Switzerland “compliant” for Basel III bank capital

BIS in Basel, © Bank for International Settlements 2009

BIS in Basel, © Bank for International Settlements, one of the buildings where global supervisors meet

BASEL, SWITZERLAND – Switzerland Tuesday 25 June became the third country to be considered compliant with the new Basel III iinternational capital standards, after Japan in October 2012 and Singapore in March 2013.

The standards were drawn up in the wake of major banks around the world finding themselves in difficulties after the 2008 global economic crisis.

The international Basel Committee on Banking  Supervision is responsible for overseeing compliance with the standards.

More work needed to capitalize banks, say stability board

A sister institution, the  Financial Stability Board (FSB), met Monday in Basel to discuss vulnerabilities affecting the global financial system and progress in authorities’ work to strengthen global financial regulation.

It published a press release Tuesday noting that “Despite important progress in strengthening the resilience of the global financial system, some parts of the system remain in a state of incomplete repair. Some jurisdictions need to continue to improve the capitalisation of their banking systems. The balance sheet assessment to be undertaken by the ECB later this year in preparation for the single supervisory mechanism, together with clarity on the availability of adequate capital backstops, will be important to strengthening the Eurozone banking system. In other parts of the world where credit growth has been very rapid over recent years, building further resilience remains a priority.”

New stress scenarios should  be taken into account

The FSB says that “over the last several weeks, volatility in interest rates, asset prices and capital flows has increased. Market participants and supervisory authorities should incorporate in their stress tests scenarios that involve considerably elevated interest rate risk, widening credit spreads, falls in asset prices, and material volatility in foreign exchange markets and capital flows. Constrained capital levels in banks have been a contributory factor to reduced secondary bond market liquidity, potentially resulting in larger price movements in these markets in times of stress.”

US, EU have more work to do to be Basel III compliant

The US and the European Union, also reviewed in October 2012, were not considered compliant but the Bank for International Settlements noted at the time that “In the case of the European Union and the United States, the gradings were based on draft regulations, meaning that there is now a window of opportunity for the gaps identified to be closed.”

China is currently under review and Brazil and Australia are next on the calendar for review.

Swiss banking system compliant

The assessment of Switzerland:

“The assessment team evaluated compliance of Switzerland’s domestic capital rules vis-à-vis international Basel capital standards through its Regulatory Consistency Assessment Programme (RCAP). The team held technical discussions with senior officials and staff of the Swiss Financial Market Supervisory Authority (FINMA), and met with senior representatives from banks and regulatory audit firms based in Switzerland.

“Switzerland has implemented its Basel capital framework with an intention that it conforms closely to the Basel standard. The assessment found the implementation of the International Approach closely aligned with Basel III standards and therefore assessed it as “compliant”. 11 out of 14 assessed components were found to be “compliant”, while three of the components were graded “largely compliant” (definition of capital, credit risk-IRB, and Pillar 3). Although some differences with the Basel framework were found in these three areas, none of the findings were evaluated to be material at this point.

“An alternative capital adequacy regime in Switzerland, the “Swiss Standardised Approach”, which has its origins prior to Basel I, is used primarily by smaller Swiss banks and is being phased out by end-2018. This approach was not assessed as compliant, but given it is not the approach used by most internationally active banks and is being discontinued, the assessment team judged that it should not impact on the overall rating for Switzerland.

“In response to the assessment, FINMA initiated the rectification of the most important identified deviations from the Basel framework, without which the assessment would have been less favourable. This constitutes a strong commitment on the part of Switzerland to the global regulatory reforms, and is reflected in FINMA’s response to the report.”