UPDATE 2-Switzerland adds ZKB to list of too-big-to-fail banks

Mon Nov 11, 2013 10:59am EST

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(Adds comment from financial regulator FINMA and bank's owner)

ZURICH Nov 11 (Reuters) - The Swiss National Bank (SNB) said on Monday it had added Zuercher Kantonalbank (ZKB) to its list of banks that come under closer supervision due to their importance to the wider financial system.

Local government-owned ZKB joins UBS and Credit Suisse as Swiss banks whose stability is considered essential for the well-being of Switzerland's financial system. They are required by the SNB to meet tougher regulatory requirements as a result, including holding a bigger capital cushion to protect themselves against potential market shocks.

Now, financial regulator FINMA will have to define capital rules for ZKB, which is mainly involved in retail business such as cash accounts and mortgage lending.

"It is too early to talk about specific numbers," a FINMA spokesman said.

"We have to analyse what the too-big-to-fail rules mean in ZKB's case."

ZKB had already asked its local government owner for 2 billion Swiss francs ($2.17 billion) in additional capital in January, and expects to be able to shoulder the additional requirements without raising fresh capital, the bank said at a press conference on Monday.

ZKB is also one of roughly a dozen Swiss banks being investigated by U.S. authorities on suspicion of helping wealthy Americans evade taxes, though on Monday said there was no link between that probe and the SNB move.

The tougher rules have already led Switzerland's two largest banks to act. Credit Suisse has pruned risky assets and slashed investment banking activities which soak up substantial capital.

UBS has gone further. Just over one year ago, the bank said it would cut 10,000 jobs and largely wind down its fixed income business in favour of returning to its private banking roots.

The SNB's move also puts the spotlight on other big retail players in Switzerland such as Raiffeisen. A spokesman for the cooperative lender said the bank was in contact with the SNB, but that it is unclear when and how the central bank will rule.

In June, the central bank said capital at major domestic banks such as ZKB did not reflect the risk that a housing bubble in Switzerland could burst, or the risk to their business should interest rates in Switzerland rise from historic lows.

In February, the Swiss government acted on the SNB's recommendation that banks hold additional capital against their mortgage books to restrain an "excessive" rise in real estate prices and "exorbitant" mortgage debt.

The SNB has been hamstrung by rising housing prices, particularly in and around cities like Geneva, because it cannot lift interest rates due to its lid on the strong Swiss franc.

Since the collapse of U.S. investment bank Lehman Brothers more than five years ago, authorities have been grappling with the question of how banks regarded as systemically important, or too big to fail (TBTF), can be recapitalised without causing panic or needing taxpayer cash. ($1 = 0.9223 Swiss francs) (Reporting Katharina Bart and Albert Schmieder. Additional reporting by Ruppert Pretterklieber and Silke Koltrowitz; Editing by Greg Mahlich and David Evans)

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