The “Swiss finish” to Basel III banking reforms have set tougher standards for Swiss banks, which must wait and see if they turn out to be an advantage or a burden.This content was published on October 5, 2010 - 08:12
The G20 meeting of the world’s most influential nations has yet to agree on the Basel III proposals, let alone impose more stringent rules to protect economies from collapsing banks. Individual countries are also plotting their own regulatory course.
In the midst of the uncertainty, Swiss banks UBS and Credit Suisse say they can meet the requirement to set aside 80 per cent more capital than international competitors to cushion against potential losses.
Shares rose for both banks on Monday after Swiss regulators announced their proposals to combat the spectre of a bankrupt institution dragging down the national economy.
Switzerland has long required its biggest banks to adopt a larger safety net against bad risks than other countries. But Monday’s announcement has opened up the gap even further, leading some to fear that Switzerland may have gone too far.
Follow the leader?
The Swiss Bankers Association (SBA) welcomed the regulators’ proposals to further bolster capital reserves, but it warned that other countries had to follow Switzerland’s lead.
“With a view to preventing the international competitiveness of [UBS and Credit Suisse] from being impaired, the SBA expects the relevant Swiss authorities to ensure that international standard-setting bodies implement measures that are similarly strict and far-reaching,” it said in a statement.
The Swiss Business Federation, economiesuisse, also voiced concerns that the G20 meeting in November might not reach agreement about steering a tough course.
Bankers in Germany, Denmark and France have already complained that the current Basel III proposals are too rigid. By contrast, the United States has pushed for tougher reforms, but has also passed its own extensive banking regulations and did not adopt the current Basel II rules.
“The proposed Swiss regulations have sent a clear signal to the world that Swiss banks are the safest in the world,” economiesuisse chief economist Rudolf Minsch told swissinfo.ch.
“But our main concern is that the Basel III regulations might not be taken on by some countries. If there is a reluctance to implement them, then the difference between the Swiss finish and other financial markets becomes rather large.”
Mind the gap
Until now, global regulations have effectively mirrored Switzerland’s lead. As early as 2008, Swiss regulators imposed capital requirements on UBS and Credit Suisse that were largely adopted by the Basel III proposals when they were announced last month.
But the global financial regulatory landscape does look rather fragmented at the moment. German banks have been very vocal against some elements of Basel III, Britain has gone in the opposite direction by hinting it may apply its own tougher finish, while countries such as Greece or Ireland are still battling severe economic problems.
However, banking analysts share the same confidence as the Swiss financial regulator that it is only a matter of time before the rest of the world catches up with Switzerland.
“At the moment the Swiss finish looks very tough compared with the recommended Basel III regulations,” Zurich Cantonal bank analyst Andreas Venditti told swissinfo.ch.
“But the Basel commission is trying to find global agreement on additional measures to tackle systemic risk. When we have the Basel III systemic risk add-on, the difference between Swiss and global regulations will be smaller.”
Bank Sarasin analyst Rainer Skierka said tougher rules were aimed more at investment banking, while Switzerland’s prized private banking business would benefit from a crackdown on risky financial transactions.
“For wealth management in general, and Switzerland in particular, improving the quality of core capital requirements is a big plus because this is what investors are looking for at the moment,” he told swissinfo.ch.
All the more reason, according to economiesuisse, that Switzerland should set a good example to the rest of the world by passing the Swiss finish proposals through parliament next year.
But even that may not be so easy with various political parties espousing additional rules, such as a crack-down on bonuses. Rudolf Minsch believes the proposals as a whole should be passed without changes to avoid disrupting the delicately balanced package.
“We have serious concerns that the parliamentary debate could be driven by party political concerns rather than by the facts alone,” he told swissinfo.ch.
Under the requirements of the proposed Swiss Finish, UBS and Credit Suisse must put aside a bigger buffer to cover their risks.
The proposed new global regulations, Basel III, demand a buffer of 7% of risky assets.
UBS and Credit Suisse must build their safety net to 19%, 10% of which are in the form of the safest and most liquid equity and 9% in coco bonds.
This comprises a first tier of capital (4.5% of risk weighted assets held in the highest quality, most liquid equity) that 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.
These new bonds would allow the banks to raise money from the private sector in exchange for shares at a pre-set trigger point if conditions deteriorate.
There are also limits on the amount banks can borrow to fund trading activities.
The Basel III banking reforms were presented last month as a global blueprint to help reduce the risk of another financial crisis.
They recommended that banks hold back at least 7% of their capital to cover risks. Other recommendations include limits to the amount banks can borrow to effect trades and the need to reduce the risk of large banks bringing down economies if they fail.
Britain’s regulator, the Financial Services Authority, has publicly hinted that it will seek to impose extra requirements on how much capital large banks must set aside. Observers believe British too-big-to-fail banks would face similar rules to the Swiss finish.
A package of reforms passed in the US in July stopped banks that operated deposit accounts from speculating with their own money or investing in hedge funds. A commission will be set up to take control of failing banks while the trading of derivatives will be more closely regulated.
President Barack Obama is also pushing for a tax on banks that would net $90 billion (SFr88 billion) within ten years.
In June, Britain imposed a super tax on banks that is expected to net £2 billion (SFr3.1 billion) a year. This followed a one-off tax on excessive bank bonuses.
France and Germany are also set to impose similar taxes designed to claw back tax payers’ money that was used to bail out banks.
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