Big Swiss banks still overexposed to risk

19th June 2009, Comments 0 comments

The Swiss National Bank calls for stronger regulation in their 2009 Financial Stability Report.

Geneva -- Switzerland's central bank on Thursday warned the country's biggest banks were still exposed to the global slump as it sought stronger international regulation to stabilise the sector.

The warning in the Swiss National Bank's 2009 Financial Stability Report came after the collective profits of Swiss banks dropped by 40 percent in 2008 and the number of banks that made losses quadrupled compared to 2007.

The SNB said the stability of the whole Swiss banking sector would be threatened if the economic recession turns out to be deeper and longer lasting than expected.

Without naming UBS and Credit Suisse, the top two, it called on the big banks to improve their resistance by strengthening their capital base, cutting in their risk and adjusting their costs.

Despite the measures taken in 2008 to cut their risky investments and the overall size of their portfolios, "the big banks' overall risk exposure continues to be material," the central bank said.

"In addition to the still-sizeable market risks, they face a marked increase in credit risks as a result of the economic downturn," it added.

"Their overall risk exposure appears material not only in absolute terms but also relative to their ability to absorb future losses."

Although it forecast a stabilisation of financial markets and a gradual economic recovery in 2010, the Swiss central bank said it still expected a "sharp deterioration" in credit quality in the short- and medium-term.

Further price changes should also be expected in some European property markets and the two features combined could make "substantial loan losses" and lower bank earnings likely, as well as undermine capital.

In December 2008, the Swiss financial markets supervisor (FINMA) imposed stronger capital requirements on UBS and Credit Suisse, even though domestic standards were already tougher than international norms.

While it supported those measures, the national bank said Thursday that "additional steps will be needed.

"Therefore the SNB is working at the international level for sounder capitalisation of large, systemically important banks," the report added.

The international Financial Stability Board, which was strengthened in response to the crisis, is due to hold its first meeting of central bankers, national regulators and officials in the Swiss city of Basel on  26 June.

On Wednesday, US President Obama proposed a radical overhaul of financial supervision in the United States, a message picked up in Britain the same day.

The SNB report emphasised that Switzerland's smaller retail and regional banks were in better shape and more resilient to the downturn.

"The situation of the big banks appears to be more difficult," it said. A worse-than-expected recession and renewed turmoil on financial markets "would constitute a considerable threat to the stability of the Swiss banking sector."

The profits of the 327 Swiss banks fell by CHF 8.4 billion (EUR 5.6 billion, USD 7.8 billion) in 2008, according to SNB statistics.

The number of Swiss banks which recorded an outright loss grew from 11 to 43, for total losses of CHF 38.9 billion compared to CHF 4.3 billion in 2007.

In 2008, Switzerland injected CHF 6 billion into the country's biggest bank, UBS, as part of a massive state aid package, with some USD 39 billion worth of UBS' illiquid assets placed in a special fund.

On Thursday, the SNB also decided to leave its key interest rate unchanged at a historic low as it sought to improve the economy.

Peter Capella / AFP / Expatica

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