Skiplink Navigation

Main Features

Swiss banks get stricter rules than Basel III

Will UBS and Credit Suisse remain competitive?


Big Swiss banks UBS and Credit Suisse must hold almost twice as much capital as set out in the new international Basel III standards, a report has said.

The government’s “too big to fail” commission said on Monday that the move would limit the risk that a bank failure would drag down the economy.

The commission was set up in the wake of the financial crisis and the government bail-out of the troubled bank UBS in 2008.

Made up of top regulators, bank executives and other industry experts, the group said that the two banks would hold at least ten per cent of risk-weighted assets, based on new global standards (Basel III), in form of common equity.

In addition, the banks should hold another nine per cent, which could be contingent convertible (CoCo) bonds, taking the current total capital requirements to 19 per cent.

CoCo bonds in effect represent a type of insurance policy that shifts the burden of bailing out struggling banks away from the taxpayer and into the private sector.

Holders of these bonds commit themselves to buying shares from banks when things start to get really bad. This would guarantee banks a vital cash injection just when they need it.

The new Swiss rules go well beyond the Basel III regulations, agreed last month, which require banks to hold a minimum of seven percent in the form of common equity.

These measures, yet to be rubber stamped later this year, are designed to help prevent another global financial crisis.

In terms of the Swiss rules, the two banks would have an end of 2018 deadline which is in line with the deadline for the new global rules, the commission said.

World playing catch-up

“The measures will strengthen the long-term resilience and competitiveness of the Swiss financial centre,” commented Swiss National Bank chairman Philipp Hildebrand.

But the Swiss Bankers Association (SBA) urged Swiss regulators to push the rest of the world into adopting additional measures to tackle the "too big to fail" issue.

The G20 group of most influential global countries meets in November to discuss whether to beef up Basel III to lessen the risk of big banks bringing down national economies if they collapse.

"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," the SBA said in a statement.

Patrick Raaflaub, director of the Swiss Financial Market Supervisory Authority (Finma), expressed his confidence at a press conference on Monday that other countries would follow Switzerland's lead.

Swiss banks confident

Both big banks said on Monday that they were confident they would meet “too big to fail” requirements in the stipulated timeframe.

The banks have in the past said they would meet the international requirements through retained earnings, although UBS has said it would probably not pay out dividends over the next couple of years.

Experts say the eagerly-awaited report should be a blueprint for future Swiss banking regulations.

However, the government still has to discuss it and the report still needs to go through parliament.

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". The Swiss have also been at the forefront of pushing for new global standards.

No break-up rules

The focus of the commission's report is on UBS and Credit Suisse as systemically relevant banks, which still hold more than four times the country's gross domestic product of $540 billion (SFr528 billion) in liabilities on their balance sheets.

Swiss banks already have to meet stricter requirements for capital and liquidity then their global peers, and regulators, in particular the Swiss National Bank, had left no doubt that rules would be tightened beyond international minimum standards.

The new rules may crimp the two bank’ ability to compete in the field of investment banking, analysts said. Swiss regulators want them to focus more on less risky private banking.

The commission said both banks should be organised in a way that would allow for the break up of parts that are relevant for the functioning of the economy in case of insolvency.

But it was up to banks to find the right structure, and regulators would only order structural changes if the banks failed to come up with a convincing framework themselves.

Swiss Finish

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% in the form of the safest and most liquid equity and 9% in 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.

end of infobox

Too big to fail

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.

end of infobox and agencies

Neuer Inhalt

Horizontal Line

Survey Swiss Abroad

Survey: Keyboard and Hand close-up

advent calendar

subscription form

Form for signing up for free newsletter.

Sign up for our free newsletters and get the top stories delivered to your inbox.

Click here to see more newsletters