Noel Illien and Oliver Hirt
BERN (Reuters) – The Swiss government said on Wednesday that UBS and three other systemically important banks must face tougher capital requirements to protect the country’s broader economy, a year after bailing out Credit Suisse.
In 209 pages of recommendations on how to control banks considered “too big to fail” (TBTF), the Swiss government proposed 22 measures for direct implementation. He did not specify how far the stricter capital requirements would go.
The TBTF plan will come under scrutiny in Switzerland and beyond because if UBS collapses, there will be no local rivals to gobble it up. The bailout and nationalization are likely to cause serious damage to public finances.
“Quantitative and qualitative capital requirements for systemically important banks should be purposefully tightened and supplemented with a forward-looking component,” the government’s summary of recommendations says.
The increase in claims on UBS would be “significant, particularly if UBS maintains its current size and structure or even grows,” the explanatory document said.
UBS shares fell 1.9% at 1230 GMT after trading was briefly halted. UBS declined to comment on the report.
UBS’s Swiss government-backed takeover of Credit Suisse last year was the largest systemic bank merger since the 2007-2009 financial crisis.
Switzerland aims to quickly put these measures into effect and present two packages for implementation in the first half of 2025: one with changes at the regulation level that can be approved by the government, and the other for parliamentary consideration.
UBS’s balance sheet, at about $1.7 trillion, is now double Switzerland’s annual output, giving it exceptional weight for a major economy.
The government has said it rejects the idea of legislating the possibility of temporary state ownership of a bank in crisis.
The report talked about giving more powers to Swiss market regulator FINMA, the possibility of applying capital surcharges and strengthening the financial position of subsidiaries, but stopped short of a “complete increase” in capital requirements.
“It is difficult to reach a definitive judgment on the precise impact of the increase in capital requirements,” it said, noting that they must consider “proportionality” given the competitive pressures Swiss banks face.
“Preference should therefore be given to measures that aim to strengthen the capital requirements of (systemically important banks) and increase their transparency, and that provide clarity and room for maneuver in a crisis, even in the case of complex banking structures,” the government said. the report says.
The tightening of rules comes amid increased scrutiny of Switzerland’s banking culture. The lower house of parliament last month backed a proposal to return senior executives’ salaries if the banks were bailed out with public money.
The government’s TBTF report said it would also consider bringing back bonuses.
Analysts predict UBS may have to find billions of extra dollars to hedge against the risk that it too could collapse, but that process is likely to take time as the government has said it will await the outcome of a parliamentary inquiry into Credit Suisse . demise.
This will happen no earlier than the end of 2024.
INTERNATIONAL CONCERN
Ahead of the report’s release, international organizations expressed concern about the giant bank merger and its consequences, including the IMF and the OECD.
The Financial Stability Board, a global financial watchdog, also warned Switzerland about the risks of UBS failing.
The FSB intends to review its rating of UBS on its list of global systemically important banks following the takeover of Credit Suisse, which is due to complete later this year. Moving up a notch will increase the demand for capital.
Switzerland’s lower house of parliament last year backed a proposal calling for systemically important banks to have a leverage ratio of 15% of assets, far higher than the European Union, US and UK.
Analysts do not expect such stringent conditions to be imposed on UBS, which currently has a Tier 1 common stock ratio of 14.5%, or $79 billion, equating to a leverage ratio of 4.7%.
“There needs to be a targeted implementation of the proposed measures for systemically important banks, and in part specifically for UBS as the only remaining global systemically important bank in Switzerland,” the government said.
Higher capital requirements could force UBS to shrink its balance sheet and reduce its loan supply, experts say.
UBS executives warn that excessive capital requirements will ultimately harm consumers, and banking industry insiders say the bank is lobbying officials.
Finance Minister Karin Keller-Sutter said last year that tougher capital requirements were coming, but also said it was important not to damage Switzerland’s ability to compete with financial centers such as New York, London, Singapore and Dubai.