Basel III — New Regulatory Capital Regime For Swiss Banks

Author:Mr Martin Lanz, Olivier Favre, Jean-Yves De Both and Tarek Houdrouge
Profession:Schellenberg Wittmer

In October 2011, the Swiss legislator published a proposal for the implementation of the regulatory framework known as "Basel III", as applicable to Swiss banks. The new regulatory capital requirements will enter into force on 1 January 2013, with an implementation period extending to the end of 2018.


    1.1 Key Features of the New Capital Regime

    The new capital regime aims at achieving a higher resilience of banks to losses compared to the regime under the Basel II framework. This shall be achieved, inter alia, by ensuring that banks have access to sufficient capital of "good quality" for absorbing losses in a "going concern" context.

    The size of required total capital (without taking into account the equity capital buffer and the countercyclical buffer) has not been changed, and remains at 8% of risk-weighted assets.

    However, the composition of such capital changes significantly. Banks must now hold Common Equity Tier 1 (CET1) capital of 4.5% of risk-weighted assets (previously 2%) and they may hold additional Tier 1 capital of up to 1.5% and Tier 2 capital of up to 2% of risk-weighted assets.

    In addition, banks must create a capital buffer in the form of CET1 capital of 2.5% of risk-weighted assets, which leads to a total CET1 capital of 7% of risk-weighted assets. Under certain credit market circumstances, a countercyclical buffer of up to 2.5% of additional CET1 capital may temporarily apply to all categories of banks, where required for macro-prudential reasons. This countercyclical buffer aims at improving the resilience of the banking sector during phases of excessive credit growth. The respective rules entered into force on 1 July 2012.

    Basel III minimum capital requirements:

    In line with the Basel III framework (Basel III: A global regulatory framework for more resilient banks and banking systems), all Swiss banks organised as stock corporations – not only banks of systemic importance within the meaning of the too-big-to-fail legislation – may (for the purposes of establishing sufficient AT1 and T2 capital) make use of the newly created capital instruments included in the Banking Act as part of the too-big-to-fail legislation. Such new capital instruments include bonds with a write-off feature, reserve capital, and convertible capital.

    1.2 Adding "Swiss Specific Buffers" to the Basel III Requirements

    The requirements of the Basel III framework (including minimum capital requirements, capital buffers, and where necessary, macro-prudentially motivated countercyclical buffers) are supplemented by additional capital requirements introduced by FINMA Circular 2011/02 (Additional Swiss Requirements). The regulation set out in FINMA Circular 2011/02 entered into force on 1 July 2011 and shall remain applicable also post-implementation of Basel III.

    In its Circular 2011/02, FINMA requires, depending on the size and importance of the bank, an additional capital buffer in addition to the requirements of the Basel III framework of up to 1% of risk-weighted assets (applicable...

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