It wants them to raise their common equity ratio – measuring the ability to absorb losses on investments – to 10%.
This is higher than a new international requirement of 7%, although the banks have been given until 2018 to comply.
The two banks together have liabilities that are more than four times the Swiss economy’s entire annual output.
The Swiss “expert commission” is also recommending that the total capital ratio of the banks – a broader measure that includes debts that can be converted into equity – be raised to 19%.
Again, this is much higher than the international standard agreed by the Basel committee of central bankers, which sets the bar at only 10.5%.
The higher levels required by the commission reflect the sheer enormity of the two banks, and the threat a failure by either one could pose to the Swiss economy.
“The measures will strengthen the long-term resilience and competitiveness of the Swiss financial centre,” said Philipp Hildebrand, chairman of Switzerland’s central bank, which was represented on the commission.
Higher global standards?
The Basel committee on international banking standards has previously said that it too will set higher global requirements for lenders that are deemed “too big to fail”.
Regulators are afraid that the failure of such large banks would cause a crisis for the entire global financial system, akin to the failure of Lehman Brothers in 2008.
The details of any international minimum standards – which are likely to affect big UK banks such as Barclays and HSBC – are still being hammered out between its member countries.
However, the move by Switzerland may provide some indication of what the new international minimum for “too big to fail” banks may turn out to be.
An important innovation in the Swiss recommendations are contingent convertible bonds (“Coco bonds”).
These are debts of the bank that would immediately convert into equity – shares in the bank – if the bank breaches the minimum common equity ratio required by regulators.
In this way, the Coco bonds would automatically top-up the banks’ capital buffer against losses.
The new type of debt would count towards the banks’ total capital ratios.
The commission also made recommendations on other issues, including how much cash the banks should keep back for crises, and how their possible bankruptcy could be made simpler and less disruptive.
The new capital ratios are lower than had been speculated in the Swiss financial press, and were greeted positively by markets.
Share prices in Credit Suisse and UBS rose on the news, by 1.5% and 0.7% respectively, before falling back again in a general market sell-off.
UBS has previously indicated that it may need to skip paying dividends for two years in order to meet capital requirements.
But Credit Suisse – which was less hard hit by the global financial crisis than its rival – said that it thought it would not need to cut dividends or issue new shares to meet the new standards.
It claimed already to have a total “tier 1” capital ratio of 16.3% as of July.
“[The bank] will be able to comply with these new measures without having to materially change its growth plans or current capital and dividend policies,” said Credit Suisse in a statement.
Instead, the banking group would rely on the accumulation of surplus profits not paid out as planned dividends, as well as issuing Coco bonds. – BBC