SNB Rates Zurich Regional Bank Systemically ImportantElena Logutenkova and Zoe Schneeweiss
The Swiss central bank said it classified Zuercher Kantonalbank, the country’s largest state-owned regional bank, as systemically important under stricter capital and liquidity rules.
The announcement was issued in agreement with ZKB, the Zurich-based Swiss National Bank said in a statement today. The lender, owned by the canton of Zurich, said it “expects to already be able to meet the future minimum requirements today.”
UBS AG and Credit Suisse Group AG, the country’s two largest banks each holding assets surpassing gross domestic product, were the only two Swiss lenders to be classified as too big to fail after the financial crisis threatened to undermine the system’s stability. The two lenders have to fulfill stricter regulatory requirements and hold capital equal to as much as 19 percent of assets, weighted according to risk.
The SNB is able to classify a bank as systemically important based on criteria such as the size of its balance sheet, market share of domestic deposits, loans and payments as well as the company’s risk profile, quality of assets, liquidity and leverage. The cantonal banks were Switzerland’s biggest mortgage lenders at the end of August, overseeing 299.4 billion francs ($325 billion), or 35 percent of all outstanding domestic loans, according to the central bank website.
The bank’s role in domestic deposits and lending is “the key factor” for classification as a systemically important institution, ZKB said in a statement. The bank’s market share of Swiss deposits and loans is 6 percent to 8 percent, while the share of deposits and loans in the region of Zurich is 35 percent to 40 percent and 30 percent to 35 percent, respectively, according to the statement.
ZKB is the fourth-biggest commercial bank with assets of about 150 billion Swiss francs ($163 billion), or about a quarter of Swiss annual GDP. The Zurich-based lender had 79.8 billion francs in customer loans outstanding at the end of June, including 68.7 billion francs in mortgages.
The Swiss Financial Market Supervisory Authority, or Finma, will determine the new requirements for capital and liquidity that ZKB will have to fulfill, taking into account the degree of its systemic relevance. The bank will also have to draw up an emergency plan, detailing provisions that will be made to maintain systemically important functions.
ZKB had a core Tier 1 capital ratio, a measure of financial strength, of 14.9 percent at the end of June. The bank said it expects to be meeting the stricter capital requirements already now, as it surpasses the 13.6 percent minimum ratio it had to fulfill so far. After boosting liquidity reserves, it doesn’t expect to make amendments.
“Even with this regulation, we don’t have an immediate capital need,” ZKB Chief Executive Officer Martin Scholl said at a briefing in Zurich.
Switzerland’s Raiffeisen Group of cooperative banks is the third-biggest commercial bank, with assets of about 165 billion francs according to the SNB. The lender is in talks with the central bank on systemic relevance, spokesman Franz Wuerth said by phone today, adding that no decision has been taken.
Banque Cantonale Vaudoise, the second-biggest cantonal bank by assets according to SNB data, had a balance sheet of 40.4 billion francs at the end of June. The lender hasn’t been in contact with the SNB regarding systemic relevance, Jean-Pascal Baechler, a spokesman, said by e-mail today.
SNB spokesman Walter Meier declined to comment on what other banks may fall into the systemically important category. The central bank oversees financial stability, cooperating with the banking regulator Finma in Bern.
The SNB has warned about the build-up of risks in the domestic real estate market as record-low interest rates boosted demand and fueled prices. The UBS Swiss Real Estate Bubble Index rose to 1.20 points in the third quarter from 1.15 points in the previous three months, with Zurich among regions considered most at risk. A reading above 2 points would indicate a bubble.
The Swiss government earlier this year followed the SNB’s proposal to introduce tougher capital rules by the end of September, forcing lenders to hold capital equal to an additional 1 percent of risk-weighted assets tied to residential mortgages. At the behest of the central bank, the government is able to raise the measure to as much as 2.5 percent.
SNB President Thomas Jordan said on Nov. 8 that while borrowing costs will remain low, the central bank is “constantly monitoring” the situation on the Swiss mortgage market to see if additional measures are necessary. The central bank will hold its next quarterly rate meeting in December.