04/10 Switzerland Proposes Tougher Rules for Its Biggest Banks

October 4, 2010
By JACK EWING

FRANKFURT — A Swiss government panel Monday proposed rules that would require the nation’s two big banks, UBS and Credit Suisse, to hold more capital in reserve than international competitors as a way to provide extra insurance against a catastrophic failure.

The rules, which require approval by the Swiss parliament, address concerns by the Swiss National Bank and others that a severe crisis at Credit Suisse or UBS could prove more than the nation of 7.8 million people could bear. The two banks’ combined balance sheets are five times the size of the Swiss economy.

“Given their size, it cannot be ruled out that the big Swiss banks are potentially T.B.T.B.R.,” or too big to be rescued, the Commission of Experts said in a report. The commission, which was appointed by the Swiss Federal Council, included representatives of the central bank as well as industry and the two big banks.

Credit Suisse and UBS said in statements that they will be able to meet the requirements, which by the end of 2018 would require them to maintain low-risk reserves equal to 10 percent of their total assets. That is a higher reserve requirement than was proposed for global banks last month by the Basel Committee on Bank Supervision.

Switzerland’s decision to hold its big international banks to a higher standard could alarm some in the industry, who have expressed fear that countries will use the so-called Basel III proposals merely as a starting point to impose onerous new requirements on banks.

With its banking tradition and reputation for prudence, Switzerland could also serve as an influential precedent for other governments which are rewriting their banking rules. However, analysts said that the proposed Swiss rules are not as strict as some in banking circles had feared.

“These are at the better end of expectations and hence should be a positive catalyst for the shares,” Jon Peace, a banking analyst at Nomura Global Equity Research, said in a note Monday.

“The proposed measures will strengthen the stability of the financial system,” Credit Suisse, based in Zurich, said in a statement. “They also represent an appropriate solution to the ‘too big to fail’ problem relating to the big banks without compromising their international competitiveness or that of the Swiss financial center.”

The rules would require the two big Swiss banks to hold so-called common equity, the most durable form of capital, equal to 10 percent of their risk-weighted assets, or assets whose value has been adjusted according to how risky they are. The more reserves a bank has, the more it is able to absorb losses if the value of its holdings declines or its customers cannot repay loans.

The Swiss proposals also set up sliding scales that would automatically increase the reserve requirements for banks as their assets grow or they acquire more market share.

Under the formula, Credit Suisse and UBS would be required to hold another 9 percent in reserves, for a total of 19 percent. But the additional 9 percent could be in the form of so-called contingent convertible bonds: debt that banks issue that automatically converts to equity in time of a crisis, so that it can be used to cushion losses.

Mr. Peace of Nomura noted that it is unclear whether anyone will want to buy such bonds. The 9 percent ratio “is at the high end of market expectations,” he said, “and could be a cause for concern given that such a market does not really exist today.”

The Basel rules would require banks to hold a ratio of 7 percent common equity to risk-weighted assets, up from as little as 2 percent currently.

Both sets of proposals would give banks until the end of 2018 to comply.

However, the Basel rules could wind up being similar to the Swiss rules as they apply to big or highly interconnected institutions, whose failure would threaten the financial system or the economy.

A separate panel known as the Financial Stability Board, which is working in concert with the Basel Committee, is considering stricter rules for such institutions.

The Swiss National Bank already rescued UBS once after the bank lost 46 billion Swiss francs, or $47 billion, from the end of 2007 through 2009. The report Monday noted that the S.N.B. ultimately made a profit of 1.2 billion francs on the support it provided to UBS.

Smaller banks in Switzerland would not have to hold as much capital in reserve as Credit Suisse and UBS.