Compliance

Swiss Regulator Sets Out "Too Big To Fail" Standards For UBS, Credit Suisse

Tom Burroughes, Group Editor, London, 8 May 2014

articleimage

Switzerland’s two biggest banks have been issued with decrees from the country’s financial watchdog on “too big to fail” requirements.

Switzerland’s two biggest banks, which have both announced first-quarter results in recent days, have been issued with decrees from the country’s financial watchdog setting out “too big to fail” requirements, an issue that arose when major banks – such as UBS – had to be bailed out by taxpayers in the 2008 crash.
 
The “too big to fail” – or TBTF – regime sets out capital rules on “systemically important banks” (a term applied to banks that are so large that their failure would pose serious risks to the overall financial system).

Based on the 2012 year-end figures the decrees have set out for the first time the total capital requirements that vary for both banks depending on their size and national market share.

(Editor’s note: It is understood that although the data for end-2012 is, by definition, out of date and the banks’ figures have changed, the statement was issued to spell out the kind of standards that the regulator wants to enforce.)

Assuming no change for both banks in subsequent years, the minimum capital requirement for UBS would be 19.2 per cent and 16.7 per cent for Credit Suisse of their risk-weighted assets in 2019. The second capital requirement, an un-weighted leverage ratio, would amount to 4.6 per cent (UBS) and 4.0 per cent (Credit Suisse), the Swiss Financial Market Supervisory Authority said in a statement yesterday.

Swiss banks typically have tougher capital requirements than set out for the world’s largest banks under Basel III rules. When the 2008 financial crisis broke, UBS, which had huge losses stemming from the collapse in the US sub-prime mortgage market, received public funds as part of a bailout (this money has been since repaid). Credit Suisse did not receive a bailout. In a country priding itself on its financial health the shock of the UBS situation was profound causing political controversy and calls for reform. UBS has since significantly wound down its investment banking exposure. 

The “too big to fail” issue concerns what happens when a bank’s exposures are so large that their failure would bring down an entire economic system. This issue has prompted policymakers around the world to consider ideas such as splitting banks apart, including putting distance between their retail arms and investment banking arms. It is debatable whether the banking system has changed significantly in this respect since 2008.

FINMA said the difference between both banks in terms of the capital requirements is due solely to Credit Suisse's “much smaller market share in the domestic credit business as can be deducted from the data available”.

“Considering the current efforts by banks to reduce their balance sheet and the likelihood of potential changes in their market share, it is not unreasonable to assume that the 2019 capital requirements will drop,” FINMA said in its statement.

In their first quarterly reports for 2014 the banks have recently complied with their disclosure requirements in line with the rules set out by FINMA, it said.

Register for WealthBriefing today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes