Proportionality in Swiss financial regulation: definition

 

Swiss banking regulations are complex, as it is the case within most countries when regulators seek to secure the financial sector. Getting into compliance and staying in compliance can be complex for small banks. However, the legislator has sought to introduce a degree of flexibility with lighter rules in certain well-defined cases. So let’s take a closer look at the concept of proportionality in financial regulation. Use this glossary to find out what the proportionality concept means, and which regulatory texts are concerned when it comes to facilitating compliance.

What is proportionality in financial regulation?

The word proportional means sized or adjusted based on a criteria. The notion of proportionality therefore consists of introducing variants into financial regulation, according to different criteria. This means that the law does not contain a set of rules for its application, but rather several, depending on the case. It may also involve provisions that make an exception for certain banks. FINMA refers to the concept of effectiveness and proportionality in banking supervision.

Proportionality for banks depends on:

  • the size of the bank ;
  • the type of licence (e.g. for an institution with a Fintech banking licence) ;
  • the complexity of the financial entity ;
  • its risk profile.

Where are the categories of banks defined in the Swiss regulation?

The principle of proportionality for Swiss banks is based on the classification of institutions in a category from 1 to 5. Annex 3 of the Banking Ordinance (OB) sets out the categories in detail in a paragraph entitled “Classification of banks”. The first category corresponds to banks that are systematically important at global level. Category 5 comprises the smallest banks in Switzerland.

What criteria should be used to classify a bank?

Article 2 of the Banking Ordinance (OB) sets out the criteria for classifying Swiss financial institutions according to thresholds in billions of Swiss francs. The four classification criteria are as follows

  • balance sheet total ;
  • assets under management ;
  • privileged deposits ;
  • minimum equity capital.

Which regulations include proportionality for banks in Switzerland?

At the end of our full article on the small banks regime, we set out the list of exemptions as of the end of August 2023.

Here are the regulatory texts in force that include the concepts of “category bank” (and therefore proportionality) in Switzerland:

  • OFR (Ordinance on the Capital Adequacy and Risk Diversification of Banks and Securities Firms) ;
  • OLiq (Ordinance on Liquidity for Banks and Securities Firms)  ;
  • BO (Ordinance on Banks and Savings Banks) ;
  • FINMA Circular 15/02 Liquidity risk- banks ;
  • FINMA Circular 16/01 Publication – banks ;
  • FINMA Circular 17/07 Credit risk – banks ;
  • FINMA Circular 19/01 Risk spreading – banks ;
  • FINMA Circular 19/02 Interest rate risks – banks ;
  • FINMA Circular 13/03 Audit activities ;
  • FINMA Circular 08/21 Operational risks – banks (partially replaced) ;
  • FINMA Circular 23/01 Operational risks and resilience – banks.

Which future or planned Swiss regulations also include notions of proportionality?

Using our RegTech e-Reg solution, we can identify, for example, the draft ordinances relating to the final Basel III by the end of August 2023:

  • pOFR (the text has been published since been published) ;
  • pOPub-FINMA ;
  • pOCre-FINMA ;
  • pOMar-FINMA ;
  • pOPFP-FINMA.

What is the small bank regime?

Although the principle of proportionality in financial regulation already existed before at FINMA level, it took on a new dimension in 2020 in legal terms. FINMA is introducing a system known as the small bank regime. It is amending the Ordinance on the Capital Adequacy (CAO) and various circulars to this end.

The principle is to introduce new regulatory simplifications for banks that are admitted to this regime. This additional proportionality in Swiss financial regulation is aimed at particularly liquid and well-capitalised financial institutions.

What new proportionality does the small bank regime introduce in Switzerland?

The exceptions or simplifications concern banks in categories 4 and 5. They mainly refer to proportionality in terms of capital and liquidity requirements. There are also simplified qualitative requirements for circulars issued by FINMA. This simplification of the regulations reduces the complexity of their implementation and makes it easier for the financial institutions concerned to manage the risk of non-compliance.

👉To discover other definitions around RegTech, we suggest you return to our glossary table of contents.

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