The Banking Act requires banks to have adequate capital and diversify risks. The CAO contains the corresponding implementing provisions and also transposes the new Basel III regulations into Swiss law. The revision of the ordinance aims to implement two additions to Basel III, and other member states of the Basel Committee, e.g. the EU and US, are also planning to do likewise. The ordinance revision concerns the introduction of a leverage ratio (LR), as well as new risk diversification provisions.

Leverage ratio

The capital adequacy requirements prescribed for banks are currently calculated on the basis of the share of their risk-weighted assets (RWA). In accordance with Basel III, the CAO prescribes risk-weighted capital ratios that rise with increasing size. Systemically important banks must meet more stringent and unweighted requirements. An unweighted capital adequacy requirement will also be introduced for all non-systemically important banks from 1 January 2018. A safety net in the form of a leverage ratio will be created with this capital adequacy requirement based on the leverage ratio. First of all, a minimum core capital (Tier 1) to total exposure ratio of 3% is required of a bank. Like previously, systemically important banks must meet more stringent requirements. The prescribed rate can be as much as 10% for them.

Risk diversification

The risk diversification provisions serve to identify and prevent concentrations of risk. The aim is to prevent losses that could arise from such concentrations and that are considered a cause of bank insolvency. Under the new rules, risk concentrations will be measured only according to core capital (Tier 1), as supplementary capital (Tier 2) will generally not be taken into account. Moreover, banks will be allowed only very restricted use of models for determining their risk concentrations, as modelling errors have a major impact when calculating these risks. Further changes concern overruns of the upper limits enshrined in the CAO, the weighting of certain assets, as well as the adjustment of some special rules for systemically important banks. According to the Basel Committee's schedule, the new risk diversification provisions are to enter into force on 1 January 2019.

Federal Council adopts revision of Capital Adequacy Ordinance