By Katharina Bart
ZURICH, June 19 (Reuters) - Switzerland's central bank has urged UBS and Credit Suisse to further improve their capital strength, even after good progress made in recent years, due to the "substantial" risks still faced from economic and legal issues.
The Swiss National Bank (SNB) said UBS and Credit Suisse still face the risk of major losses under adverse economic scenarios, as well as potential operational and legal risks.
It said while their risk-weighted capital ratios were strong by comparison with international rivals, their leverage ratios - which are a simple measure of capital against loans - were not.
"The SNB recommends that they continue to improve their resilience and, in particular, their leverage ratios," the central bank wrote in its annual financial stability report published on Thursday.
UBS and Credit Suisse have made significant changes in recent years to comply with the Swiss interpretation of tougher international rules set to take effect in 2019.
Zurich-based UBS, which on Thursday said it had taken note of the SNB's recommendations, has withdrawn from large parts of riskier debt-trading activities in favour of focusing on its flagship private bank.
UBS is also revamping its corporate structure to ensure it can be broken up more easily in a crisis, cutting the amount of money it must set aside for potential losses and allowing it to pay shareholders a special dividend.
Credit Suisse plans to begin paying out roughly half its profits to shareholders once it hits a key capital ratio. It will also reduce assets, sell real estate and take other actions to help meet the 10 percent capital ratio, which it expects to achieve by year-end.
But banks across the world continue to face potentially big bills to pay for past problems.
Credit Suisse last month became the largest bank in decades to plead guilty to a U.S. criminal charge and will pay more than $2.5 billion in penalties for helping wealthy Americans evade taxes.
Credit Suisse improved its leverage ratio to 3 percent at the end of March and UBS's was 3.1 percent, both up from 2.3 percent a year earlier, the SNB said, based on loss-absorbing capital when a bank is still considered a going concern, which excludes some capital held by the banks.
Both are therefore both close to global rules to have a ratio of at least 3.1 percent, which come into effect in 2019.
Some regulators, including in Switzerland, the United States and Britain, are expected to demand their banks have higher capital ratios, potentially of 4 percent or more, although firms will be given several years to achieve that.
The SNB said the loss potential for the two big banks stemmed mainly from losses on loans in Switzerland and the United States, as well as exposure to counterparties and positions in equities.
The central bank said imbalances in the Swiss housing and mortgage markets persisted but had eased recently.
Last week, a Swiss official said the government was weighing measures to cool demand in the housing market out of fear that Switzerland's high levels of household debt could provoke a real estate crash if the economy went into recession.
The SNB said risks from a rise in interest rates had increased for the sector because of a big rise at Raiffeisen, the Swiss cooperative lender that is the third biggest bank in Switzerland with more than 1,000 branches there.
The SNB's "baseline" view is that Switzerland's economy continues to grow, making conditions favourable for the banking sector. It said growth in the euro area remains sluggish and its banking sector is still perceived as "relatively fragile".
The financial stability report came alongside the central bank's June monetary policy assessment. The SNB's rate decision is expected at 0730 GMT. (Editing by Stephen Coates and David Holmes)