the Capital Adequacy Ordinance (CAO), supplemented by FINMA Circular 15/03. These texts will be amended to incorporate the final Basel III standard.

3.3 – Level of leverage ratio required in Switzerland

According to CAO Art. 46, non-systemic Swiss banks must have core capital of at least 3% of unweighted positions. This level is in line with the Basel minimum standards.

4 – NSFR regulatory ratio

NSFR means Net Stable Funding Ratio. It is also known as the funding ratio. It is one of the major reforms introduced by the Basel Committee after the 2008-2009 financial crisis.

4.1 – Definition and role of the regulatory ratio

The purpose of this indicator is to ensure the long-term funding of banking institutions. Thus, the Basel Committee wrote in 2014 that “The NSFR will require banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities”. With such a financial structure, the risk of default decreases. For now, however, the impact of this ratio doesn’t seem to be very significant in Switzerland.

4.2 – Financial regulations relating to the NSFR : texts to use

The Liquidity Ordinance  (LiqO) governs the NSFR ratio. FINMA Circular 15/02 sets out the application rules. The final implementation of Basel III will have no impact on these regulatory requirements in Switzerland.

4.3 – Calculation and level of the funding ratio in Switzerland

Article 17g of LiqO details the calculation of the NSFR. It is the ratio of Available Stable Funding (ASF) to Required Stable Funding (RSF). Minimum requirements correspond to an NSFR of at least 1.

5 – Concentration risks

Even if this is not strictly a regulatory ratio, the limits applicable to large exposures can sometimes be structuring. They require active monitoring.

5.1 – Specific rules in order to limit the risk of bank concentration

The aim is to measure and limit the risk of excessive concentration among banking institutions. In our view, these indicators are quite effective. Based on our experience, it is, after the capital requirement ratio, one of those that raises the most questions.

5.2 – Regulatory texts governing major risks

The Capital Adequacy Ordinance (CAO) regulates “large exposures”, notably in Title 4. Article 95 defines “large exposure” as the total position with a counterparty or group of related counterparties reaching or exceeding 10% of adjusted core capital. 

Art. 109 defines the concept of a group of related counterparties. Finally, FINMA Circular 19/01 sets out the practical implementation. Basel III final will have no impact on this point. The current Swiss version of Basel III already takes into account all Basel standards.

Swiss regulatory ratios are still evolving

Over the past few years, regulators have been working hard to change banking ratios at international level, in order to limit banks’ risk without slowing their growth and innovation. These ongoing changes are set to continue.

In a fast-moving and dynamic society where innovation is constantly shaking up practices, today’s banking indicators will probably no longer be appropriate tomorrow. Regulators will have to incorporate new concepts to respond to the financial crisis of 2023, particularly in terms of liquidity and interest-rate risk. But these will not be the only changes. Sustainability ratios, among others, will be added to current requirements. The regulatory process continues to adapt !

easyReg accompanies this perpetual change and offers you RegTech solutions to simplify your life, now and in the future. Would you like to discover our e-Reg platform? Contact us for an online demonstration.