Cat. 4 and 5 / Small banks regime

Both financial market law and FINMA’s risk-oriented supervision are designed to be proportional (principle of proportionality). This means that the regulations and supervision take account of the individual institutions’ various sizes, business models and risks. In addition to FINMA’s current practice of risk-oriented supervision, small, particularly liquid and well capitalised banks can benefit from the relaxations introduced as part of the small banks regime. These institutions are obliged to hold additional capital and liquidity and must not have any elevated risks in the areas of business conduct and interest rate risk. In return they enjoy reduced regulatory burdens and simplifications.

Admittance criteria

The admittance criteria for the small banks regime and the simplifications pertaining to capital requirements are set out in the Capital Adequacy Ordinance (CAO). The requirements contained in the Capital Adequacy Ordinance are not applicable to branches and non-account-holding securities firms. As a result, they cannot take part in the small banks regime. All of the following admittance criteria must be fulfilled before a bank or an account-holding securities firm can apply for the simplifications under the small banks regime. These criteria must be complied with at all times both at the level of the single entity and at the level of the financial group.

• The institution must be a Category 4 or 5 bank or account-holding securities firm
• Simplified leverage ratio of at least 8%
• Average liquidity coverage ratio (LCR 12 months) of at least 110%
• Refinancing rate of at least 100%

In addition, FINMA can reject the application for simplifications in the following cases if supervisory measures or proceedings have been initiated against the institution in the following areas:

• Rules of conduct under the Financial Services Act (FinSA)
• Market conduct rules under the Financial Market Infrastructure Act (FinMIA)
• Money laundering and terrorist financing under the Anti-Money Laundering Act (AMLA)
• Cross-border business

Furthermore, FINMA can reject the application if an institution has inadequate interest rate risk management in place or if the interest rate risk is unreasonably high.

Simplifications

Institutions participating in the small banks regime have reduced calculation obligations with regard to required capital and liquidity and also benefit from simplified qualitative requirements in FINMA circulars.

• Elimination of quality and quantity requirements in relation to the required capital including elimination of the calculation of risk weighted assets (RWA) and elimination of the capital buffer and sectoral countercyclical capital buffer (CCB)
• No requirement to calculate and comply with NSFR (liquidity)
• Qualitative simplifications in FINMA circulars
  • Elimination of specific requirements for handling electronic customer data
  • Reduced disclosure obligations
  • Reduced requirements in relation to the duties of risk control
  • Lower frequency of comprehensive risk assessment by internal audit
  • Elimination of specific outsourcing requirements

Application to participate

Category 4 and 5 banks and account-holding securities firms can apply to be admitted to the small banks regime. Together with their application, interested institutions must prove that they fulfil the criteria. To address any uncertainties regarding fulfilment of the criteria, particularly the grounds for exclusion relating to business conduct and interest rate risk, the institutions can contact FINMA before submitting their application.