SNB wants rules to split up big banks if needed

* SNB says Swiss may adopt rules to split off parts of banks

* Risk exposure at UBS, Credit Suisse still high

* SNB says UBS, CS must cut risks, shore up capital further

By Sven Egenter

ZURICH, June 18 (Reuters) - Switzerland may have to create rules to split off parts of its dominant banks UBS(UBSN.VX) and Credit Suisse(CSGN.VX) if needed to fend off risks to its economy, the Swiss National Bank said in its stability report.

The two banks were still in a difficult situation as their risk exposure remained material, the SNB said in the report published on Thursday.

Swiss regulators -- especially the SNB -- have been pressing ahead with tougher regulation for the country's big banks after record losses at both institutions and a near-collapse of UBS stoked fears of an Icelandic-style meltdown.

The two banks hold over $3 trillion in liabilities -- about six times Swiss gross domestic product, making the country more exposed to risks from its banks then almost any other.

Even under the SNB's baseline scenario of a gradual economic recovery in 2010, the banks faced substantial loan losses, lower earnings and a negative impact on capital, highlighting the need for UBS and Credit Suisse to shore up their resilience further, according to the report.

Should the recession deepen further and last longer, the whole system's stability would face a considerable threat, the central bank said. SNB Vice-Chairman Philipp Hildebrand has called for a debate without taboos to protect the economy.

TOO-BIG-TO-FAIL

Regulators should address the "too-big-to-fail" problem of important banks quickly once the crisis was over, the SNB said.

"One should examine the extent to which, in a crisis, those big bank units that are economically important for the Swiss economy can be split off and possibly transferred to other banks within the country and the rest wound down," it said.

Rules for an orderly wind-down should be created on an international level but if no progress was in sight, Switzerland may have to adopt rules on a domestic level, the SNB said.

Regulators would have to define an organisational structure in cooperation with the banks that would simplify a wind-down while remaining compatible with the universal bank model.

The SNB said the country may have to define limits to the size of its big banks, should efforts to create rules for an orderly wind-down fail.

The central bank urged UBS and Credit Suisse to improve their resilience to shocks from a possible worsening of the crisis.

While the smaller, domestic banks were in a good position to weather the recession, the situation for the big banks was more difficult as they were exposed to worsening credit conditions abroad, and their debt and capital situation was worse.

"It is therefore essential that the big banks take all the necessary measures to ensure their resilience to the eventuality of a further significant deterioration in economic and financial conditions," the SNB said.

The banks had to reduce their risk positions, strengthen their capital base, preserve an adequate liquidity cushion and bring their costs in line with the changed market environment.

The SNB estimates that -- based on the experiences of the 2002/2003 recession -- UBS and Credit Suisse may need provisions of some 15 billion Swiss francs ($13.77 billion) together to prepare for losses from the loan portfolios.

For a factbox on Swiss regulation click on [ID:nL7679750]

For an Analysis of Swiss regulation click on [ID:nL7679750]

For the full SNB report click on: www.snb.ch/