Used as monitoring tools, observation ratios form part of the new liquidity regulations set out in Basel III, complementing the short-term liquidity (LCR) and structural liquidity (NSFR) ratios. Contrary to the LCR and NSFR ratios, no minimum requirements apply to the various observation ratios. The Swiss Financial Market Supervisory Authority FINMA is currently getting ready to introduce the additional observation ratios and therefore requires supervised institutions to submit a report for test purposes starting this autumn.
As required in the Basel III minimum standards, banks must meet internationally harmonised quantitative liquidity requirements, which include the short-term liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). At the beginning of this year, Switzerland introduced the LCR and FINMA started the NSFR observation period. The Basel reform package also provides for other metrics, i.e. observation ratios, which supervisory authorities use as monitoring tools, as well as to capture information about a bank’s cash flows, balance sheet structure and available unencumbered collateral.
Starting this autumn, FINMA requires the submission of test reports on these observation ratios. While prior test reporting will help the banking industry to prepare for the introduction of this new regulation, it will also assist the competent authorities to evaluate the impact of the introduction of the observation ratios. In addition, the data collected will be taken into account in the discussions led by the national working group on liquidity regulation.
The observation period lasts for 15 months. Test reporting of observation ratios is based on Excel data collection forms and begins on 30 September 2015. Six quarterly test reports are to be submitted by all banks assigned to FINMA supervision categories 1 to 3 and selected institutions from category 4.
The first set of data collected must be submitted within three months, i.e. by the end of December 2015; all other data within two months. General reporting for all banks using the forms provided by the SNB will begin in the first quarter of 2017.
FINMA has posted a data collection form with information for supervised institutions on how to prepare the report on its website. Background information on the concept behind the observation ratios and how the data collection form is structured is also provided. During the test reporting phase, the data collection form is subject to modification.