Capital Floors, the Revised SA and the Cost of Loans in Switzerland

Abstract

The Basel Committee has recently announced plans to revise the Standardised Approach (SA) to bank capital for credit risk and to employ the revised SA as a floor for bank capital based on internal models. Some aspects of the proposals remain unclear but it is likely that the new approaches will have a major impact on the overall level of capital and its distribution across banks and asset classes.

This paper examines the effects of the proposed changes in capital rules on the Swiss loan market. Using primarily public information, we estimate the effects on the capital of individual Swiss banks broken down by asset class. We infer what this is likely to imply for lending rates in the Swiss market.

We find that the proposed Basel rule changes would significantly boost capital for corporate and commercial mortgage exposures while capital for residential mortgages could actually fall for SA banks. This pattern of effects across asset classes is at variance with the lessons of the recent financial crisis which was triggered by the collapse of the US residential mortgage market. It is also inconsistent with current policy concerns in Switzerland where regulators have publicly expressed concern about possible overheating in the residential mortgage market.

Keywords: Credit Risk, Regulation, Banks, Public Institutions

JEL Classification: G21, G28