The impending implementation of Basel III Final in Swiss banks is expected to have a significant impact on the credit market. This regulatory overhaul will reshape the credit business, affecting loan pricing and capital requirements.
Major banks like UBS, Zürcher Kantonalbank (ZKB), and Raiffeisen, which have benefited from lower capital requirements due to their credit risk models, will be particularly affected by the introduction of an output floor that mandates a minimum risk-weighted asset calculation. This change will triple capital requirements for top-rated residential mortgages, altering the competitive dynamics in the mortgage market.
The changes from Basel III Final are expected to lead to an increase in mortgage costs, particularly for systemically relevant banks using Internal Ratings-Based (IRB) models. This could affect approximately 25% of the total mortgage volume. Regional and cantonal banks will be impacted differently based on their business models, with those focusing on rental properties facing higher capital requirements. The standardized approach offers a more favorable risk weight for owner-occupied properties with low loan-to-value ratios, potentially leveling the playing field for non-IRB banks.
Accurate credit cost calculations will be crucial for banks to avoid mispricing loans or holding undesirable assets on their balance sheets. The output floor will impact unrated small and medium-sized enterprise (SME) loans, leading to a market repricing. Non-IRB banks could benefit from a lower risk weight for SME loans without external ratings, while IRB banks will face higher capital requirements due to the output floor.
The reliance on Internal Ratings-Based models has given large banks a competitive edge in determining regulatory capital requirements. However, the introduction of the output floor threatens to erode this advantage. Banks must prioritize robust internal risk assessment frameworks to accurately gauge credit risk and align capital requirements with regulatory expectations.
As the January 2025 deadline approaches, banks need to adapt and innovate in response to these regulatory changes to shape the future of the Swiss credit market.