UBS AG and Credit Suisse Group AG need to hold almost double the capital required under Basel III rules, said a Swiss government-appointed panel, proposing the first capital surcharge on too-big-to-fail banks.
Switzerland’s biggest banks should hold total capital equal to at least 19 per cent of their assets, weighted according to risk, compared with 10.5 per cent level the Basel Committee on Banking Supervision announced last month, the Swiss panel said today. By 2019, the lenders need to have a common equity ratio of at least 10 per cent, compared with 7 per cent required under Basel III rules, and the rest in contingent capital.
Switzerland, which propped up UBS in the credit crisis, asked the panel of bankers, regulators and other experts to propose ways of avoiding future bailouts. The two banks’ total assets of 2.6 trillion Swiss francs ($2.64 trillion) are more than four times the size of the Swiss economy.
The plan is “a win-win situation for Switzerland,” said Harris Dellas, a professor of macroeconomics and monetary policy at the University of Bern. “If the banks don’t manage to raise the required extra capital, they will have to shrink without the government directly forcing them to. If they do, then this means that the markets have faith in them and they can continue playing in the big league.”
No share sales
The proposals, which have to be endorsed by the government and approved by Parliament, may jump-start the market for contingent convertible bonds, or CoCos. The banks, which said last week their risk-weighted assets may balloon to 400 billion francs each under the Basel III rules, may have to sell as much as 72 billion francs in CoCos to meet the new requirements, according to Bloomberg calculations. The banks said they plan to take steps to “significantly” reduce risk-weighted assets.
UBS and Credit Suisse both expect to meet the new capital requirements without having to sell new shares, the banks said today in separate statements.
“It’s obviously a challenge to the Swiss banks to have a massive overcapitalization relative to peers, but it is achievable,” Dirk Hoffmann-Becking, a London-based analyst at Sanford C Bernstein, said. He said the minimum common equity requirement is lower than the 12 per cent he expected.
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UBS fell 0.3 per cent to 16.61 francs as of 11:48 am in Zurich trading, paring this year’s gain to 3.5 per cent. Smaller rival Credit Suisse climbed 0.6 per cent to 42.03 francs.
Limited dividends
UBS “is well positioned to fulfil the new requirements and capital regulations within the transitional period and well before the proposed effective date of end of 2018, without raising common equity,” the bank said. Credit Suisse said it’s confident of complying with the new measures “without having to materially change its growth plans or current capital and dividend policies.”
Dividend payments in the coming years will depend on whether the banks are successful in selling contingent convertibles, Hoffmann-Becking said. Even if they can’t sell any CoCos and have to meet the 19 per cent target with only common equity, UBS could achieve that in 2014 and Credit Suisse in 2015 to 2017 by cutting risk-weighted assets and halting dividends.
Break-up rejected
The panel, which rejected proposals to break up the two Zurich-based banks or directly limit their size and activities, such as proprietary trading, recommended a “rapid” implementation of all the proposals as a package. Peter Siegenthaler, who heads the commission, said he would expect the government to send the proposal to Parliament next year.
Three of the four biggest parties in Switzerland’s parliament signaled they may approve the commission’s proposals.