By Katharina Bart
ZURICH, June 19 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of the SNB's recommendations, has withdrawn from large parts of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
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)