Big Swiss banks face tougher capital rules

4th October 2010, Comments 0 comments

Swiss government-appointed experts on Monday sought tougher capital standards for Switzerland's biggest banks, UBS and Credit Suisse, that far exceed new international "Basel III" regulations.

"Compared with the minimum requirements of Basel III, the Commission's proposals require the big banks to hold around 40 percent more common equity and around 80 percent more total capital," said one of the experts, Swiss central banker Thomas Jordan.

"The proposals ... combined with the improvements under the Basel III framework (would) ... directly reinforce their stability," he added.

Analysts worldwide have been on the lookout for such domestic proposals after regulators in Britain and the United States signalled that they might also seek tougher standards than Basel III as well.

The Swiss commission of experts said the difference between its proposals and the international standards, which are up for approval at a Group of 20 nations (G20) summit next month, would narrow "if the international minimum is increased by means of a surcharge for systemically important banks."

The experts from the central bank, regulator, ministries and banks recommended in a report that the capital ratio for the two big Swiss banks should amount to a total of 19 percent of risk-weighted assets, including 10 percent in high-quality common equity.

The Swiss central bank and the Financial Markets Authority (FINMA) welcomed the proposed top-up and said it should be implemented swiftly.

"The Swiss National Bank and FINMA regard it as absolutely essential that the committee's proposals are implemented in their entirety," they said in a joint statement.

The commission estimated that the two big banks would be required to set aside a total of about 75 billion Swiss francs (56 billion euros, 77 billion dollars) each, or five percent of their balance sheet.

But it insisted that the economic benefits of the proposals, which would be phased in in the same timeframe as Basel III between 2013 and the end of 2018, would outweigh the costs.

Credit Suisse and UBS are regarded as "too big too fail" because of their size and influence on the Swiss economy.

UBS, then the biggest of the two, had to be shored up during the financial crisis by a multi-billion dollar state rescue package.

The Basel III rules drawn up by central banks and regulators in the wake of the collapse of banks during the financial crisis will be submitted to the G20 summit of major industrialised and developing nations in South Korea in November.

Their rule for high-quality common equity is 7.0 percent, up from the current 2.0 percent.

Credit Suisse and UBS signalled that they were prepared to meet the higher Swiss hurdle.

"Credit Suisse believes that, despite these very tough measures, it can meet the new requirements within the prescribed timeframe," the bank said.

UBS said it was "well positioned to fulfil the new requirements and capital regulations within the transitional period and well before the proposed effective date of 2018, without raising common equity."

The Swiss commission also advocated measures to guarantee payments, deposits and lending if a big bank becomes insolvent, with a trigger mechanism if the bank's capital ratio falls below a particular threshold.

Commission member Patrick Raaflaub, of FINMA, said the report aimed to ensure that a big bank could slide into bankruptcy "without major harm for the sector or the economy."

Analyst Teresa Nielsen of Vontobel bank said the additional Swiss proposals were "less severe than expected."

UBS's share price fell by 0.5 percent while Credit Suisse rose by 0.4 percent.

© 2010 AFP

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