Skiplink Navigation

Main Features

Eagle eyed Banks scramble to meet regulators's requirements

Mark Branson is making banks change their ways

Mark Branson is making banks change their ways


Two years ago, Switzerland’s two largest banks - UBS and Credit Suisse - were ordered to cut risks, strengthen reserves and generally better insulate themselves against further financial crises. But they still do not meet the criteria of the so-called Swiss finish.

In June of this year, the Swiss National Bank (SNB) chided both banks for acting too slowly in adopting the so-called “Swiss finish” regulations, which require them to set aside far greater capital reserves than the international standard by 2019. Despite praising the banks’ response in December, the SNB warned that risks remain high.

Following its rogue trading scandal last year, UBS has finally decided to ditch its riskier investment banking ventures. Credit Suisse has opted to retain these trades, but has made efforts to ring fence them from the rest of the group’s operations.

Mark Branson is head of the banks division at the Swiss Financial Market Supervisory Authority (Finma). He is charged with ensuring that banks of all sizes comply with tough new rules that promise to make them more resilient to both global and domestic financial shocks. How satisfied are you that UBS and Credit Suisse are moving fast enough to adopt Swiss finish regulations?

 Mark Branson: The two big banks have obviously been set challenging targets. They have a journey to make and they are well underway.

The capitalisation of both banks is considerably stronger than a few years ago, both in terms of quantity and the quality of the underlying capital instruments. But there is still some way to go before these banks reach the targets in terms of the capital buffers that they hold. In June, the SNB said both banks were too slow in responding to the immediate risk of a euro crisis. Are alarm bells also ringing at Finma?

 M.B.: The world in which all the global banks operate is uncertain by nature and still has a lot of potential pitfalls. Given that there are risks, the faster banks move their way up this path [to adopting new regulations] the better - but there are no alarm bells. UBS and Credit Suisse have responded differently to the regulatory challenge. Which of them is right?

 M.B.: The regulations sets the framework within which each bank has to operate and they make their own strategic choices. It would be overstepping the mark for us to influence those choices.

In the end, the markets and clients will make their judgement and we will see which model is more successful. Is “Anglo-Saxon” investment banking the root of all evil for the big banks in Switzerland?

 M.B.: The trading arms of investment banks became exaggerated in size, scope and risk taking in the years leading up to the crisis. Deregulation and increased balance sheet leverage led to excessive risk.

But many services of investment banks also play an important part in the global financial system. If there was no way to trade securities apart from through the illiquid, opaque private sphere then the world would not be a better place. Then why not ring fence these operations from retail banking to protect small investors, as in other countries?

M.B.: Switzerland has a basically liberal regulatory infrastructure and framework  and it is very un-Swiss to dictate to firms how they should organise themselves. Ring fencing was clearly discussed by the ‘too big to fail’ expert commission, but was deemed too strong an intrusion in the commercial freedom of enterprises. Looking at the wider banking set-up, how worrying is the continued real estate boom in Switzerland?

M.B.: From a price perspective, it is worrying that the indicators show that we still have a booming market. When real estate booms reverse they tend to reverse very rapidly and take banks with them.

When there are almost forces of nature pushing markets in a certain direction - extremely low interest rates, a relatively stable economy, high immigration rates in certain areas and lack of alternative investment classes - it is very difficult to stop them.

The combination of regulation and self-regulatory enhancements that came into force in the middle of this year could be having an effect [of decelerating mortgage lending], but it is a bit too early to tell.

Swiss banking regulations

The Basel III banking reforms, presented in 2010 as a global blueprint to help reduce the risk of another financial crisis, recommend that banks hold back at least 7% of their capital to cover risks.

The tougher Swiss Finish regulations require UBS and Credit Suisse to put aside a bigger 19% safety net to cover their risks by 2019.

Some 10% of this capital cushion must take the form of the safest and most liquid equity. The remaining 9% can be held as so-called coco bonds that would convert to loss absorbing equity at a pre-set trigger point if conditions deteriorate.

The new capital requirements are set out in three tiers.

This first tier of capital (4.5% of risk weighted assets held in the highest quality, most liquid equity) is considered a minimum requirement for maintaining normal operations.

A second buffer tier of 8.5% would comprise 5.5% highest grade equity and up to 3% in coco bonds.

A third tier, called a progressive element, could be called upon if problems worsened. This element would be made up of coco bonds.

The banks could earn a “discount” on the amount of capital they have to hold in the third tier if they could prove that risky business lines could be isolated and liquidated in an orderly manner in the event of a crisis.

There are also limits on the amount banks can borrow to fund trading activities.

end of infobox