- Credit Suisse, UBS tried to steer Swiss away from U.S. rules
- Ermotti says approach costly, compares `apples with potatoes'
Switzerland’s finance ministry is asking the country’s biggest banks to comply with a too-big-to-fail rule modeled on U.S. standards after rejecting requests from UBS Group AG and Credit Suisse Group AG for easier terms, according to people briefed on the deliberations. The shares fell.
The ministry will demand that lenders have capital equal to about 5 percent of total assets, in line with the U.S. leverage ratio for its biggest banks and above the 3 percent minimum set in a global agreement by the Basel Committee on Banking Supervision, according to the people, who asked not to be identified because the talks aren’t public. The Swiss government will also align its calculation of the ratio with the method employed in the U.S., resulting in fewer types of debt counting toward capital, one of the people said.
The leverage ratio has gained importance as a measure of financial strength since the 2008 crisis. UBS and Credit Suisse had argued that the Swiss financial system isn’t comparable with the U.S., where lenders benefit from deeper capital markets. To meet the new targets the banks will need to add billions of equity to their buffers or shrink their activities.
“Higher requirements mean that the banks will have fewer funds to return to shareholders,” said Andreas Brun, a Zurich-based analyst at Zuercher Kantonalbank. “For UBS, whose investment case is based on rising dividend expectations, this is a big issue. For Credit Suisse, whose capital situation is worse, this means a higher dilution because of a bigger requirement of a capital increase.”
UBS shares dropped as much as 3.5 percent in Zurich trading today and were down 1.2 percent at 1:10 p.m. Credit Suisse declined as much as 3.9 percent and was down 1.7 percent.
A government-appointed expert panel recommended in December that Switzerland follow the lead of the U.S., which in recent years has introduced some of the world’s toughest capital requirements. Zurich-based UBS and Credit Suisse reported Basel III leverage ratios of 3.6 percent and 3.7 percent at the end of the second quarter, indicating they would be more than 1 percentage point short of the new target. These numbers include additional Tier 1 securities.
Mario Tuor, a spokesman for the government, declined to comment on the number.
The banks are aware of the government’s position and will be able to factor it into calculations of their future capital needs for their third-quarter earnings reports, three people said.
Leverage ratios have gained favor among regulators as the most effective way to evaluate a bank’s robustness because the method doesn’t involve estimates of risks on their activities.
Resolving the issue is especially relevant for Credit Suisse, which will make its first major announcement on strategy under Chief Executive Officer Tidjane Thiam on Oct. 21. The bank is weighing a stock sale that may raise between 6 billion Swiss francs ($6.2 billion) and 8 billion francs, a person with knowledge of the plan said last week.
‘Apples and Potatoes’
The new rule may call for common equity to be at least 3.5 percent of assets, with the remaining 1.5 percent coming from debt instruments that can be converted into equity if the bank strays into the regulatory danger zone, one of the people said.
That would leave Credit Suisse with a capital shortfall of 8.7 billion francs, based on its financial situation at the end of the second quarter, UBS analysts Daniele Brupbacher and Mate Nemes said in a note last week.
“This is not an advantage,” said Peter Stenz, who helps manage shares of both banks at Zuercher Kantonalbank. “It won’t be easy to get to those 5 percent, but not impossible. “They’ll just have to be a little less generous with the dividend until they get there.”
UBS Chief Executive Officer Sergio Ermotti, who has said he isn’t against stricter regulation in principle, has decried the plan to use a U.S.-style leverage ratio as a standard for Switzerland, insisting the two financial systems are about as similar as “apples and potatoes.” Among the differences, the market for securitized debt is bigger in the U.S., meaning its banks can pass on more of the risks of lending by packaging their loans into tradable securities.
An increase in the leverage ratio of 1 percentage point would cost UBS an extra 1 billion francs a year, he said in June. “And who profits most if we adapt to the American rules?” he said in a speech in August. “The U.S. banks.”
Both banks signaled their concern about a leverage ratio at this level in a comment in the expert report. UBS Chairman Axel Weber and Urs Rohner, his counterpart at Credit Suisse, were part of the panel.
UBS may be able to get by without raising capital, while a leverage ratio of 5 percent will leave Credit Suisse little choice, said Alevizos Alevizakos, a London-based analyst at Keefe, Bruyette and Woods Inc.
“Given the potential 5 percent leverage ratio, we understand why Mr. Thiam would prefer to build some capital buffer,” ahead of a potentially costly overhaul of the bank, he said in a note Tuesday.
The Swiss government said in February that it will announce the new rule this year. To that end, it set up a working group that includes the Finance Department, the Swiss National Bank, the financial regulator and the two banks. While UBS and Credit Suisse don’t have a final say, they have inundated government officials with documents setting out their position, according to one person.
Switzerland imposed some the world’s strictest too-big-to-fail requirements in 2011 after the government came to UBS’s rescue during the 2008 financial crisis. UBS and Credit Suisse have assets of 1.83 trillion francs combined, about three times the size of the Swiss gross domestic product, making the two banking behemoths a disproportionately bigger danger to their country’s economy if they fail than their peers elsewhere. Both are compliant with all Swiss capital rules.
“The loss potential for the Swiss big banks – estimated under the different adverse scenarios considered – continues to be substantial relative to their capitalization,” the SNB said in a report in June. The central bank recommended the banks improve their leverage ratio.
Regulators are now fine-tuning the proposed rule, which the government still has to approve. The leverage ratio is still below what some Swiss lawmakers have demanded. The Swiss lower house last month called on the government to increase the leverage ratio to 6 percent over two years.
For more, read this QuickTake: Capital Requirements
“Regulators are pushing and the banks are squealing,” said Eric Knight, founder and chief executive officer of Knight Vinke Asset Management LLC, a UBS shareholder who has called on the lender to spin off its securities unit.