Swiss bank Credit Suisse has announced plans to alter its legal structure, making it easier to break up the bank in the event of a major crisis. The approval of the Swiss regulator is still needed, but changes could start from mid-2015.This content was published on November 21, 2013 - 14:23
The bank plans to set up a new legal structure to house its Swiss-based wealth management assets and domestic services to retail and local business customers as well as institutional clients, such as pension funds.
The measures are aimed at isolating and protecting services vital to the Swiss economy – such as savings deposits and business and mortgage lending – if the group goes bust. The Swiss-based product and sales hub would also fall under the umbrella of this new structure.
“This will take some years to fully accomplish, but once the changes are in place and are funded with sufficient capital, it will be a positive for the Swiss economy and the taxpayer,” Bank Vontobel head of research Panagiotis Spiliopoulos told swissinfo.ch.
Spiliopoulos added that the organisational revamp, required by Swiss regulators to meet too-big-to-fail laws, should ease the burden on the bank to set aside reserve capital to cover risky assets held on its books.
The legislation, enforced by the Swiss Financial Market Supervisory Authority (FINMA), is tougher than standard international regulations. But it allows for some easing off – or “discount” – of capital requirements if banks present a credible “living will” that allows for an orderly liquidation.
“Splitting the bank into different legal entities and booking business in different jurisdictions should lead to the expectation of a considerable discount from the Swiss regulator, particularly as the government and politicians have been pushing to encourage this reorganisational behaviour for some time,” Spiliopoulos said.
In a statement on Thursday, Credit Suisse said it would also reorganise units in Britain and the United States to cordon off investment-banking business to regions where it originates.
Swiss too big to fail law
Revisions to the Swiss Banking Act – which came into force on March 1, 2012 – imposed tough new measures to reduce the threat to the economy of the largest banks collapsing.
The regulations applied the traditional “Swiss finish” touch, making them more stringent than the globally accepted Basel III standard measures.
The largest banks, originally just UBS and Credit Suisse until they were joined by ZKB in November 2013, must boost their capital reserve buffer to cover between 14% and 19% of their riskiest assets by the end of 2018.
A maximum of 10% of these risky assets must be covered by the most liquid capital that the banks can access at any time. Another 9% (max) can be underwritten by financial instruments, such as contingent convertible (CoCo) bonds, which could be converted to equity if conditions get really bad.
Given that banks have their own internal models for risk weighting assets (that could prove fallible), “too big to fail” banks must also back up at least 4.56% of total assets, irrespective of risk, with a capital buffer that could absorb losses.
Further measures laid down in the laws stipulated that the largest banks must demonstrate that they have diversified risk by reducing interdependencies between business units.
They must also draw up a “living will”, defining how organisational changes would guarantee the survival of vital basic domestic services (such as retail deposits, business and mortgage loans) in the event of a collapse.
The law will be automatically reviewed in 2015.
Credit Suisse’s main rival, UBS, preceded Thursday’s announcement back in October, when it too said it was setting up a new Swiss subsidiary within the same time frame.
But Switzerland’s largest bank has yet to provide the kind of detail that Credit Suisse has made public.
The 2012 too-big-to-fail law for Switzerland’s most important banks was voted in after the government and the central bank were forced to bail out UBS at the height of the financial crisis in 2008.
At the time the law was brought into force, only Credit Suisse and UBS were considered “category one systemically relevant” – in other words, their collapse would prove too much for the Swiss economy to bear.
Earlier this month, Zurich Cantonal Bank was added to the list as it commands a market share of up to 8% in domestic retail deposits, mortgage and business loans.
However, some politicians do not believe the regulations go far enough and have argued for tougher caps yet to be placed on the banking heavyweights.
Recent motions from the centre-left Social Democratic Party and the rightwing Swiss People’s Party both call for a ban on investment banking traders placing market bets for the bank’s own profit using clients’ money.
Both motions also call for big banks to hold back more capital reserves to cover all assets regardless of risk. The Social Democrats go the furthest in demanding a so-called leverage ratio of 10%, up from the 4.5% required by current laws.
Finance Minister Eveline Widmer-Schlumpf waded into the debate last month, stating in a newspaper interview that she supported the beefing up of leverage ratios.
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