Switzerland’s financial markets supervisory authority is keen to intensify its dialogue with the country’s small banks and give them more breathing space, acknowledging that such institutions are confronting ever-increasing regulatory pressures and that their numbers have been in decline, a top official of the authority, FINMA, has said.
FINMA chief executive Mark Branson made his comments earlier this week, at symposium the authority hosted for smaller banking institutions in Bern.
Branson said that around 300 banks and securities dealers are currently operating in Switzerland, of which just under 260 (85%) fall into what it considers the “small bank” and “microbank” categories.
Despite representing the largest portion of the Swiss financial market in terms of numbers, the total assets of these smaller institutions together account for less than 10% of the total assets from all banks and securities dealers in Switzerland, Branson told his audience.
“Many small banks have established successful niches – in terms of either regional coverage or product offering, we also see that, on average, small banks are much less profitable than the larger institutions, and vast swathes of research concur that big banks save costs based on scale,” he added.
“KPMG has found that the return on equity at large private banks is on average as much as 2.5 percentage points higher than at small private banks. The picture for retail banks is similar.
“A recent report from IFBC consultancy shows that larger banks continue to outperform their smaller competitors in terms of both profit per employee and cost/income ratio.”
The difficulty of applying proportionality to regs
With respect to regulation, Branson said FINMA had retained its existing bank categories because that has been efficient in implementing the principle of proportionality.
“We see potential for reducing the administrative burden primarily in categories 4 and 5,” he said.
“The risks posed to the stability of the Swiss banking system by individual banks in categories 4 and 5 are manageable. We have also seen that it is possible to resolve a small bank in an orderly way without there being dramatic consequences either for creditors or the system as a whole.”
On the other hand, Branson said, systemically important institutions must continue to be subject to high prudential standards – and he noted that FINMA didn’t regard “category 3” banks as “small”.
“They [category 3 banks] play too fundamental a role in our retail banking market as well as weighing heavily in the wealth management industry or their respective regional economies,” he explained.
There are difficulties as well, for banking regulators and banks, in that it’s harder to apply proportionality to regulations than it is to capital requirements, Branson pointed out.
“The fact is that regulation is highly complex in some areas, and in some cases this complexity is driven by international standards, while in others it has actually been the brainchild of overcautious industry representatives. Regulations reflect and are in many cases guided by the complexity of major institutions. For small banks, however, the burden arising from increased complexity is an undesired side-effect.
“Differentiating properly between large and small institutions and reducing the requirements for smaller players is an ongoing task at FINMA, and one that we take seriously. Much of the load has already been lifted from the shoulders of category 4 and 5 banks. For example, small banks are subject to less frequent and more condensed liquidity-reporting requirements. They also have reduced disclosure obligations and simplified procedures with regard to the capital that must be held against market risks. In future they will also benefit from easier outsourcing requirements,” said Branson.
According to Finma’s CEO, it would be “ideal” if FINMA could set up an entirely separate regime for small banks, “but this is simply not possible.”
Three starting points to give room to small banks
Branson unveiled some of the solutions considered to provide relief to Swiss small and microbanks. Three “starting points” are examined to give them more breathing space.
“We envisage three starting points whereby our solidly entrenched principle of proportionality can be more fully applied. Our first approach would be to alleviate the above-mentioned problem of regulatory complexity. To lighten your workload, we want to simplify the calculation method for key indicators, especially where those figures do not actually depict an institution’s risk profile, for instance the non-risk-weighted 5/5 leverage ratio and net stable funding ratio (NSFR).
“Calculations here can be simplified without rendering the indicators meaningless. And we would like your input on this because there is no point making simplifications that have no ready application at your end.
“The second approach is more radical, whereby small stable, conservative banks would be exempted from some regulations. In other words, they would no longer have to calculate, report or disclose certain global benchmarks in cases where basic capital requirements are largely exceeded. 40% of all small banks have a leverage ratio of more than 10%, giving them an adequate buffer to absorb relatively high losses.
“So they could be freed from having to report risk-weighted capital ratios. Here we need to become comfortable with the idea of less comprehensive oversight. Hence we want to test the system carefully first by carrying out a pilot project on twenty or so category 5 banks in 2018. Depending on our findings, we could then extend the system to other institutions or key indicators.
“The third way forward involves auditing. We have been working on this idea for some time now and are relatively far ahead. Auditing needs to be fine-tuned to be more risk-focused. And auditing is another area where proportionality must be applied more consistently.
“Low-risk category 4 and 5 institutions with a solid track record should only be audited for supervisory purposes every two or three years – not every year. The audits would not need to be so extensive. We have a clear goal here: help you to save time and money.”
Branson concluded his speech by highlighting FINMA’s will to start “a candid, solution-oriented conversation” with small banks.
“Please tell us where the rub is,” urged FINMA’s CEO.