Swiss financial market supervisory authority Finma wants to intensify its dialogue with Swiss small banks and give them more breathing space at a time the local market is set for tightened regulation and its number of players declines year after year.
These are two key aspects of the speech delivered by Mark Branson, chief executive officer of Finma, at the Small Bank Symposium held on 2 October 2017 in Bern.
Branson said that around 300 banks and securities dealers are in operation in Switzerland, of which just under 260 (85%) enter into the small bank and microbank category (categories 4 and 5 at Finma).
Despite forming the largest bit of the Swiss financial market, these small and microbanks together totalled assets of less than 10% of the total assets from all banks and securities dealers in Switzerland.
“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.
“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,” said Branson.
The difficulty of applying proportionality to regs
Discussing regulation, Branson said the institution 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. 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,” he pointed out.
Branson added that on the other hand, systemically important institutions must continue to be subject to high prudential standards. Also he recalled that Finma does not consider banks falling in the category 3 as small.
“They (banks from category 3) 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.
Finma’s CEO argued that it is harder to apply proportionality to regulations than to capital requirements.
“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.
