Major Swiss Banks To Raise More Capital Amid Revised Rules

Amid heightened regulations across the global financial industry in the post-crisis era, major Swiss banks will continue to face tougher regulatory requirements. On Thursday, Switzerland’s central bank said that UBS Group AG (NYSE:UBS) and Credit Suisse (SIX:CSGN) Group AG (TO:CS) need to raise billions more in order to meet the nation’s new capital requirements.

In its annual Financial Stability Report, The Swiss National Bank (SNV), noted that as part of the revised ‘too big to fail’ (TBTF) regulations, the Federal Council has approved measures to considerably increase requirements on loss-absorbing capacity, particularly leverage ratio requirements.

The increase encompasses the requirements for going-concern capital, which is loss-bearing under normal operating conditions, as well as gone-concern instruments, which are applied to recapitalize a bank in case of an impending insolvency without resorting to government support.

Further Requirements

SNB noted that over the past year, both UBS and Credit Suisse have further improved their capital position in terms of both risk-weighted capital ratios and leverage ratios. Also, both the banks are fully compliant with “too big to fail” requirements, however, in order to meet the revised rules that will be effective from early 2020, they need to “need to take action – particularly in meeting the leverage ratio requirements and the gone-concern requirements.”

Regarding the leverage ratio requirement, UBS and Credit Suisse need additional going-concern capital of around CHF 10 billion each. SNB stated that these banks could cover the “bulk of this capital requirement” by issuing high-trigger contingent convertible debt (CoCos). CoCos are converted into equity in the event the capital falls below pre-specified threshold, or trigger.

With respect to the gone-concern requirements, the Swiss banking giants have to issue loss-absorbing instruments in the range of CHF 20–CHF 25 billion each, or “replace debt instruments that fall due with bail-in instruments.”

SNB stated, “These new going-concern and gone-concern requirements will put Switzerland back among the international leaders as regards regulatory loss-absorbing capacity.”

Mixed Response

Credit Suisse noted in a statement, "We have already announced that, as part of our debt capital programme between now and 2024, we will align our existing contingent capital stock from 18.5 billion Swiss francs of high and low trigger instruments to around 15 billion Swiss francs of fully-compliant AT1 (additional tier 1) high-trigger instruments, in line with the SNB's comments today."

However, UBS which is already taking initiatives to address revised too-big-to-fail regulations said in a statement, "While we disagree with a number of depictions, the report does not point out anything materially new."

Bottom Line

Following the 2008 financial crisis that witnessed the CHF 6 billion bailout of UBS, Switzerland was among the first nations to bring in tougher rules in the financial sector to prevent further crisis. Gradually, many other countries followed suit and several have surpassed the Swiss requirements.

Both UBS and Credit Suisse trimmed its balance sheet following the financial crisis and are working on several restructuring initiatives to strengthen the financials, while embracing new rules. While possible enforcement of regulations will put some pressure on the top line of the banking behemoths in the short run, it will make them sustainable in the long term and position them better to withstand any crisis.

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