Swiss bankers urge restraint ahead of reforms

Odier (l) congratulates the departing Roth Keystone

The Swiss Bankers Association (SBA) has reiterated warnings to regulators not to clamp down too hard on banks as they finalise sweeping reforms in the coming months.

Speaking at the association’s annual address, SBA chairman Patrick Odier called for “proportionate” regulations that would not be “detrimental to the financial centre and the wider economy.”

This week the Basel Committee on Banking Supervision agreed new rules that would require banks to hold more capital reserves to cover potential losses. The Basel III rules also stipulate that the quality of those reserves must improve – stripping out less stable assets.

A new leverage ratio will be introduced as well to enforce a limit on the amount of trading with borrowed funds.

The committee will also look at imposing further reforms to reduce the risks posed to national economies by so-called ‘too big to fail’ banks, which could bring down companies, jobs and pension schemes if they went bust.

A Swiss report on the same topic is expected out later this month, enhancing expectations of a “’Swiss finish’ – another set of measures above and beyond international standards.

Inflated cushion

Outgoing SBA chief executive Urs Roth said the Swiss banks have long accepted being the recipients of more stringent regulations as their combined assets are worth almost eight times the entire Swiss gross domestic product.

But the SBA is concerned that the latest crop of regulations, to be imposed against the backdrop of the financial crisis, could damage the global competitiveness of Swiss banks.“We have made the point to our regulators to be careful not to throw the baby out with the bath water,” he told swissinfo.ch.

Swiss banks have traditionally been ordered to maintain capital reserves against losses that are 20 per cent higher than international standards.

In 2008, UBS and Credit Suisse were ordered to inflate this cushion twice the level of global recommendations during prosperous times, easing to 50 per cent higher in poor economic conditions.

Roth said that the two big banks could “live with” these tougher conditions. In fact, the wealth management focus of most Swiss banks made it desirable to adopt a safety first approach.

“We recognise that a strong capital base is particularly important for Swiss banks as we rely on the confidence and trust of our customers,” he told swissinfo.ch.

“Wealth management clients put a lot of value on a strong capital basis. This is why Swiss banks have already had in the past a stronger capital base than comparable competitors abroad,” he added.

Risky trading

But the SBA is wary of some voices in Switzerland calling for banks to be kept on a much tighter leash, bonuses to be taxed and for the big two banks to be broken up to reduce the chances of them toppling the economy in the event of another crisis.

“We are strongly opposed to Switzerland going it alone,” said Odier. But he warned that banks must also regulate themselves by establishing strong leadership and effective business models to avoid future pitfalls.

Roth told swissinfo.ch that the two big Swiss banks had made considerable progress on reducing risky positions, by cutting down on proprietary trading. The action of making trades with the bank’s own money for its own profit was cited as one of the reasons that banks fell into such distress during 2008 and 2009.

“We think it extremely important that proprietary trading has been reduced considerably,” Roth pointed out.

“The concentration on the classical advisory business in investment banking sector is key. Some proprietary trading must remain in order to keep the markets going and service clients, but that has to clearly remain constricted.”

Swiss banks may not have to wait very long until they discover the full extent of future regulations. The Swiss ‘too big to fail’ report is due out later this month, while the G20 group of most influential nations will meet to rubber stamp Basel III in November.

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.