Swiss Panel Recommends Stricter Rules for UBS, Credit Suisse
Dec. 5 (Bloomberg) — Switzerland should adopt stricter capital requirements for UBS Group AG and Credit Suisse Group AG following the introduction of tighter rules in the U.S. and the U.K., a government-appointed panel recommended, concluding a year-long review of measures to avoid bailouts.
“Switzerland should be among the countries with the highest standards internationally” for big banks, the panel said in a report published today, adding that this applies to both of two key measures of financial soundness. “The Swiss lead with regard to risk-weighted requirements is small and the country is somewhat behind the U.S. and the U.K. in the area of leverage ratio.”
Switzerland was one of the first countries to introduce stricter rules after the 2008 financial crisis, when the government spent 6 billion Swiss francs ($6.2 billion) to bail out UBS, the largest bank. Since then, other countries have caught up and some have exceeded the Swiss requirements. The rules, some of which are still being phased in, are meant to prevent the failure of a large bank from posing a threat to the wider economy. With 1.05 trillion Swiss francs in assets, UBS is about 1.7 times the size of Switzerland’s gross domestic product.
“Since the introduction of the too-big-to-fail rules it has become clear that even the full implementation of this package of requirements will not resolve the too-big-to-fail problem,” the report said. “Additional measures are therefore necessary.”
Common Equity
The panel was appointed in September 2013 to review the government’s strategy for Switzerland’s financial center, including safeguards against instability. By law the government has to submit its own report on the effectiveness of too-big-to- fail regulation to the parliament before the end of February. The government today acknowledged that it had received the report and wouldn’t comment on the contents yet.
While the conclusions aren’t binding, the report carries weight given the makeup of the panel. Led by Aymo Brunetti, the government’s former chief economist and a professor of economic policy at the University of Bern, it includes the chairmen of UBS and Credit Suisse, as well as representatives from the Swiss financial regulators, the finance ministry and industry interest groups. Brunetti is scheduled to hold a press conference in Bern today.
Under the current rules, the ratio of going-concern capital to assets must be at least 3.12 percent for UBS and Credit Suisse. Such capital can include common equity and contingent capital. This is “barely more” than the international minimum standard for all banks of 3 percent and less than what’s required in the U.S. and the U.K., the report said, without recommending a specific level for the leverage ratio requirement.
The U.S. this year adopted supplemental leverage ratio rules requiring systemically important banks to hold capital equal to at least 5 percent of total assets. The U.K. has also introduced a supplement, which may require its biggest lenders to have a minimum leverage ratio of between 3.35 percent and 4.95 percent, the report said.
Internal Models
Switzerland may raise the leverage ratio requirements for too-big-to-fail banks following the panel’s review, which could put pressure on Credit Suisse’s ability to pay dividends, Morgan Stanley analysts Huw van Steenis and Canset Eroglu said in a September note to clients.
Current Swiss rules also call for common equity to be at least 10 percent of the banks’ assets weighted according to their risk. That’s the same as in the U.K., while trailing Norway and Sweden, the report said.
The panel also recommended that Swiss regulators complete their review of models the banks use to calculate risk weightings for assets and take corrective action if significant differences between a standardized approach and the lenders’ methods cannot be explained. UBS and Credit Suisse have some of the lowest ratios of risk-weighted assets to total assets among global lenders, according to the International Monetary Fund, the report said.
“This raises the question whether internal bank models adequately assess the risks,” said the report, written in German.
Other recommendations included setting a deadline for organizational changes the banks need to introduce to make it easier to break out systemically important Swiss units in a crisis and requiring those units to meet the same capital requirements applied to the group.
To contact the reporters on this story: Jeffrey Vögeli in Zurich at jvogeli@bloomberg.net; Elena Logutenkova in Zurich at elogutenkova@bloomberg.net To contact the editors responsible for this story: Elisa Martinuzzi at emartinuzzi@bloomberg.net Cindy Roberts, Simone Meier
