The concept of large risks within Swiss banks: definition

The notion of large risks is a topical one, with the implementation of the final Basel III in Switzerland at the beginning of 2025. Do you know exactly what this concept consists of? What texts govern it? What changes have been made to the CAO, the ordinance on capital adequacy and risk diversification for banks and securities firms? This glossary gives you the definitions and keys to understanding everything, from the maximum permissible concentration risk to the rules of FINMA Circular 2025/02.

When do we encounter the notion of large risks in Switzerland?

In Switzerland, the concept of “large exposure” is used to designate the maximum permissible concentration risk, thus forcing the diversification of risk-taking. For a long time, the only large-risk requirements were those relating to the maximum concentration risk of an institution’s loans. Please refer to the capital adequacy ordinance, CAO.

Since the publication of FINMA Circular 2025/02 in 2024, maximum concentration rules also apply when monitoring investments made by clients. This glossary page discusses both topics.

What are concentration risks in a Swiss bank?

The notion of “large exposure” is defined in article 95 of the CAO. Thus, “A large exposure arises when the overall position vis-à-vis a counterparty or a group of related counterparties reaches or exceeds 10% of the core capital taken into account, adjusted in accordance with art. 31 to 40”.

This overall position towards a counterparty includes loans, but also all other exposures (e.g. through derivatives or guarantees).

The aim of large-scale risk management in the banking sector is to monitor the limits that must not be exceeded, in order to avoid excessive concentration of risks.

What does the CAO say about large exposures?

This ordinance not only defines what constitutes a large exposure, but also sets out all the rules to be applied by banks. Large exposures are dealt with in Articles 95 to 123 of the CAO. This is the regulatory source for reporting large exposures, whether on an individual or consolidated basis.

The ordinance adds to article 95: “banks must identify and monitor large exposures and other high credit risks to a counterparty or group of related counterparties, and comply with the corresponding reporting obligations”.

Article 109 of the CAO explains the concept of a group of related counterparties. FINMA Circular 19/01 provides the key to implementing the CAO requirements for large exposures. Finally, the new provisions relating to final Basel III arrive, with the implementation of the revised CAO on January 1, 2025.

Does final Basel III have an impact on FINMA Circular 19/01 “Risk spreading – banks”?

At the end of 2023, the Federal Council adopted the amendment to the CAO. These new provisions are designed to adapt Swiss regulations to Basel III requirements. They come into force on January 1, 2025. Final Basel III has relatively little impact on large-risk requirements. In fact, the changes linked to Basel III were already integrated when FINMA Circular 19/01 “Risk allocation – banks” was published.

Large banking risks: limits as useful as regulatory ratios

Large exposure is a financial concept, not a regulatory ratio in its own right. However, it does have a number of limits, which have the merit of structuring risk monitoring. All these regulatory requirements are aimed at strengthening supervision and containing the excessive concentration of banking institutions in Switzerland.

Impact of Circ. 25/02 “Rules of conduct under FinSA and FinSO” on large-scale risk

The new circular, published on November 22, 2024, will come into force at the beginning of 2025. This text corresponds to FINMA’s expectations regarding the effective implementation of the Financial Services Act and Ordinance.

With regard to large risks, this regulatory text introduces a transparency obligation for private customer portfolios. Thus, an unusual concentration of risks constitutes a large risk. The service provider must inform his client. The specified level is a concentration of 10% or more on a security, or 20% on a single issuer. In addition, FINMA adds in its explanatory report that concentration in correlated industries, countries or currencies also represents a high risk.

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