Bloomberg News

Swiss Government Adopts Stricter Capital Rules for Banks

June 01, 2012

The Swiss government has adopted stricter capital and leverage rules for banks, including UBS AG (UBSN) and Credit Suisse (CSGN) Group AG.

UBS and Credit Suisse, Switzerland’s biggest banks, will have to hold equity amounting to at least 4.56 percent of their total assets on the balance sheet and certain off-balance sheet items, the government said in a statement today. The Swiss financial regulator in 2008 gave the two banks until 2013 to boost their capital as a proportion of assets, excluding domestic lending, to at least 3 percent at group level and at least 4 percent for individual institutions.

The leverage requirement is part of a package of so-called too-big-to-fail rules that are being introduced for UBS and Credit Suisse. Under the rules, the banks also have to hold common equity equal to at least 10 percent of their risk- weighted assets and another 3 percent that can be in the form of contingent capital. In addition, the banks have to hold more contingent capital, in proportion to their total assets and market share.

Swiss policy makers are running ahead of counterparts in the U.S. and Europe to make sure UBS and Credit Suisse cut risks and hoard capital to avert the type of banking collapse that hobbled Iceland’s economy. A Swiss government-appointed panel in 2010 rejected proposals to break up the two Zurich-based banks or directly limit their size and activities.

Capital Requirements

The two banks were previously estimated to need to hold total capital equal to 19 percent of risk-weighted assets. This estimate now stands at about 18 percent after the lenders cut assets, Finance Minister Eveline Widmer-Schlumpf told reporters today in the Swiss capital Bern. The too-big-to-fail requirements are planned to be phased in by 2018.

The government today also adopted tougher regulations for mortgage lending and rules that will allow it in the future to raise capital requirements for all banks by as much as 2.5 percent of risk-weighted assets to counter “excess credit growth.” These measures will come into effect on July 1, Widmer-Schlumpf said.

Borrowers will from July have to supply at least 10 percent of the lending value of the property from their own funds without using their pension assets. Mortgages will also have to be paid down to two-thirds of the lending value within 20 years.

Mortgage Demand

“There is no sign of a weakening in the strong demand for mortgage financing, not least due to the exceptionally low level of interest rates,” the Swiss Financial Market Supervisory Authority said in a statement today, adding that an increase in rates may raise the possibility of defaults and falling prices. “When a real-estate bubble bursts, the implications for the country’s financial system can be extremely serious.”

The Swiss central bank last year lowered its benchmark interest rate to zero to bolster the economy. President Thomas Jordan told SonntagsZeitung in an interview published on May 27 that while developments in the property market are giving him a “stomach pain,” with risks of a bubble, borrowing costs will “remain very low for a longer period of time.”

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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