Study: capital buffers at cantonal banks bigger than needed

Zurich Cantonal Bank is the biggest of the 24 cantonal banks in Switzerland. Keystone / Claudio Thoma

Switzerland’s cantonal banks keep significantly more equity capital than legally required – but unlike for UBS, their capital levels go largely unnoticed.

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A bank’s size is measured by how much money it holds from savers and investors and how much it lends as mortgages and loans. At Swiss cantonal banks, these amounts – also known as total assets – have been increasing by over 3% annually.

Together, the 24 cantonal banks now have total assets of CHF839 billion ($1,074 billion), even more than UBS’s Swiss business (CHF501 billion), as a new study by Zurich-based Independent Credit View (I-CV) shows.

‘Robust capital buffers’

Size can bring risks. But for the cantonal banks, this isn’t currently a problem, say analysts. “They have robust capital buffers,” says Christian Fischer of I-CV. Indeed, the buffers are even much larger than required by law. The biggest cantonal bank, in Zurich, holds 21.2% core equity capital, 11.7% more than necessary. The Schwyz Cantonal Bank has a core equity capital ratio of 22.6% – 13.4% above legal requirements. The Glarus Cantonal Bank, with the smallest buffer, still has 3.1% “excess reserves”.

Fischer says the situation is “completely overcapitalised” – and it’s something many aren’t aware of. If the banks were to reduce their capital buffers, they could use the money to finance new business and generate more revenue, he tells SRF.

Switzerland is familiar with discussions about capital levels, largely due to UBS. Following the Credit Suisse takeover, the government wants UBS to build up a larger buffer. The bank is resistant, and has argued that it already has sufficient capital, and that if it were required to increase it further, its competitiveness would suffer: it would have to set aside the money and wouldn’t be able to put it to work. Moreover, it would become less attractive to investors.

UBS is projected to have a core equity tier 1 capital ratio of 14.4% at the group level in 2025.

Big issue for UBS

But why is the topic of excess capital so hotly debated at UBS, while it’s hardly known at the cantonal banks? Fischer says this is due to the shareholder structure.

“Majority shareholders of cantonal banks are usually the cantons themselves, which don’t focus as much on profitability as UBS shareholders,” he says. Cantonal banks traditionally have a mandate to support the regional economy, not primarily to generate high returns for the cantons. For the cantons, the substantial capital reserves of their banks are also an advantage, as many provide a guarantee in case something goes wrong.

Yet a lot can go wrong – for example, Basel Country’s cantonal bank had to write off an estimated CHF200 million last year because its sustainability bank, Radicant, was not a success. The Graubünden Cantonal Bank also recently made headlines because it is facing a multi-million franc lawsuit over its acquisition of the BZ Bank.

The St Gallen Cantonal Bank meanwhile expanded into Germany over ten years ago. However, its German subsidiary still has tens of millions of francs in accumulated losses on its books. The St Gallen Cantonal Bank states that the business has potential. According to analyst Fischer, banks should be cautious. “These are different markets, these are different risks. The cantonal banks would have been better off sticking to what they know, he says.

Adapted from German by AI/dos