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Capital adequacy regulation – No accumulation of requirements – Firm rejection of the revision of the Capital Adequacy Ordinance with respect to mortgage business

Basel, 2012/01/16 00:00:00 GMT+1 The Swiss Bankers Association (SBA) offers its opinion today on four regulation proposals, all of which focus on the capital adequacy requirements of banks. While the SBA essentially supports measures aimed at increasing systemic stability, it highlights the need to avoid at all costs undesirable cumulative effects. The SBA essentially supports three of the four regulation proposals while rejecting the revision of the Capital Adequacy Ordinance with respect to mortgage business in its present form, as it is not conducive to its purposes.
The Federal Department of Finance (FDF) and the Swiss Financial Market Supervisory Authority (FINMA) are carrying out four consultations on the regulation of capital adequacy. These consultations relate to the "Too big to fail" issue, Switzerland's implementation of Basel III, the anticylical capital adequacy buffer and capital adequacy requirements in the mortgage market. The SBA essentially recognises the need for the global financial sector to hold a higher amount of equity in the interests of making the entire financial system safer and more stable. For this reason, the banks in Switzerland have provided their constructive assistance in the search for solutions to the issue. Today the Swiss banks already number among the world's best capitalised institutions.

While the SBA essentially supports the approach of the regulation proposals with regard to the "Too big to fail" issue, the Swiss implementation of Basel III and the anticyclical buffer, it is of the opinion that all three areas still offer potential room for improvement.
 
For example, the draft proposals for the ordinances on the "Too big to fail" issue (the Banking Ordinance and the Capital Adequacy Ordinance) go too far and in particular go beyond the scope of the recommendations of the "Too big to fail " Committee of Experts (final report of October 2010) and the guidelines on the revised Banking Act (2011 autumn session). This relates on the one hand to new organisational requirements (contingency planning) for institutions with systemic relevance. On the other hand, the new measures would also lead to a situation where capital adequacy requirements could exceed 19% (e. g. via the progressive component and the leverage ratio).

Furthermore, with regard to Basel III we are of the opinion that the current tried and tested Swiss standard approach to credit risk (SACH) should be maintained. The benefits generated by its abolition would not justify the high costs incurred by a switch to a new approach. Switzerland's implementation of Basel III has been drawn up by a national working group under the aegis of FINMA, in which the SBA is represented. The SBA essentially supports the intended implementation which adheres closely to the content and timetable set down in the recommendations of the Basel Committee on Banking Supervision.

In terms of the introduction of an anticyclical equity buffer, the SBA is in favour of efforts to improve systemic stability and recognises the possible stabilising contribution that could be made by a suitably designed buffer. However, the design put forward in the consultation documents leaves open a large number of issues relating to content and the institutional framework. For example, the authority to activate or deactivate such a buffer needs to be more clearly regulated in order to keep any damaging economic effects to a minimum.
 
Against this backdrop, the SBA rejects, however, the proposed tightening of specific capital adequacy requirements for mortgage business. Both variations put forward for discussion by the FDF for the design of a more stringent risk weighting of specific mortgage loans reveal major shortcomings in terms of their effectiveness and of the implementation expenses. In particular the negative impact on mortgage clients and on the real economy cannot be reliably estimated (e.g. influence on the supply of credit needs). We reject an additional tightening of capital adequacy requirements in this area, also in order to prevent a dangerous accumulation of new regulatory requirements with a similar objective. Nevertheless, we recognize a certain need for action concerning new business, and we are ready to provide our assistance in elaborating new, temporary solutions.

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Our position and argumentation are based on our overall assessment of the related four consultations. More detailed information on the consultations in question can be found at the Draft Legislation.