Swiss banks must increase the amount of capital they set aside to deal with future financial shocks, the country’s central bank said in a report on the lessons from massive losses sustained by banks due to the credit crunch.

In particular, the Swiss National Bank said that risk-weighted capital requirements should be tightened for Swiss banks and a minimum capital-to-assets ratio should be set, the SNB said in its Financial Stability Report.

A move to create a floor for any capital-to-assets ratio would “be an effective means of further strengthening the resilience of the two big banks to shocks”, the report said, referring to Credit Suisse and UBS.

“Making the financial system more resilient to shocks means the size of capital and liquidity has to be increased….According to the Swiss Federal Banking Commission, the best insurance against an unacceptable risk of [bank] failure is to have a capital base far in excess of the international minimum requirements,” the report said. (The SFBC is the country’s financial sector regulator).

UBS and Credit Suisse have been hit by losses sustained as a result of the drop in the US housing market and the associated losses in often complex mortgage-backed securities and derivatives. UBS, in particular, has suffered badly. To date, it has booked write-downs of $37 billion. The firm has recently held a $15.4 billion rights issue to increase its financial strength.

Neither UBS or Credit Suisse commented on the SNB's report when contacted by WealthBriefing.

At present, banks are obliged under a set of complex rules known as Basel II - because they were drawn up in the Swiss town of that name – to maintain a set level of capital dependent on how risky a bank’s exposures are.

A difficulty for regulators and banks has been to calculate the risk posed by complex financial products such as collateralised debt obligations, which are packages of loans and bonds of varying levels of financial strength. The credit crunch raised the issue of whether many CDO were, or could be, accurately valued in a fast-changing market environment.

The SNB said it was vital to strengthen Swiss banking because the financial sector accounted for at least 10 per cent of the country’s gross domestic product.