Basel III to Raise Swiss Mortgage Costs?

The domestic banking sector is not all that enthusiastic about the BIS' current campaign to address international bank capital resilience.

The Basel Committee for Banking Supervision released a very clear statement after its regular meeting yesterday asking its members to implement the planned Basel III standards as quickly as possible.

More than two third of the jurisdictions under its umbrella plan to implement most standards in the next two years, but a few will only do so in 2025.

The key Bank for International Settlements (BIS) committee did indicate that the banking system has remained broadly resilient to date in the face of a resurgence of inflation, a worsening economic outlook, and tighter financial conditions. It was clearly concerned, however, that these factors may expose vulnerabilities in the financial system.

Potential Weakness

Basel III reforms aim at addressing many potential weaknesses, particularly those that resulted from the 2008 financial crisis, particularly related to the strength and resilience of bank capital.

The committee can set standards and promote cooperation, but each member has to approve and implement the framework in their jurisdiction.

Disgruntled Banks

Basel III is mainly directed at internationally active banks, but local, domestic institutes will be expected to comply with the framework. As part of that, there have been several criticisms voiced about the planned reforms.

An association of Swiss cantonal banks said that the capital requirements and higher administrative costs will make mortgage loans more expensive. They also said that the standard does not address important characteristics in the Swiss market. In most jurisdictions, particularly Anglo-Saxon ones, there is no ability to use life insurance or retirement assets as additional collateral.

It would also lead to property valuations being frozen for seven years, which will lead to competitive distortion between Finma-regulated institutions and retirement funds, and other, similar types of entities.

Major Banks

The Swiss government, while it was shepherding approval of the new framework, indicated that riskier businesses would require more capital, and would affect banks according to their product selection individually. But they indicated that the overall capital requirements for the banking sector would not change all that much, except for the major banks.

In any case, the political tug of war will come to an end on 1 January 2024, which is when the new framework becomes effective.