A package of reforms on capital requirements for banks is currently being drafted. Known as “Basel III Final,” the project goes too far for Swiss banks.
The Federal Council and the Swiss Financial Market Supervisory Authority Finma have raised the ire of Swiss banks. With the “Basel III Final” reform package, the two bodies want to make banks’ capital requirements more risk-sensitive. The mortgage market is also affected.
In the future Swiss banks will have to comply with more detailed requirements for risk management and the determination of the capital required in each case.
Excess for ideas
In principle the Swiss Bankers Association (SBA) supports the planned implementation of Basel III Final in the mortgage market, according to a statement.
At the same time, however, the association states that the Federal Council and Finma are massively overreaching with the planned extension of the lowest value principle from two to seven years and with the far too high risk weight surcharges for rented residential properties, it declared.
This would be to the detriment of the competitiveness of the Swiss banks, their clients and the stability of the financial markets, the bank representatives explained. All this must therefore be corrected by the end of October as part of the current consultation process. The banks feel that they are being squeezed dry.
More own funds
The lower-of-cost or market principle is a central element of mortgage market regulation. It means that banks may only finance on the basis which is lower – either the purchase price or the market value. This means that customers would have to pay any difference between the purchase price and the market value themselves – in addition to the minimum amount of equity to be contributed.
This contributes to stability in the real estate market. Today, the lower-of-cost or market principle applies for two years after the change of ownership. The SBA criticized that the seven-year period envisaged by the Federal Council and Finma for the lower of cost or market principle is far too long and cannot be justified in terms of content.
Increasing economic costs
This would severely restrict the ability of customers to profit from increased real estate prices. And this would result in considerable economic costs because, for example, the possibility of value-preserving renovations or of setting up a company or investing with funds from the mortgage would all be eliminated.
In addition, this would set in motion a “transfer carousel” from the banks to unequally regulated players, which would also miss the authorities’ goal of limiting ‘excessive’ valuation gains, explained the mouthpiece of the big banks. For the lowest value principle, the two years – according to the status quo – should therefore be maintained.
Risk premiums inappropriate?
But there is still a thorn in the side of the Swiss banks. The currently-planned surcharges on the risk weights relevant for capital adequacy are many times too high for rented residential properties. The surcharges could neither be justified by risk considerations nor by formal requirements under Basel III Final and have nothing to do with risk sensitivity.
Capital costs resulting from the surcharges will have to be borne by the customers. Those deteriorating conditions could also lead to a migration of customers to players who have to hold significantly less – or no capital at all – for the same risks.
According to the SBA the surcharges for rented residential properties should be reduced to a level that is more in line with the risks. In concrete terms, this means that the risk weight surcharge should therefore be 5 percent instead of 15 percent, especially for mortgages on residential properties between 60 percent and 80 percent.
The SBA’s position paper provides even more insight into what the Swiss banks don’t like about the changes. In any case, the banks’ ideas differ quite a bit from those of the Federal Council and Finma.