Switzerland instructed UBS Group AG and Credit Suisse Group AG to hold capital equal to 5 percent of assets, raising the bar on a rule designed to protect taxpayers from having to bail out banks.
The decision came just hours after Credit Suisse announced a capital increase of 6.05 billion Swiss francs ($6.3 billion) as part of an overhaul that will help the bank comply with the new rule, known as the leverage ratio. Both banks had pressed the government in recent months for easier terms.
At least 3.5 percent of the capital must be of the highest quality, or common equity Tier 1. The remaining 1.5 percent must be in Tier 1 instruments that would be converted or written down if the CET1 ratio falls below 7 percent, according to a separate statement from Finma, the Swiss financial regulator. Bonds that fulfill this requirement are known as high-trigger or “going-concern capital.”
On top of this, the banks must hold 5 percent of loss-absorbing debt, measured in terms of total exposure.
The implementation of the high-trigger standard may exclude 5.1 billion francs of Credit Suisse’s 11.5 billion francs of outstanding Tier 1 notes, based on its latest earnings presentation. Just over half of UBS’s about 5 billion francs of AT1s have a 7 percent trigger, based on Bloomberg data.
"For existing capital instruments which can no longer be issued as eligible under the new requirements, transitional provisions are envisaged in the sense of grandfathering," the government said in a separate statement.
The banks have until the end of 2019 to satisfy the requirement, the government said in a statement Wednesday.
Swiss National Bank President Thomas Jordan said he doesn’t expect the new rule to hurt the economy. It will instead improve “the stability of the Swiss financial system and the economy as a whole,” said Mark Branson, head of the financial regulator Finma.
The leverage ratio gained importance for regulators in the United States and Europe after several banks, including Zurich-based UBS, were bailed out in the financial crisis. It is a measure of the losses a bank can sustain before its shareholders are wiped out.
A government-appointed panel recommended in December that Switzerland follow the lead of the U.S., which has also raised its leverage ratio to 5 percent.
UBS and Credit Suisse have assets of 1.83 trillion francs combined, about three times Switzerland’s gross domestic product. That means the two banks present a bigger risk to their local economy than their peers elsewhere.