Swiss banks on track to meet tougher capital rules

ZURICH • UBS and Credit Suisse are "on track" to meet Switzerland's tougher capital rules for the two systemically important banks after improving their capacity to absorb losses, the country's central bank said.

Both already fully comply with going-concern requirements in terms of risk-weighted assets but still have to improve their loss-absorbing capacity as defined by the leverage ratio, the Swiss National Bank (SNB) said in its annual financial stability report.

The banks have until 2020 to issue bonds and build capital to comply with the rules, among the world's toughest. Switzerland last year increased the amount and quality of capital the banks have to hold relative to their total liabilities, a measure called the leverage ratio. The regulations impose minimum levels of capital to absorb current operating losses and fund an orderly resolution if necessary, known as going-concern and gone-concern capital respectively.

The rules are designed to help the two banks withstand dire economic and financial conditions. For the first time, the central bank this year considered among its adverse scenarios an extended period of negative interest rates in Switzerland and in the euro area.

Switzerland imposed the first too-big-to-fail rules in 2012 after the government came to UBS' rescue during the 2008 financial crisis. Combined assets of the two banks amount to nearly three times Switzerland's gross domestic product.

UBS said in a statement: "Our strong capital position is reflected in our funding costs and places us well to deal with a regulatory environment that continues to evolve."

Over the past 10 years, UBS has decreased its balance sheet by two-thirds and significantly reduced risk while increasing loss-absorbing capital by over 40 per cent to 74 billion francs (S$105 billion), the bank said.

Some requirements may increase in light of efforts by the Basel Committee on Banking Supervision, which is seeking a compromise on new standards at talks in Sweden today.

The international body wants to restrict banks' use of internal models to evaluate risk, as this has led to inconsistency and undermined confidence in their estimates. "The SNB supports and is committed to a swift finalisation of the Basel III reform," the central bank said.

Improving capital has been a priority for Credit Suisse chief executive officer Tidjane Thiam. He also tapped shareholders for about 6 billion francs at the start of an overhaul in late 2015 to reduce risk and expand in wealth management.

The SNB said UBS and Credit Suisse must make more progress in drawing up robust resolution plans. Both Credit Suisse and UBS have carved out separate legal entities to make them easier to wind down in a crisis and avoid taxpayer-funded bailouts.

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A version of this article appeared in the print edition of The Straits Times on June 16, 2017, with the headline 'Swiss banks on track to meet tougher capital rules'. Print Edition | Subscribe