UBS AG and Credit Suisse Group AG need to hold almost double the capital required under Basel III rules, said a Swiss government-appointed panel, proposing the first capital surcharge on too-big-to-fail banks.
Switzerland’s biggest banks should hold total capital equal to at least 19 percent of their assets, weighted according to risk, compared with 10.5 percent level the Basel Committee on Banking Supervision announced last month, the Swiss panel said today. By 2019, the lenders need to hold at least 10 percent of capital in common equity, compared with 7 percent required under Basel III rules, and the rest in contingent capital.
Switzerland, which propped up UBS in the credit crisis, asked the panel of bankers, regulators and other experts to propose ways of avoiding future bailouts. The two banks’ total assets of 2.6 trillion Swiss francs ($2.64 trillion) are more than four times the size of the Swiss economy.
“It’s indispensable that Switzerland imposes tighter rules than other countries,” Peter V. Kunz, head of the business law department at the University of Bern, said before today’s release. “Because of their size, the two big banks pose a bigger threat to Switzerland than the systemically relevant banks in other countries do to their economies.”
The proposals, which have to be endorsed by the government and approved by Parliament, may jump-start the market for contingent convertible bonds, or CoCos. The banks, which said last week their risk-weighted assets may balloon to 400 billion francs each under the Basel III rules, may have to sell as much as 72 billion francs in CoCos to meet the new requirements, according to Bloomberg calculations.
No Share Sales
UBS and Credit Suisse both expect to meet the new capital requirements without having to sell new shares, the banks said today in separate statements. The banks are already required to hold more capital than international rivals as regulators apply a so-called Swiss finish.
“Today’s announcement should bring a relief to the market that the Swiss finish has turned out to be lower than feared and the deadline is in line with the Basel Committee for Banking Supervision recommendation,” Teresa Nielsen, an analyst at Vontobel Holding AG, said in a note.
UBS rose 0.5 percent to 16.75 francs as of 9:15 a.m. in Zurich trading, bringing this year’s gain to 4.5 percent. Smaller rival Credit Suisse climbed 0.6 percent to 42.02 francs.
UBS “is well positioned to fulfill the new requirements and capital regulations within the transitional period and well before the proposed effective date of end of 2018, without raising common equity,” the bank said. Credit Suisse said it’s confident of complying with the new measures “without having to materially change its growth plans or current capital and dividend policies.”
The panel rejected proposals to break up the two Zurich- based banks or directly limit their size and activities, such as proprietary trading.
UBS and Credit Suisse may have common equity ratios of 13 percent and 10.1 percent, respectively, by the end of 2012, JPMorgan Chase & Co. analysts led by Kian Abouhossein estimated last week. Morgan Stanley analysts led by Huw van Steenis today estimated the ratios at 11.3 percent and 8.6 percent, respectively.
The Basel committee on Sept. 12 set the new minimum ratio of common equity to risk-weighted assets for banks from 27 countries at 4.5 percent, plus a buffer of 2.5 percent. The requirement, which has to be met by 2019, compares with the 2 percent minimum ratio under less-strict Basel II rules.
Under today’s proposals, the two banks may need to increase the capital buffer to 8.5 percent. Of that, at least 5.5 percent has to be in the form of common equity, compared with Basel’s 2.5 percent, and the rest can be made up of contingent capital, such as CoCos.
The plan is also the first globally to apply a specific capital surcharge for systemically important banks. The size of this additional capital buffer, currently proposed at 6 percent, can change over time, depending on the ratio of a bank’s assets to the Swiss economy, its market share of domestic lending and how easy it would be to liquidate. All of this cushion should be in the form of contingent capital, the panel said. The first contingent capital buffer should convert into equity once common equity falls below 7 percent of risk-weighted assets. The second cushion could convert at a 5 percent common equity ratio and may be used to support the systemically important parts of a bank’s business, while the rest is wound down in a crisis, the panel proposed. The experts also suggested making stricter liquidity rules for the two banks, which came into force at the end of June, into law.
Switzerland rescued UBS in 2008, investing 6 billion francs to help the bank spin off $39 billion of toxic assets into a Swiss central bank fund. The state sold its UBS holdings for a profit of 1.2 billion francs less than a year later. Credit Suisse declined government assistance.
Switzerland is not alone in addressing the issues of too- big-to-fail banks. The Financial Stability Board, which coordinates the work of national financial regulators on an international level, is due to make recommendations on the topic to the Group of 20 leaders’ summit in November. The U.S. passed a set of financial rules in July, giving regulators new authority to unwind failing financial firms that may threaten the entire system, as well as imposing limits on proprietary trading at banks. The bill, known as the Dodd-Frank Act, also prevents the Federal Reserve from approving bank acquisitions that would result in a firm exceeding 10 percent of the total liabilities of the U.S. banking system and requires regulators to make recommendations on standards for risk-based capital, leverage, liquidity and contingent capital.
The German Cabinet approved in August a so-called bank restructuring bill, which seeks the powers to break up banks in a crisis, saving their systemically important parts and letting the rest fail. The bill, which the government wants to become law in January, also foresees the creation of a bailout fund with contributions from all banks relative to their size and importance to the financial system.
At the height of the credit crunch in 2008, Swiss regulators gave UBS and Credit Suisse four years to raise their risk-weighted capital to as much as double the Basel II requirements. A cap on leverage means the banks must aim to hold capital equal to at least 5 percent of their assets in good times.
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