Big Swiss Banks Need $31 Billion for New Capital Rules, SNB Says

Updated on
  • UBS disagrees with ‘number of depictions’ in the SNB report
  • Credit Suisse says aligning CoCo stock with stricter rules

UBS Group AG and Credit Suisse Group AG need to issue billions more in bonds to meet Switzerland’s new capital requirements and prepare for stricter global standards, the country’s central bank said.

QuickTake Capital Requirements

While the banks have improved their capital stance over the past year, "they need to take action -- particularly in meeting the leverage ratio requirements and the gone-concern requirements," the Swiss National Bank said in its annual financial stability report published Thursday.

Switzerland this year increased the amount and quality of capital its two biggest banks have to hold relative to their total assets, a measure called the leverage ratio. UBS and Credit Suisse have until the end of 2019 to issue bonds and build capital to comply with the rules, designed to protect the economy should one of the lenders collapse.

The new regulations impose minimum levels of so-called going-concern and gone-concern capital to absorb losses during a crisis or insolvency. They also disqualify some of the contingent convertible bonds that the banks have issued in recent years to raise capital. CoCos convert into equity or get written down if capital falls below a certain threshold, or trigger.

Credit Suisse and UBS need additional going-concern capital amounting to roughly 10 billion francs ($10.4 billion) each, the SNB said. The two banks need to issue gone-concern instruments between 20 billion francs and 25 billion francs, the central bank said.

This assumes that their exposure remains constant and doesn’t take into account possible reductions on gone-concern requirements, such as potential rebates granted by Swiss regulator Finma for improving their resolvability. The banks are in the process of changing their legal structure to make them easier to break up in a crisis.

UBS Disagrees

Switzerland introduced too-big-to-fail rules in 2012 after the government came to UBS’s rescue during the 2008 financial crisis. The two banks have combined assets of 1.78 trillion francs -- almost three times Switzerland’s gross domestic product.

"We take note of the report," UBS said in a statement. "While we disagree with a number of depictions, the report does not point out anything materially new."

UBS currently has a leverage ratio of 5.4 percent and Credit Suisse 5.1 percent - more than the new lower limit of 5 percent. These include bonds issued under the old regime that currently still count toward the ratio under so-called grandfathering rules.

Internal Models

The Swiss government also increased its ratio for risk-weighted assets, another measure of financial strength. For going-concern requirements, UBS already meets the requirement and Credit Suisse is very close to meeting it for now, the SNB said.

It is likely, however, that these requirements will increase in light of measures drawn up by the Basel Committee on Banking Supervision, the SNB said. The international body, which sets standards for the industry, wants to restrict banks’ use of internal models to evaluate risk, as this has led to inconsistency and undermined confidence in their estimates.

“We have already announced that, as part of our debt capital program between now and 2024, we will align our existing contingent capital stock from 18.5 billion francs of high- and low-trigger instruments to around 15 billion francs of fully compliant AT1 high-trigger instruments, in line with the SNB’s comments today,” Credit Suisse said in a statement.

UBS shares were trading 1 percent lower at 2:02 p.m. in Zurich while Credit Suisse’s stock was down 2.7 percent after it fell as much as 5.3 percent earlier Thursday, hitting a new all-time low. The 39 member Bloomberg Europe Banks and Financial Services Index was down 1.6 percent.