Swiss banks are in the final stretch of implementing «Basel III Final» by January 1, 2025, a complex and costly undertaking, as Andreas Ita notes in his article for finews.first. But are banks prepared for the new rules in the domestic credit market?
finews.first is a forum for authors to comment on economic and financial topics.
Price adjustments in the market have been observed for some time now. Corporate clients have voiced concerns about worsened conditions since UBS’s acquisition of Credit Suisse. However, the Credit Suisse (CS) exit isn’t the only factor; «Basel III Final» has already begun impacting credit pricing.
Large banks such as UBS, Zürcher Kantonalbank (ZKB), and Raiffeisen use proprietary credit risk models to determine regulatory capital requirements. These Internal Ratings-Based (IRB) models for calculating risk-weighted assets (RWA) must be approved by Finma. Compared to the standardized approach, the IRB approach results in significantly lower capital requirements.
For prime residential mortgages, the risk weight under the standardized approach is currently 35 percent. However, the IRB models used by the above banks assign a risk weight of only around 5 percent for top-tier mortgages, leading to substantial capital savings. Banks that adopted the IRB approach, despite high implementation costs, have benefited from a competitive edge for years.
«Approximately 25 percent of the total mortgage volume may be impacted»
With «Basel III Final», most of this capital savings will be lost due to the new output floor. This rule mandates that the total RWA calculated under IRB models must equal at least 72.5 percent of the RWA under the standardized approach. For UBS, ZKB, and Raiffeisen, this means that as of January 1, 2025, their top-rated residential mortgages will have an effective risk weight of 14.5 percent, tripling their capital requirements.
According to a recent Orbit36 analysis, «Basel III Final» could lead to up to a 20 basis point increase in costs for prime residential mortgages among systemically relevant IRB banks. Approximately 25 percent of the total mortgage volume may be impacted.
«IRB banks face the output floor»
For regional and cantonal banks, the effects of «Basel III Final» depend on the business areas they’re involved in. Institutions with a high share of rental properties may face higher capital requirements from 2025 onwards. For those primarily financing owner-occupied properties with low loan-to-value ratios, «Basel III Final» could lead to lower capital requirements.
Under the standardized approach, risk weights for such properties decrease significantly, to as low as 20 percent, effectively leveling the playing field for non-IRB banks.
The Basel framework’s standardized approach for corporate loans is heavily reliant on external ratings, typically only available for larger firms. In the absence of a rating, a default risk weight of 100 percent is applied. IRB banks, on the other hand, use their models.
«Basel III Final» now permits a lower risk weight of 85 percent for SME loans without ratings, reducing capital requirements for non-IRB banks. However, IRB banks face the output floor, leading to an effective risk weight of 61.6 percent (72.5 percent of 85 percent).
«The topic is strategically significant for banks and belongs on the board’s agenda»
For most loans with strong internal ratings, the output floor will be binding. Our analysis estimates that the output floor affects unrated SME loans with up to 65 basis points. Market repricing in this range is already observed.
«Basel III Final» fundamentally alters the competitive landscape in the domestic credit market. Banks must adjust their loan pricing strategies. Failure to properly calculate credit costs could mean missed opportunities and the risk of holding the wrong loans on the balance sheet. Thus, this topic is of strategic importance for banks and merits attention at the board level.
Andreas Ita is the co-founder and a managing partner of Orbit36, which advises banks and other financial institutions in strategic planning, treasury, risk and capital management. The Swiss banker began his career trading equity derivatives and worked for 22 years at UBS. Until 2019, he was the Swiss bank’s head of group economic performance and capital optimization. He is a bank board member and holds a Ph.D. in banking and finance from the University of Zurich.
Previous contributions: Rudi Bogni, Peter Kurer, Rolf Banz, Dieter Ruloff, Werner Vogt, Walter Wittmann, Alfred Mettler, Robert Holzach, Craig Murray, David Zollinger, Arthur Bolliger, Beat Kappeler, Chris Rowe, Stefan Gerlach, Nuno Fernandes, Richard Egger, Maurice Pedergnana, Marco Bargel, Steve Hanke, Urs Schoettli, Ursula Finsterwald, Stefan Kreuzkamp, Oliver Bussmann, Michael Benz, Albert Steck, Martin Dahinden, Thomas Fedier, Alfred Mettler, Brigitte Strebel, Mirjam Staub-Bisang, Nicolas Roth, Thorsten Polleit, Kim Iskyan, Stephen Dover, Denise Kenyon-Rouvinez, Christian Dreyer, Kinan Khadam-Al-Jame, Robert Hemmi, Anton Affentranger, Yves Mirabaud, Katharina Bart, Frédéric Papp, Hans-Martin Kraus, Gerard Guerdat, Mario Bassi, Stephen Thariyan, Dan Steinbock, Rino Borini, Bert Flossbach, Michael Hasenstab, Guido Schilling, Werner E. Rutsch, Dorte Bech Vizard, Katharina Bart, Maya Bhandari, Jean Tirole, Hans Jakob Roth, Marco Martinelli, Thomas Sutter, Tom King, Werner Peyer, Thomas Kupfer, Peter Kurer, Arturo Bris, Frederic Papp, James Syme, Dennis Larsen, Bernd Kramer, Armin Jans, Nicolas Roth, Hans Ulrich Jost, Patrick Hunger, Fabrizio Quirighetti, Claire Shaw, Peter Fanconi, Alex Wolf, Dan Steinbock, Patrick Scheurle, Sandro Occhilupo, Will Ballard, Nicholas Yeo, Claude-Alain Margelisch, Jean-François Hirschel, Jens Pongratz, Samuel Gerber, Philipp Weckherlin, Anne Richards, Antoni Trenchev, Benoit Barbereau, Pascal R. Bersier, Shaul Lifshitz, Klaus Breiner, Ana Botín, Martin Gilbert, Jesper Koll, Ingo Rauser, Carlo Capaul, Markus Winkler, Thomas Steinemann, Christina Boeck, Guillaume Compeyron, Miro Zivkovic, Alexander F. Wagner, Eric Heymann, Christoph Sax, Felix Brem, Jochen Moebert, Jacques-Aurélien Marcireau, Ursula Finsterwald, Michel Longhini, Stefan Blum, Zsolt Kohalmi, Nicolas Ramelet, Søren Bjønness, Gilles Prince, Salman Ahmed, Peter van der Welle, Ken Orchard, Christian Gast, Jeffrey Bohn, Juergen Braunstein, Jeff Voegeli, Fiona Frick, Stefan Schneider, Matthias Hunn, Andreas Vetsch, Fabiana Fedeli, Kim Fournais, Carole Millet, Swetha Ramachandran, Thomas Stucki, Neil Shearing, Tom Naratil, Oliver Berger, Robert Sharps, Tobias Mueller, Florian Wicki, Jean Keller, Niels Lan Doky, Johnny El Hachem, Judith Basad, Katharina Bart, Thorsten Polleit, Peter Schmid, Karam Hinduja, Zsolt Kohalmi, Raphaël Surber, Santosh Brivio, Mark Urquhart, Olivier Kessler, Bruno Capone, Peter Hody, Michael Bornhaeusser, Agnieszka Walorska, Thomas Mueller, Ebrahim Attarzadeh, Marcel Hostettler, Hui Zhang, Michael Bornhaeusser, Reto Jauch, Angela Agostini, Guy de Blonay, Tatjana Greil Castro, Jean-Baptiste Berthon, Marc Saint John Webb, Dietrich Goenemeyer, Mobeen Tahir, Didier Saint-Georges, Serge Tabachnik, Vega Ibanez, David Folkerts-Landau, Andreas Ita, Michael Welti, Fabrizio Pagani, Roman Balzan, Todd Saligman, Stuart Dunbar, Carina Schaurte, Birte Orth-Freese, Gun Woo, Lamara von Albertini, Ramon Vogt, Andrea Hoffmann, Niccolò Garzelli, Darren Williams, Benjamin Böhner, Mike Judith, Jared Cook, Henk Grootveld, Roman Gaus, Nicolas Faller, Anna Stünzi, Thomas Höhne-Sparborth, Fabrizio Pagani, Guy de Blonay, Jan Boudewijns, Sean Hagerty, Alina Donets, Sébastien Galy, Roman von Ah, Fernando Fernández, Georg von Wyss, Stefan Bannwart, Andreas Britt, Frédéric Leroux, Nick Platjouw, Rolando Grandi, Philipp Kaupke, Gérard Piasko, Brad Slingerlend, Dieter Wermuth, Grégoire Bordier, Thomas Signer, Gianluca Gerosa, Christine Houston, Manuel Romera Robles, Fabian Käslin, Claudia Kraaz, Marco Huwiler, Lukas Zihlmann, Sherif Mamdouh, Harald Preissler, Taimur Hyat, Philipp Cottier, Andreas Herrmann, Camille Vial, Marcus Hüttinger, Serge Beck, Alannah Beer, Stéphane Monier, Ashley Simmons, Lars Jaeger, Shanna Strauss-Frank, Bertrand Binggeli, Marionna Wegenstein, George Muzinich, Jian Shi Cortesi, Razan Nasser, Nicolas Forest, Joerg Ruetschi, Reto Jauch, Bernardo Brunschwiler, Charles-Henry Monchau, Ha Duong, Teodoro Cocca, Jan Brzezek, Nicolas Mousset, Beat Weiss, Pascal Mischler, Andrew Isbester, Konrad Hummler, Jan Beckers, Martin Velten, Katharine Neiss, Claude Baumann, Daniel Roarty, Kubilay Yalcin, Robert Almeida, Karin M. Klossek, Marc Taverner, Charlie T. Munger, Daniel Kobler, Patrick Stauber, Anna Rosenber, Judith Wallenstein, Adriano Lucatelli, Daniel Goleman, Val Olson, Brice Prunas, Francesco Magistra, Frances Weir, Luis Maldonado, Francesco Magistra, Nadège Lesueur-Pène, Massimo Pedrazzini, Eric Sarasin, David Ellis, Dina Ting, Christopher Gannatti, Shaniel Ramjee, Mihkel Vitsur, Nannette Hechler-Fayd’herbe, Ralph Ebert, Chris Cottorone, Francesco Mandalà, Mariolina Esposito, Maryann Umoren Selfe, Dominique Gerster, Marc Arand, Christian Kälin, Nadège Dufossé, Benjamin Melman, Florin Baeriswyl, Marc Reinhardt, Thomas Holderegger, Beat Wittmann, Bruno Cavalier, Louise Curran, Adrian Cox, Philip Adler, Serge Fehr, Marc Lussy, Axel Brosey, Colin Vidal, Vivien Jain, Ralf Zellweger, Maria Vassalou, Nico Fiore, Gary Burnison, Thomas Signer, and Brigitte Kaps.
