Finma revises Swiss banks large exposure rules

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The Swiss financial market regulator Finma has announced it has updated its circular regarding local banks’ risk diversification in line with the revised Basel III standards.

The amended version aims to adjust Swiss banks’ current large exposure rules with improved requirements for measuring and controlling large loans.

The circular will be subject to a consultation ending on 14 July 2017, said Finma.

Revised Basel III measures impose a maximum limit on the size of individual loans with the aim of reducing the risk of a bank encountering difficulty or even going bankrupt as a result of a default on a large loan.

The new rules are to be transposed into Swiss law in accordance with the Federal Council’s strategy of adopting key international standards in the financial sector.

Therefore the Federal Council is to amend its capital adequacy ordinance. Finma’s ordinance and the council’s circular are both scheduled to enter into force on 1 January 2019.

Under the amended capital adequacy ordinance, large loans and investments are hence limited to 25% of a bank’s core capital, not its total capital as before.

Swiss banks’ positions in Swiss Pfandbriefe will not exceed 20% instead of 100% before.

Finma warned exceeding the upper limit of 25% is no longer permitted, with the current wide-ranging exceptions for financing residential real estate in particular being abolished.

The Swiss financial market watchdog said it has conducted a first impact study involving 20 institutions and that “it showed new rules rectify the weaknesses in the current regime as desired
but have a noticeable impact in some respects.”

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