Switzerland to Enforce Stricter Capital Rules on Major Banks - Analyst Blog

Amid heightened regulations across the global financial industry in the post crisis era, major Swiss banks will continue to face tougher regulatory requirements. In order to prevent any future financial crisis and protect the economy, the Swiss government is set to lay stricter capital requirements for UBS Group AG ( UBS ) and Credit Suisse Group AG ( CS ).

After consultations with the banks, the Swiss Financial Market Supervisory Authority FINMA, and the central bank for amendment of existing laws, the government will issue new capital rules by the end of this year.

Though as of now no specific requirements have been disclosed, the government highlighted the fact that these banks should be subject to highest risk-weighted capital and the unweighted leverage ratio requirements in the world.

Pressing on the need for further proactive measures, the Swiss government mentioned in a statement, "Additional measures and adjustment are required to boost the resilience of systemically important banks further and to make their restructuring or orderly resolution possible without taxpayers incurring any costs."

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. Gradually, many other countries followed suit and several have surpassed Swiss requirements. The rules are aimed to prevent any further crisis.

The Panel's Recommendation

The latest announcement by the government does not come as a surprise. This follows a panel of expert views that recommended higher leverage ratio for UBS and Credit Suisse last year.

The panel of experts, which was appointed by the Swiss Government in Sep 2013, was set up to analyze the existing structure of the Swiss financial centre and put forward proposals for developing the "financial market strategy." The group headed by a professor at the University of Bern, Aymo Brunetti, focused on several areas including analysis of Swiss too-big-to-fail rules.

Per the Swiss approach, the going concern leverage ratio for large banks is 3.12%. However, the report highlighted the fact that such a ratio is "barely more than" the minimum requirement of 3%, which is the international standard for all banks including the non-systemically important banks.

The panel put forward its views on fortifying the Swiss too-big-to-fail measures and reducing the implied "government guarantee" attached with too-big-to-fail banks.

Banks' Efforts

Notably, 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.

UBS currently targets Basel III risk weighted assets to reduce CHF 215 billion by Dec 31, 2015 and reduce CHF 200 billion by Dec 31, 2017. Credit Suisse targets additional Group leverage exposure reductions of about CHF 230 billion, expecting a new target range of CHF 930-950 billion by end-2015 on a foreign-exchange adjusted basis.


Both UBS and Credit Suisse welcomed the measures and will adopt further new rules as required. However, UBS noted that such measures should ensure comparability with global standards and stated that "disclosure of potential negative consequences for the financial center and the broader economy is necessary."

Credit Suisse mentioned the measures should be in line "with international developments in terms of both content and timing."

We believe any possible enforcement of regulations will put some pressure on the top line of the banking giants in the short run, but it will make them sustainable in the long run.

Currently UBS carries a Zacks Rank #3 (Hold) and Credit Suisse carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the finance space include Customers Bancorp, Inc. ( CUBI ) and Provident Financial Holdings, Inc. ( PROV ). Both the stocks sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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