It was meant to come as welcome relief to banks burdened by regulation: the Swiss financial market regulator proffered a relaxation for small companies. The response wasn’t quite as expected.

Mark Branson, the head of Switzerland’s banking regulator Finma, last week opened the door to reverse a trend: while his team has acquired a taste for meticulously uncovering anything untoward at banks that strayed from the acceptable path, he now offered a rare piece of deregulation.

«Other jurisdictions also speak of easing,» said Branson according to the German transcript of his speech. «But no country has come as far as we have.»

Bucking the Trend

The comments left a lasting impression on some 300 executives and managers of Swiss banks in the audience. Since last July, Finma has been testing a series of alleviations at 68 banks of categories 4 and 5, the smallest banking institutes in Switzerland.

Next year, the authorities want to seamlessly introduce the capital requirement directive based on the results from the pilot.

Finma’s pronounced intention to loosen the screws seemed to buck the trend toward ever-tougher regulation, which can be traced back to the banking crisis ten years ago. The new regime for the small institutes hence kindled hopes among the wider banking community – but also was met by a fair degree of skepticism.

Beware the Boomerang

Bank directors, treated with suspicion for many years, aren’t ready yet to trust the new sweeter talk from Bern. Matthias Preiswerk and Daniel Ruuedi for instance, the two partners at Baumann & Cie. in Basel recently said that there was the risk of a boomerang effect.

Veterans of the private banking industry seem particularly concerned about the easing of the control procedures. Since the new rules came into force, small banks only need proper screening every two or three years, instead of every year. The decision was a bid to help small firms cut costs, Branson told the representatives of small bank last week.

Old vs. New Regime

Baumann & Cie. however is considering sticking to the annual review because the procedures has been tried and tested. How Finma would conduct an investigation into an incident at a firm that fell under the new regime has however not been established. Other small banks are also thinking about sticking to the old regime, Baumann & Cie. said.

The reluctance of the small banks to embrace the new rules may dampen the intended effect of the change. Branson indicated he is aware of the issue, saying that some banks may no longer needed all the procedures implemented in his speech, adding that he wanted to get the simplest yet responsible form of regulation of small banks.

Participation Remains Voluntary

Finma told finews.com that the large majority of responses from small banks had been positive in their appreciation of the change. In the dialogue with the industry, the body also addressed criticism and demands, but the spokesman said he had yet to hear somebody say the new regime was to lax. In any case, the participation in the pilot scheme and final directive was voluntary.

Half of the 60 members of the association of regional banks are taking part in the pilot scheme. The association is open to change: «From an entrepreneurial point of view, reducing the amount of government-imposed obligations is to be welcomed,» said Juerg de Spindler, the CEO of the association. In return, the companies have to take upon themselves to make sure that rules are adhered to and their reputation isn't impinged.

Finma Won't Decide Alone

The group is more worried that the easing might be partially undone before the directive has been implemented.

Finma of course isn’t the only body to look closely into this issue: Switzerland's central bank, the ministry of finance and the State Secretariat for International Finance are all taking a keen interest. Time will tell whether they all agree to ease the burden.