FINMA-Circular 2011/2 "Capital buffer and capital planning - banks"
(status: 29 June 2011)
1. What is the quality requirement for the capital buffer under Article 34 of the Capital Adequacy Ordinance (CAO, SR 952.03) as specified in margin no. 11? Does the buffer already have to meet the coming Basel III requirements?
Margin no. 12 states that the capital quality requirements for Pillar 1 apply (at least 50% Tier 1 capital and 50% Tier 2 capital). This rule will remain in force until 1 January 2013. The future quality requirement for buffer capital, together with the transition deadlines, will be influenced by the implementation of the Basel III requirements. Margin nos. 11f. of the Circular will be amended at the same time as the revised CAO comes into force on 1 January 2013. Given the buffer’s purpose of ensuring that losses incurred in a crisis scenario can be absorbed through equity capital, the requirements as regards the ability of the capital employed for the buffer to absorb losses are likely to increase.
2. Which regulatory requirements must Tier 2 capital (additional capital) raised by 1 January 2013 meet in order to be eligible for inclusion in the buffer?
All capital instruments issued after 12 September 2010 must meet the criteria set out in paragraph 58 of the Basel III text (Basel III: A global regulatory framework for more resilient banks and banking systems, http://www.bis.org/publ/bcbs189.pdf). If an institution wishes to include a Tier 1 or Tier 2 capital instrument issued after January 2011 in its regulatory capital on a long-term basis, this instrument must in principle already include a "point of non-viability" clause that provides for the debt to be either written off or converted into equity when the institution is threatened with insolvency ("Minimum requirements to ensure loss absorbency at the point of non-viability" – BCBS press release dated 13 January 2011, http://www.bis.org/press/p110113.pdf). If the instrument does not include a "point of non-viability" clause, it still remains fully eligible for the years 2011 and 2012, but its eligibility is limited to 90% of the nominal value from 1 January 2013 and reduces by 10% each year thereafter.
3. What are the rules governing the relationship between the phase-out of Tier 2 instruments and amortisation under Article 27 CAO?
Regardless of the provisions concerning the phase-out of Tier 2 instruments without a "point of non-viability" clause, Article 27 para. 2 CAO states that such instruments are to be "amortised" as regards their eligibility as lower Tier 2 capital by 20% of the initial nominal value a year in the five years prior to redemption. No allowance may be made in the final year prior to redemption. Depending on the maturity structure of a Tier 2 instrument, either the phase-out or the amortisation will have a greater impact at different points in time. The question thus arises as to whether the phase-out and the amortisation are applied together. From the regulatory point of view, a combination of the two restrictions – i.e. with an instrument subject not only to amortisation in the final five years (as a first step) but also to a phase-out cut (as a second step) – is not considered necessary. Depending on the term of the bond, its eligibility may be restricted more by either the phase-out or the amortisation. FINMA requires the greater restriction to be applied in each case.
4. At what interval and based on which data sources does FINMA review the categorisation details of an institution or group and, if appropriate, change the categorisation?
FINMA reviews the criteria for categorising institutions and the allocation of each institution and group to a supervisory category every year on the basis of supervisory and capital adequacy reporting.
5. How is the capital ratio specified in margin no. 20 defined and calculated?
The capital ratio is initially defined as the net eligible equity capital in relation to the risk-weighted positions plus the required equity for market and operational risks as well as for positions arising from unsettled transactions, this required equity having been multiplied by 12.5 to convert it into equivalent units. In addition to this, the disposable eligible capital used to cover risk concentrations (Art. 88 paras. 1a and 2 CAO) and equity interests outside the financial sector (Art. 12c CAO) must be deducted from the eligible capital before the ratio is calculated, as when determining equity coverage ratio II.
6. What happens if an institution meets two of the criteria as per margin no. 15 and the Appendix?
The risk-based categorisation outlined in the Circular is intended to achieve a high degree of separation between the individual categories. Institutions are only moved to a higher category when they meet at least three of the stated criteria.
7. Must the parent company of a group add together the privileged deposits of the banks belonging to the group?
Regardless of whether or not it holds a banking licence in its own right, the parent company is not required to report the privileged deposits of its subsidiary banks at the consolidated level. The privileged deposits of the consolidated subsidiary banks are thus added together when categorising a financial group.
8. In which situations does margin no. 16 apply, whereby the higher capital adequacy target takes precedence when an individual institution and the financial group to which it belongs do not fall into the same category?
This rule applies in cases where the individual institution functions as the parent company. It does not apply to other banks and securities dealers within the group, which remain subject to the capital adequacy target resulting from their individual categorisation. Institutions that belong to a holding structure or a contractual group must at the very least meet the capital adequacy requirements for their category, while the financial group as a whole must meet the capital adequacy target determined on a consolidated basis. However, FINMA reserves the right to demand that specific individual institutions within a group comply with a higher capital ratio, in particular when such institutions perform a function within the group that is similar to that of a parent company.
9. Does the overall capital buffer have to be reported in the capital adequacy report under "Additional capital (Pillar 2 as per Art. 34 CAO)"?
No, the additional capital requirement calculated for the specific institution must be reported under this heading. As is already common practice, the overall coverage requirement does not have to be stated.
10. Do measures agreed with FINMA as part of an institution’s existing capital planning or existing rulings remain valid following the Circular’s entry into force?
Measures agreed with FINMA as part of an institution’s existing capital planning prior to 1 July 2011 and existing FINMA rulings remain fully valid.
11. Who can I contact if I have additional questions?
banks@finma.ch or phone 031 327 93 00