Credit Suisse Group AG, Switzerland’s second-biggest bank, plans to fence off its Swiss operations in a separate unit to make it easier to salvage them in a crisis without a taxpayer bailout.
Credit Suisse will divide its remaining businesses between subsidiaries in the U.K. and U.S., and create a unit housing shared services, to address potential rules for too-big-to-fail banks, the Zurich-based company said in a statement today. The plan, to be implemented starting in mid-2015, needs the approval of the Swiss regulator.
UBS AG, Switzerland’s biggest bank, and Credit Suisse can lower their Swiss capital requirements by ensuring they are able to keep providing functions that are systemically important for the country during a crisis. UBS, which needed a government bailout in 2008, said earlier this month it plans to set up a Swiss banking unit because regulations may demand changes to the company’s legal structure.
“We applaud Credit Suisse’s plan,” Panagiotis Spiliopoulos, a Vontobel Holding AG analyst with a hold rating on the stock, said in a note to clients. “While there’s no immediate impact, the group will face slightly lower capital requirements once fully implemented as the Swiss subsidiary will only contain non-investment bank businesses.”
Credit Suisse fell 0.3 percent to 26.11 Swiss francs in Zurich trading, for a gain this year of 20 percent. UBS rose 0.1 percent to 16.59 francs.
Credit Suisse said the moves are in response to evolving rules in Switzerland, the U.S. and Britain. National regulators are imposing rules to protect their own country’s interests, undercutting efforts to develop common global regulations.
The plan addresses the U.S. Federal Reserve’s proposed requirements for foreign banks, Credit Suisse said. The Fed may require the creation of holding companies to house all U.S. assets for foreign banks, while applying to them U.S. rules on capital, leverage and liquidity. In the U.K., the plan addresses developing rules for recovery and resolution, the bank said. The program has been approved by Credit Suisse’s board.
Switzerland has imposed stricter capital and liquidity rules on its largest banks to protect the country from another crisis. The combined assets of UBS and Credit Suisse peaked at more than seven times Swiss gross domestic product in 2006, before the financial crisis led to billions of francs in writedowns and losses.
Credit Suisse’s assets fell to 895.2 billion francs ($978.3 billion) at the end of September from 1.36 trillion francs at the end of 2007, using U.S. Generally Accepted Accounting Principles. UBS’s assets shrank to 1.05 trillion francs from 2.27 trillion francs over the same period, under International Financial Reporting Standards.
The unit in Switzerland would encompass Credit Suisse’s wealth and asset management, retail and corporate and institutional clients businesses. The company last year merged asset management with the private bank and moved its Swiss trading business into the division. This will allow the bank to provide all client services during a crisis.
Two units in the U.K. will be merged into one and form the hub of the company’s European investment-banking operations. The broker-dealer subsidiary in the U.S. will hold U.S.-based operating businesses and, subject to regulatory approval, the U.S. derivatives activities, which are currently booked in London, the bank said. The operating subsidiaries in the three countries will be capitalized locally.
“These changes are designed to both meet future requirements for global recovery and resolution planning and result in a substantially less complex and more efficient operating infrastructure for the bank,” Credit Suisse said.
The current structure consists of a global branch network, mainly for the private-banking business, and three main subsidiaries, used for the investment bank. The new structure will more closely align the booking of investment-banking business to the region where it originated.
The firm had 528.8 billion francs of assets at the investment-banking division at the end of September, compared with 275.4 billion francs at the private banking and wealth management division, which includes all other businesses.
The bank also plans to create a separately capitalized unit in Switzerland, and a unit of the U.S. subsidiary, which will house shared services, including back-office employees for the group, to make sure the company has staff to manage an orderly resolution should a unit run into trouble.
Once the legal framework is agreed upon, the holding company of Credit Suisse plans to issue debt, which could be converted into equity in a crisis. This will allow for a resolution supervised by the Swiss Financial Market Supervisory Authority.
Finma said in a position paper in August that it favors resolution of big banks led by the home regulator, which under its preferred scenario would see creditors participate in losses, allowing the lender to be recapitalized and meet the needs of all units in Switzerland and abroad.
“Credit Suisse’s announcement raises the bar for other large, complex banking groups looking to restructure in the coming years,” Fitch Ratings said in a statement today. “We expect several other large European banking groups to make changes to their structures because of various legal and regulatory requirements to strengthen capitalization and improve their resolvability.”