The first step towards Basel III rules is done. The new FINMA Circular “Capital buffer and capital planning” came into force 1st July 2011. What is the impact for financial institutions in Switzerland?

Capital planning
First of all, the deadline for the establishment of a 3-year capital planning i.e. 31 March 2012 is approaching fast, with external auditors required to take position in the regulatory Long form report 2012. It is important to stress that capital planning is closely linked to the budgeting/ business planning process and it shall demonstrate that the required capital levels necessary to cover credit, market, and operational risks may be maintained even in difficult economical environments. (Scenario analysis). Moreover, the capital planning has to be properly documented and approved by the Board of Directors at least once a year.

Capital buffers
Secondly, the new rules introduce the creation of anticyclical structure of the capital buffers by applying a differentiated approach to additional capital adequacy requirements under Pillar 2. Based on FINMA supervisory ratings allocated to financial institutions (rating two to five based on total assets, assets under management, privileged deposits and required capital; rating 1 being covered by the “Too big to fail” regulation), financial institutions are assigned a target capital level ratio as well as an intervention level capital ratio. Consequently, the existing 120% additional capital coverage required by FINMA is replaced by these new rules. Transitional measures apply, however FINMA precises that if financial institutions already meet the new rules as of 1st July 2011, these become applicable immediatly as of this date.

Next steps
What happens if capital levels fall below the determined levels? Institutions have to quickly restore the required capital levels or FINMA may order punitive measures such as adjustment of dividend payments or discretionary remuneration or even require the increase of capital.

The new Circular offers further possibility to be proactive in defining the right level of capital requirements for managing current financial and regulatory affairs. Therefore, “establish a pluriannual budget and capital planning before 31 March 2012, make it approved by the Board of Directors, and take the necessary measures to ensure that capital levels do not fall below required levels” is the way forward.