Switzerland weighs tougher rules on banks

Swiss financial regulators say that they are considering taking on new emergency powers that would allow them to break up very large banks, like UBS and Credit Suisse, in order to wind down troubled business units that are not essential to the functioning of the economy.

The Swiss National Bank, in its 2009 financial stability report, said it wants to develop a better approach to dealing with crises at big banks — whose collapse would threaten the overall financial system — other than simply bailing them out, the strategy that has defined the global credit crisis that began in August 2007.

“There can be no more taboos, given our experiences of the last two years,” Philipp Hildebrand, the vice chairman of the bank, said.

The central bank left its key interest rate unchanged at a meeting on Thursday as well. That rate, which governs central bank loans with three-month terms, is now in a range of zero to 0.75 per cent. The bank has also implemented other unorthodox measures to prevent damage to the country’s export-oriented economy, including interventions to tamp down the value of the Swiss franc against the euro.

In the financial stability report, Swiss authorities, which include the central bank and the Financial Market Supervisory Authority, or Finma, signaled an aggressive approach to the ‘too big to fail’ problem that has vexed policymakers in Europe and the United States.
Switzerland is home to two such banks, UBS and Credit Suisse. UBS, hit hard by bad investments linked to the US mortgage market, has gotten a government bailout. Credit Suisse has also had losses, but arranged a recapitalisation through other sources.
The quandary, highlighted by the collapse of Lehman Brothers last year, is that letting banks fail as a result of their own mistakes can strangle the ‘real economy’ — companies and consumers not directly involved in banking.

Swiss officials have viewed the ‘too big to fail’ problem with more alarm than other European countries, principally because UBS and Credit Suisse are so large in proportion to the overall national economy. Also, Switzerland’s worldwide status as a wealth management centre has suffered as a result of the troubles at UBS.
“They have a great reputation to protect,” said Harald Benink, Tilburg University, Netherlands, and chairman of the European Shadow Financial Regulatory Committee. “It’s a different ballgame in Switzerland.”

Regulations

Hildebrand lamented that developing an international procedure for winding down a large bank in an orderly manner would be “challenging and time-consuming”, given that many national jurisdictions would be involved.

So, he said, Swiss officials would, “in close collaboration with the banks affected,” try to hammer out a domestic process for winding down a big bank in a crisis. He also hinted that authorities would simply limit the overall size of banks if they do not cooperate with regulators.

“If significant progress is not achieved within a reasonable time frame, measures that address the size of the banks should also be examined,”  Hildebrand said.

The central bank also made clear it would support Finma’s efforts to impose lower leverage ratios on banks — the relationship of liabilities to assets. The bank endorsed a ratio of 20-to-1, far lower than the ratios of 33-to-1 at Credit Suisse and 60-to-1 at UBS.
Some banks have argued that such limits do not take into account the quality of a bank’s assets, and that institutions with gilt-edged assets — solid corporate loans or government bonds — should be allowed higher leverage ratios.

Alex Biscaro, a spokesman for Credit Suisse, said the bank is in a “close and productive dialogue with the regulator” and views the central bank report as a first step in discussing new ideas. He added that cooperation with other regulators will be vital.