Amid heightened regulations across the global financial industry in the post crisis era, major Swiss banks may continue to face tougher regulatory requirements. UBS AG (UBS) and Credit Suisse Group AG (CS) should maintain a higher leverage ratio, per a recommendation by a panel of experts set up to review the nation’s financial market strategy.
The experts released a final report on Friday. However, it did not specify any range of the leverage ratio requirement. Leverage ratio is an important metric to asses how sound a bank is financially.
The panel of experts, which was appointed by the Swiss Government in Sep 2013, was set up to analyze the existing structure of the Swiss financial centre and put forward proposals for developing the “financial market strategy”. The group headed by a professor at the University of Bern, Aymo Brunetti, focused on several areas including foreign market access, automatic exchange of information in tax matters and analysis of Swiss too-big-to-fail ('TBTF') rules.
Per the Swiss approach, the going concern leverage ratio for large banks is 3.12%. However, the report highlighted the fact that such a ratio is “barely more than” the minimum requirement of 3%, which is the international standard for all banks including the non-systemically important banks. Also, the ratio is "significantly lower than the future corresponding requirements" of 5% to 6% in the U.S. for systemically important banks ('SIB').
The report mentioned, “Switzerland should be one of the countries with the highest going concern capital requirements for G-SIBs (global systemically important banks). This should be true both of risk-weighted capital requirements and of the leverage ratio.”
The panel put forward its views on fortifying the Swiss TBTF measures and reducing the implied “government guarantee” attached with TBTF banks.
Following the 2008 financial crisis that witnessed the CHF 6 billion bailout of UBS, Switzerland was among the first nations to bring in tougher rules in the financial sector. Gradually, many other countries followed suit and several have surpassed Swiss requirements. The rules are aimed to prevent any further crisis.
Notably, both UBS and Credit Suisse trimmed its balance sheet following the financial crisis and are working on several restructuring initiatives to strengthen the financials, while embracing new rules. Notably, in May 2014, The Swiss Financial Market Supervisory Authority FINMA set revised capital requirements for these two banks, to be achieved by 2019.
The minimum capital requirements as a percentage of risk-weighted assets (RWAs) are set at 19.2% for UBS and 16.7% for Credit Suisse. (Read more : UBS, Credit Suisse See Stricter Capital Requirements)
Bottom Line
The latest recommendations and findings provided by the panel were “broadly welcomed” by UBS. In its response, Credit Suisse was “pleased” that the panel “does not consider a fundamental realignment” of the Swiss TBTF rules.
The Swiss government, which is required to submit its own report on Swiss too-big-to-fail regulation to the parliament by the end of February, will analyze the panel’s report and come to its own conclusions.
We believe any possible enforcement of regulations will put some pressure on the top line of the banking giants in the short run, but it will make them sustainable in the long run.
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