UBS Group AG and Credit Suisse Group AG are “on track” to meet Switzerland’s tougher capital rules for the two systemically important banks after improving their capacity to absorb losses, Swiss National Bank (SNB) said.
UBS and Credit Suisse already fully comply with going-concern requirements in terms of risk-weighted assets but still have to improve their loss-absorbing capacity as defined by the leverage ratio, the SNB said in its annual financial stability report. The banks have until 2020 to issue bonds and build capital to
comply with the rules, among the world’s toughest.
Switzerland last year increased the amount and quality of capital the banks have to hold relative to their total liabilities, a measure called the leverage ratio. The regulations impose minimum levels of capital to absorb current operating losses and fund an orderly resolution if necessary, known as going-concern and gone-concern capital respectively.
The rules are designed to help the two banks withstand dire economic and financial conditions. For the first time, the central bank this year considered among its adverse scenarios an extended period of negative interest rates in Switzerland and in the euro area.
Switzerland imposed the first too-big-to-fail rules in 2012 after the government came to UBS’s rescue during the 2008 financial crisis. The combined assets of the two banks amount to almost three times Switzerland’s gross domestic product.
“We welcome that the SNB report recognizes the strong progress we’ve made,” UBS said in a statement. “Our strong capital position is reflected in our funding costs and places us well to deal with a regulatory environment that continues to evolve.”
Over the past 10 years, UBS has decreased its balance sheet by two-thirds and significantly reduced risk while increasing loss-absorbing capital by over 40 percent to 74 billion francs ($76 billion), the bank said.
Some requirements may increase in light of efforts by the Basel Committee on Banking Supervision, which is seeking a compromise on new standards at talks in Sweden today. The international body wants to restrict banks’ use of internal models to evaluate risk, as this has led to inconsistency and undermined confidence in their estimates.
“The SNB supports and is committed to a swift finalization of the Basel III reform,” the central bank said.
UBS had a going-concern leverage ratio of 4.3 percent and Credit Suisse 4.1 percent at the end of the first quarter — less than the new lower limit of 5 percent, according to the report. Credit Suisse completed a rights issue this month, raising about 4 billion francs, lifting its ratio to 4.6 percent, according to the SNB.
Improving capital has been a priority for Credit Suisse CEO Tidjane Thiam. He also tapped shareholders for about 6 billion francs at the start of an overhaul in late 2015 to reduce risk and expand in wealth management.
“We welcome the SNB’s recognition of the efforts we have made to bolster our capital position, including the capital increase which has just been executed,” Credit Suisse said.
The SNB said UBS and Credit Suisse must make more progress in drawing up robust resolution plans. Both Credit Suisse and UBS have carved out separate legal entities in recent years to make them easier to wind down in a crisis and avoid taxpayer-funded bailouts.
When the SNB abandoned its cap on the franc’s strength against the euro in January 2015, it took a cue from the European Central Bank and began charging banks to hold their deposits in an effort to weaken the franc. In its latest rate decision Thursday, the central bank held the so-negative deposit rate at minus 0.75 percent for deposits exceeding a fixed threshold.
While the charges on so-called sight deposits have had no “significant direct impact” on the interest rate margins of domestically focused banks, the impact on private banks — a major pillar of the Swiss financial center — have been significant, the SNB said.
“If interest rates stay exceptionally low, downward pressure on domestically focused banks’ interest rate margins will remain strong,” the SNB said.