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Banks await "Swiss finish" to Basel III rules

Under the reforms banks will be obliged to increase their capital reserves against potential losses Keystone

The Basel III banking reforms have been hailed as a regulatory milestone around the world, but they represent only half the story for Switzerland’s largest banks.

This content was published on September 13, 2010 - 17:20
swissinfo.ch

UBS and Credit Suisse must still wait for the results of a Swiss report into the “too-big-to-fail” issue later this month before they can assess the implications for their business.

The Basel III reforms, hammered out on Sunday but yet to be rubber stamped later this year, lay down measures designed to help prevent another global financial crisis.

Banks will be obliged to increase their capital reserves against potential losses, while the quality of the assets held in such buffers would also have to be enhanced.

As they have a relatively high importance in the national economy compared with other countries, big Swiss banks have traditionally been subject to an extra layer of rules that go beyond international standards - known as the “Swiss finish”.

Swiss National Bank Chairman Philipp Hildebrand gave a strong hint that even tougher rules would be forthcoming as he responded to the Basel III deal.

“For Switzerland, the Basel III reform package provides a solid foundation on which to build a comprehensive national regulatory response to the too-big-to-fail problem,” he said.

Swiss first to react

The former director of the Swiss federal finances, Peter Siegenthaler, is leading a working group looking into what measures Switzerland should take to ensure that big banks do not take down the national economy if they run into serious problems.

Observers anticipate recommendations in the too-big-to-fail report to establish a system for safely liquidating large banks should they become insolvent. The group is also expected to demand even more capital reserves to prevent bankruptcy from even occurring.

“Simply switching to Basel III will not impose major obstacles for the large Swiss banks,” Manual Ammann from the Swiss Banking Institute at the University of St Gallen told swissinfo.ch. “But they also potentially face extra too-big-to-fail regulations that would presumably lead to even more capital requirements.”

This is nothing new for UBS and Credit Suisse. In 2008, at the height of the financial crisis, the Swiss financial regulator imposed tough new regulations that have been largely taken on board by Basel III.

These Swiss rules, that are to be implemented by 2013, include an increase in the amount of capital reserves and restrictions on the sums banks can borrow to fund their activities. The Basel III reforms, that must be implemented between 2013 and 2019, are poised to supersede these Swiss regulations.

Don’t overdo it…

The Swiss Bankers association (SBA) has already warned Swiss regulators not to go overboard when deciding the “finish” they will apply to Basel III in Switzerland.

“Any weakening of the Swiss financial centre’s international competitiveness must be avoided at all costs in order to prevent negative impacts on Switzerland’s economic development,” the SBA said in a statement.

One of the SBA recommendations is to give banks enough time to implement new rules.

“It is clear that the Swiss finish will be stricter than Basel III, but one of the big questions is how much time will be given to implement it,” Bank Vontobel analyst Andreas Venditti told swissinfo.ch. “Basel III has been generous in this respect, making the reforms less onerous.”

Observers predict that UBS and Credit Suisse will be required to raise an extra two or three per cent more capital reserves than dictated by Basel III. In addition they will have to improve the standard of capital reserves that they currently hold.

Banks confident

But Venditti is confident that both banks will be able to meet Basel III and the predicted Swiss finish requirements given a similar time frame as 2013-2019. He pointed out that both banks are also busy scaling down risky investments to reduce the amount of capital they would have to raise to cover them.

“Their starting position is better than most banks because the Swiss finish obliged them to hold higher capital reserves in the first place,” he said. “I would not expect them to have to raise capital from the markets.”

Credit Suisse said it didn’t expect the new regulations to have any impact on its business.

UBS said in a statement it had taken note of the recommendations.

Basel III

The new banking rules, thrashed out on Sunday by the Basel Committee on Banking Supervision, are designed to strengthen bank finances and rein in excessive risk-taking in order to prevent another financial collapse.

Under current rules (Basel II), banks must hold back at least four per cent of their balance sheet to cover their risks.

This mandatory reserve – known as Tier 1 capital – would rise to 4.5 per cent by 2013 under the new rules and reach six per cent in 2019.

In addition, banks would be required to keep an emergency reserve known as a "conservation buffer" of 2.5 per cent.

In total, the amount of rock-solid reserves each bank is expected to have by the end of the decade will be 8.5 per cent of its balance sheet.

In addition, the quality of the assets in such Tier 1 reserves would have to be dramatically improved.

There would also be a limit imposed on the amount any bank could borrow to fund its investment activities.

The Basel III committee is still looking at extra provisions to deal with banks that are deemed too big to fail.

The deal still has to be presented to leaders of the G20 forum of rich and developing countries at a meeting in Seoul, South Korea, in November and ratified by national governments before it comes into force.

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Too big to fail

A working group of experts is due to publish the results of its findings on Switzerland’s two big banks, UBS and Credit Suisse, at the end of September.

Only in Iceland is the banking sector worth more than the Swiss sector in relation to the total national economy.

In 2007, before the crisis, banks in Iceland were worth 8.5 times the country’s GDP.

In Switzerland this figure was just under eight times GDP.

Despite the financial crisis the combined value of assets at UBS and Credit Suisse alone is currently 4.5 times higher than the Swiss GDP.

The government commissioned the report in April. It originally placed a deadline for publication by the end of the year but this was brought forward.

The government wants to know how to deal with the banks in the event that they collapse, endangering the whole Swiss economy.

The group is led by the former director of the federal finances, Peter Siegenthaler.

It is expected to recommend a system for safely winding up large banks that go bust without affecting the wider economy. It could also demand yet more capital

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