June 19, 2014 12:42 pm

Swiss central bank warns UBS and Credit Suisse over risks

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Trams drive past the offices of Swiss banks UBS and Credit Suisse at Paradeplatz square in Zurich©Reuters

The Swiss National Bank has urged UBS and Credit Suisse to improve their leverage ratios, warning that both banks continue to face substantial legal and financial risks.

The SNB conceded that Switzerland’s two largest banks had both made “significant progress” in strengthening their capital positions since it issued a similar warning last year, but said the two lenders still had further to go.

Under Swiss rules, Credit Suisse boosted its leverage ratio – a measure of a bank’s capital relative to its total assets without any adjustment for risk – from 2.3 per cent at the end of March 2013 to 3.6 per cent a year later. Over the same period UBS improved from 2.6 per cent to 3.8 per cent.

Although the SNB welcomed this progress, and noted that on a risk-adjusted basis, the capitalisation of Switzerland’s two big banks compared well with their international peers, it warned that “substantial losses can also result from operational and legal risks”. Last month, Credit Suisse paid $2.6bn to settle a long-running probe into its US wealth management business.

Regulators around the world are moving towards tighter controls on leverage in a bid to prevent a repeat of the 2008 financial crisis. While the core tier one capital ratio, which measures top quality to risk-weighted assets, remains the main control on banks, the Basel III global banking reforms also included proposals for a minimum leverage ratio of 3 per cent.

“Leverage ratios are gaining in importance as a measure of banks’ resilience. Experience shows that these ratios quickly become the focus of market attention during a crisis,” said Jean-Pierre Danthine, a member of the SNB’s governing board, at the central bank’s half-year press conference in Bern.

“Moreover, the international requirement, effective from the beginning of 2015, to disclose the Basel III leverage ratio will enable a direct comparison between large globally active banks. This is why it is essential for banks to have a solid leverage ratio.”

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Switzerland has already introduced its own rules for UBS and Credit Suisse, requiring the former to achieve a leverage ratio of 4.6 per cent by 2019, and the latter to meet a minimum of 4 per cent.

However, this so-called “too-big-to-fail” framework is due to be reviewed next year, and some Swiss politicians have suggested that the country should set tougher requirements than those currently in place.

In November, Eveline Widmer-Schlumpf, the Swiss finance minister, caused a sell-off in both bank’s shares when she said a leverage ratio of 4.5 per cent seemed “low”, and that Switzerland’s rules could be tightened further.

Shares in UBS were down 0.5 per cent at SFr17.31, and shares in Credit Suisse down 0.9 per cent at SFr27.02 in midday trading in Zürich. Both declined to comment.

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