UBS AG and Credit Suisse Group AG should further boost the capital they hold as a share of total assets to gird for risks including litigation, the Swiss central bank said today.
“The loss potential for the Swiss big banks -– estimated under the different adverse scenarios considered -– continues to be substantial relative to their capitalization,” the Swiss National Bank said in its annual financial stability report. “In addition, irrespective of the scenario considered, losses can also result from operational and legal risks.”
Credit Suisse paid $3.7 billion this year to settle legal cases in the U.S. over helping Americans evade taxes and the sale of mortgages to Fannie Mae and Freddie Mac. The bank said last month the fines in the U.S. tax case will cut its common equity ratio to 9.3 percent from 10 percent at the end of March. That’s the lowest among 17 global investment banks tracked by Bloomberg Industries.
UBS may face fines of 6 billion francs ($6.7 billion) to 9 billion francs for involvement in alleged manipulation of the currency markets, which would reduce its common equity ratio by at least three to four percentage points, Stefan Stalmann, an analyst at Autonomous Research, estimated this month. UBS’s common equity ratio rose to 13.2 percent at the end of March, surpassing the bank’s target.
The SNB said it welcomes “the significant progress” made by banks to improve their capital. Their risk-weighted capital ratios are above average for large globally active banks, though the same cannot be said for their leverage ratios, which measure the amount of capital to total assets, the SNB said.
UBS rose 0.7 percent to 17.52 Swiss francs by 9:03 a.m. in Zurich, while Credit Suisse gained 0.6 percent to 27.41 francs.
UBS said last month its Swiss leverage ratio, for which it expects to have a 4.2 percent requirement in 2019, rose to 3.8 percent at the end of March from 3.4 percent at the end of 2013. Credit Suisse, which expects its leverage ratio requirement to be 4 percent in 2019, reported that ratio at 3.6 percent after charges for the U.S. tax investigation settlement.
The Swiss requirements for leverage and risk-weighted capital ratios depend on considerations including the banks’ size and the ease of winding them down in a crisis.
“A further strengthening of resilience -- particularly in the form of improved leverage ratios -- is necessary,” the SNB report said. “Improving the leverage ratio, including in an international comparison, is of particular significance given that the ratio is gaining in importance as a measure of banks’ resilience and that, as experience has shown, it can quickly become the focus of market attention during a crisis.”
The SNB also urged banks to improve transparency on the way they assign risk weightings to different assets. The banks have provided data to the Swiss Financial Market Supervisory Authority, which, with the support of the SNB, is analyzing the internal models for risk weightings the banks use and how those differ from a standardized approach, according to the report.
“The analysis will focus on the question of whether, and why, RWA based on banks’ internal models differ from those based on the model-independent standardized approach,” the SNB said. “Differences must be well explained and have a sound economic rationale. If the model-based approach systematically results in RWA which are inexplicably lower than under the standardized approach, corrective measures would need to be considered.”
Those measures could entail setting a floor for risk-weighted assets based on internal models or applying a multiplier on risk weights for specific assets, the central bank said.
The SNB said it analyzed banks’ resilience using four different stress scenarios. It found the highest total loss potential for UBS and Credit Suisse from a re-escalation of the euro-area debt crisis, followed closely by a “deep recession” in the U.S. and a “major crisis” in emerging markets. The fourth scenario assumed falling real estate and share prices coupled with an increase in interest rates and economic stagnation in Switzerland.