SNB wants to remedy weaknesses in regulation after CS crisis
Published: Thursday, Jun 20th 2024, 09:30
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Following the CS crisis, the Swiss National Bank (SNB) wants to remedy weaknesses in banking regulation. It sees a need for action in terms of capital and liquidity requirements as well as planning in the event of a crisis.
In the area of capital, the primary focus is on eliminating weaknesses in the regulatory architecture. In its Financial Stability Report 2024, the SNB states that capital ratios must reflect a bank's actual loss-bearing capacity. Accordingly, the SNB supports the consistent implementation of the measures proposed by the Federal Council in the area of capital adequacy.
For example, the contribution of additional tier 1 capital (AT1) to stabilizing a bank's ongoing operations must be strengthened. This should be achieved through measures that ensure the timely suspension of buybacks and coupon payments following sustained losses as well as write-downs or conversion into core capital. During the Credit Suisse crisis, the write-down of AT1 bonds led to numerous legal disputes.
Furthermore, Common Equity Tier 1 (CET1) capital must be calculated more cautiously in order to be credible. The calculation must be adjusted for assets such as software and deferred tax assets: As part of a restructuring, these would usually lose most of their value.
Capital regime for parent company
Thirdly, according to the SNB, the capital regime for parent companies should also be strengthened. In its report on banking stability in the spring, the Federal Council also proposed strengthening the capital requirements for investments in foreign subsidiaries. In the case of Credit Suisse, there was a significant deterioration in the capitalization of the parent company when the value of the subsidiaries fell.
With regard to their liquidity, the SNB believes that the banks should prepare themselves - as proposed by the Federal Council - to receive extraordinary liquidity assistance. Specifically, they should be obliged to prepare an appropriate volume of eligible collateral. The SNB also supports the Federal Council's proposals in the area of recovery and resolution planning. The banks are to strengthen their early intervention instruments.
UBS well capitalized at Group level
With regard to UBS, the SNB states in the report that it will already meet the estimated future capital requirements at Group level in accordance with the "too big to fail (TBTF)" regulation by the end of the first quarter of 2024. However, the requirements for the big bank are increasing due to the increase in market share and the size of the bank following the takeover of Credit Suisse. However, according to the SNB, UBS's parent bank is more strongly capitalized than that of Credit Suisse before the crisis.
According to the SNB, UBS's loss-bearing capacity is limited by integration costs and expected losses in the "Non-Core and Legacy" area in addition to the business risks - this is a natural consequence of the CS integration.
Domestic banks with high capital buffers
According to the SNB, the domestically focused Swiss banks are well positioned overall. Thanks to their profits from recent years and capital buffers, they should be able to bear the economic impact of potential major negative shocks. According to the SNB's report, the institutions are particularly vulnerable to a significant rise in interest rates combined with price corrections on the Swiss real estate market.
However, the SNB is convinced that most of these banks would be able to absorb such losses. For example, the domestically focused banks retained a significant portion of their profits in 2023 and thus further expanded their overall loss-bearing capacity. "Overall, the capital buffers of these banks are substantial and high by historical standards."
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