Swiss banks are facing a significant transformation as they approach the implementation deadline for "Basel III Final" on January 1, 2025. This regulatory overhaul aims to enhance the resilience of banks but raises questions about the preparedness of institutions in the domestic credit market.
The recent acquisition of Credit Suisse by UBS has raised concerns among corporate clients. The introduction of Basel III Final is expected to reshape credit pricing, particularly for large banks that have relied on proprietary Internal Ratings-Based (IRB) models to determine their regulatory capital requirements. These models have allowed banks to assign lower risk weights to their assets, resulting in reduced capital requirements and a competitive advantage. However, Basel III Final introduces an output floor that will change this dynamic.
Under the new rules, the total risk-weighted assets (RWA) calculated using IRB models must be at least 72.5 percent of those calculated under the standard approach. This change will triple the capital requirements for top-rated residential mortgages at UBS, ZKB, and Raiffeisen. Analysts predict that this could lead to an increase in costs for prime residential mortgages.
The impact of Basel III Final will vary across banks, with regional and cantonal banks experiencing different effects based on their business models. The standard approach offers a more favorable risk weight for rental properties, potentially leveling the playing field for non-IRB banks.
In terms of corporate loans, the standard approach heavily relies on external ratings, while IRB banks use internal models. Basel III Final introduces an output floor that will increase the effective risk weight for IRB banks. This will lead to market repricing and banks will need to recalibrate their pricing strategies.
The implementation of Basel III Final requires banks to prioritize strategic planning and risk management. Failure to adapt may put banks at a disadvantage in a market influenced by regulatory requirements. The transition to Basel III Final is a critical juncture for Swiss banks, and they must remain vigilant and proactive in addressing the challenges posed by these new regulations.