The FINMA Circular "Capital buffer and capital planning" redefines the capital adequacy requirements for banks under Pillar 2 of the Basel Capital Accord. FINMA published a discussion paper on this topic in June 2010 and took the comments received into account when preparing this draft Circular. The consultation period will end on 14 March 2011. The main aim of the Circular is to make the capital buffer required by FINMA in excess of the legal minimum subject to objective criteria and risk-based. The size and complexity of an institution and its business activities have been considered in the measurement of the capital buffers. In addition, the buffers are to be made anticyclical. The Circular effectively brings transparency and objectivity to the existing FINMA supervisory practice. Consequently, for most institutions the new regime will not trigger a need for new capital.
Until now, the overall capital buffer that banks and securities dealers have been required to hold was 20% of the minimum requirements under Pillar 1, with the exception of the big banks, for which a stricter special regime was implemented in 2008. This percentage will in future be determined by a differentiated means of measurement. FINMA will allocate institutions to one of five categories based on their total assets, assets under management, privileged deposits and required capital. Each category is assigned a target capital level and intervention level expressed as capital ratios. This approach makes FINMA’s expectations foreseeable, understandable and transparent for the institutions in question.
The draft Circular is based on the applicable provisions of the Capital Adequacy Ordinance (CAO) and is thus not affected by the stronger capital base for banks agreed by the Basel Committee in December 2010 under Basel III. However, it is consistent with the new capital adequacy requirements under Basel III, particularly with respect to the anticyclical structure of the capital buffer. The exclusion of a leverage ratio, a key difference compared with the June 2010 discussion paper, is also intended to promote consistency with Basel III. The leverage ratio will not be made binding under Basel III until 1 January 2018 following a period of observation and a transitional phase.
Anticyclical capital buffer
The currently applicable Basel II provisions require institutions to hold more capital during periods of economic downturn than in growth periods. This causes strong, undesirable procyclical effects. To counteract this procyclicality, the draft Circular specifies that institutions must comply with the capital buffer target and build up the required capital as necessary in individual cases. The capital buffer accumulated in this way can then be temporarily drawn on within given limits if crisis situations arise due to an economic downturn or problems specific to the institution in question. Institutions are subsequently required to implement measures enabling them to meet the target again.
The Circular also stipulates minimum requirements for a basic capital planning concept.
Additional institution-specific capital requirements
In line with its current supervisory practice, under the new capital regime FINMA may continue to require certain institutions to hold additional capital in excess of the target for a given category under certain circumstances.
No additional capital requirements for most institutions
The analyses conducted by FINMA in advance of the proposed Circular showed that the overwhelming majority of institutions already have a capital base that fulfils the Circular's requirements. The total level of capital in the system will thus not be increased by the provisions of the Circular, but will essentially be maintained at the existing level and made more transparent. The draft Circular in its presented form is largely based on the discussion paper published in June 2010 and already incorporates initial responses from the market.
Basis of capital adequacy requirementsThe international minimum standards applicable to capital adequacy requirements are set by the Basel Committee on Banking Supervision (Basel II provisions). Under the Basel II Framework of June 2006,capital adequacy is based on three pillars: minimum capital requirements (Pillar 1), supervisory review process (Pillar 2) and market discipline (Pillar 3). The Basel requirements were implemented in Switzerland in the Federal Ordinance on Capital Adequacy and Risk Diversification for Banks and Securities Dealers of 29 September 2006 (Capital Adequacy Ordinance, CAO; SR 952.03). According to Article 34 of the CAO, banks have to hold additional capital under Pillar 2. The safety margin thus created is intended to ensure that the minimum requirements under Pillar 1 are fulfilled at all times – even in the event of a serious crisis – and that those risks not covered or insufficiently covered under the minimum requirements are also adequately secured. The Basel II provisions are currently being revised: the revised version of the Basel minimum requirements (Basel III) were approved by the Basel Committee in December 2010.
Tobias Lux, Media Spokesperson, Tel. +41 (0)31 327 91 71, email@example.com