Swiss regulator backs bank bail-ins before government rescues

ZURICH Wed Aug 7, 2013 10:40am EDT

The logo of Switzerland's biggest bank UBS is seen on an office building at the Paradeplatz square in Zurich July 25, 2013. REUTERS/Arnd Wiegmann

The logo of Switzerland's biggest bank UBS is seen on an office building at the Paradeplatz square in Zurich July 25, 2013.

Credit: Reuters/Arnd Wiegmann

ZURICH (Reuters) - Switzerland shouldn't bail out its largest banks again before asking creditors and shareholders to stump up, the local financial regulator said on Wednesday.

Authorities have been grappling since the collapse of U.S. investment bank Lehman Brothers five years ago with the question of how banks regarded as systemically important - or too big to fail (TBTF) - can be recapitalized without causing panic or needing taxpayer cash.

In Switzerland, regulator FINMA has joined with the Swiss National Bank (SNB) to enforce stiffer regulator on UBS UBSN.VX and Credit Suisse (CSGN.VX), which form the backbone of a financial industry that generates 6 percent of the Alpine nation's gross domestic product.

FINMA has now backed "bail-ins" by creditors should UBS, rescued by the Swiss government nearly five years ago, or Credit Suisse risk collapse.

The regulator recommended spreading bank losses across a range of creditors, including shareholders, holders of contingent convertible (CoCo) instruments (which may convert into equity under certain conditions) and owners of debt including senior debt.

"This recapitalization must be sufficient to meet the needs of all group companies in Switzerland and abroad," FINMA said in its position paper. "This buys time with regard to restructuring the affected banks so that they can return to viable operation."

UBS and CS both declined comment.

ECONOMICALLY IMPORTANT

The regulator also said a big bank could be broken up and its assets run down or liquidated should a bail-in fail, in order to shield activities seen as key to the Swiss economy.

Because of UBS's and Credit Suisse's sprawling operations, Swiss regulators are keen to cooperate with their international counterparts on disaster scenarios. But FINMA said on Wednesday it should have the lead on coordinating recovery and resolution plans for the two banks.

Last month, the Bank for International Settlements laid out a blueprint for how to recapitalize a major lender in the event of a failure, including a bail-in of creditors.

Europe is pushing ahead with plans to implement a bail-in regime that would see bondholders and big depositors take hits.

But the bail-in model does not fully respect the creditor hierarchy, as it can inflict losses on bondholders before shareholders have been fully wiped out, the BIS said last month.

UBS drew a line under its 2008 bailout last week, saying it will buy back from the SNB a fund set up to purge the Swiss bank of toxic assets but which has since turned profitable.

The move will boost UBS's capital defenses and was welcomed by investors as the bank exits many fixed-income lines and focuses on its flagship private banking business.

Credit Suisse is sticking with its large investment banking operation, but its reliance on fixed-income trading concerned some investors following that bank's second-quarter earnings.

(Editing by David Holmes)