How does Basel III Finalization impact Swiss Banks?

Swiss Banks should act now to identify how the finalized Basel III rules will impact them.

In response to the 2008 global financial crisis, the Basel standards were revamped and updated to support and guide post-crisis global reforms. The BCBS published the final documents on the Basel III Finalization package in December 2017, which is generally referred to as “Basel III Finalization” or “Basel IV”, with a primary goal of improving resilience within the global banking system. The revised set of standards covers multiple sets of regulatory changes, across all risk types, which seek to enhance the quantity and quality of regulatory capital and liquidity. Goals are to restore credibility in RWA calculations by enhancing the robustness and risk sensitivity of the standardized approaches, to constrain the use of internal model approaches to improve comparability and reduce complexity and to complement the RWA capital ratio with output floor and leverage ratio requirements.

The go-live date of the Basel III reforms has been formally deferred by the BCBS by one year due to the COVID-19 crisis, from the originally planned implementation date of January 2022, to January 2023.

The implementation of these rules in Switzerland is currently under discussion by the National Working Group, with no formal announcements yet, although limited deviations from the BCBS standards are expected. Some dates regarding the implementation in Switzerland have been announced, which are in effect similar to those in the European Union (EU). The European Commission recently published its legislative package, with an application date of 1 January 2025. From a Swiss perspective, we now expect that the official consultation of a revised Capital Adequacy Ordinance will run from July to October 2022. Based on the latest communications, we expect that the new Swiss regulation will be published mid-2023, with a transition phase of about 12 months, so that from a regulatory point of view, all banks have to be ready to go-live under the new regulations from July 2024 at the latest, and hence first reporting from September 2024 onwards, which is slightly earlier than the EU’s start date in January 2025.

The specific changes introduced by the Basel III Finalization package (as well as some related packages) are presented in the overview attached to this article. We have clustered the main changes into the following areas:

• Credit Risk: The Advanced Internal Ratings Based (A-IRB) approach will no longer be available for some low-default exposure segments. At the same time, additional requirements (incl. data) are introduced for the Standardised Approach, such as a due diligence requirement for borrowers, even when external ratings are applied.
• Market Risk: The Fundamental Review of the Trading Book will be introduced. This includes the switch to an Expected Shortfall approach in the Internal Model Approach (IMA), whilst the Standardised Approach is revised to better incorporate risk sensitivities.
• Operational Risk: The Standardised Measurement Approach (SMA) will replace all previous approaches leading to increased comparability, but potentially also to increased capital requirements for banks currently using an Advanced Measurement Approach (AMA).
• Capital Floor: Risk Weighted Assets (RWA) will be defined as the higher amount of internal model approaches and a percentage of RWAs calculated by using standardized approaches only. This percentage will be phased-in up to 72.5% in 2028, starting at 50% in 2023 (dependent on final implementation deadlines in Switzerland).
• Leverage Ratio: The Leverage Ratio Denominator (LRD) will be further refined, and a new leverage ratio buffer is introduced for G-SIBs.
• Counterparty Credit Risk: Whilst the revised rules on the Standardised Approach for Counterparty Credit Risk (SA-CCR) are already applicable, changes are set for the Credit Value Adjustment (CVA), including the introduction of Standardized (SA-CVA) and Basic Approaches (BA-CVA), and the removal of an advanced approach.