The Swiss National Bank called on Thursday for rules allowing drastic action on the nation's dominant banks if their problems threatened the entire economy, and renewed measures to fight recession and fend off deflation. Switzerland's two top banks, UBS and Credit Suisse, were still in a difficult situation, the SNB said.
It also called for rules which would allow parts of the banks to be split off if needed, or their size to be limited, just a day after President Barack Obama laid out his vision for recrafting US financial regulation. The Swiss central bank gave no signals that it would soon reverse its ultra-low interest rates and unconventional policy of buying bonds and currency interventions.
Intervention in currency markets to stop the Swiss franc rising had achieved its aims, the SNB said, but it also renewed its pledge to take "firm action to prevent an appreciation of the Swiss franc against the euro". "The situation is gradually normalising, although it remains very vulnerable.
The risks are still clearly skewed to the downside and are major," SNB Chairman Jean-Pierre Roth told a news conference in Berne. The global economic downturn has hit Swiss exporters hard and its banks, particularly former flagship UBS, are struggling with the credit crisis and a crackdown on banking secrecy. Switzerland slipped into recession in mid-2008. While it has held up better then many neighbouring countries thanks to its resilient consumers, the export slump is spreading to ever more sectors, driving up unemployment.
"We have seen a bottoming out in a lot of the economic indicators and a lot of the financial stress has come down a lot, but we are far from normality in terms of markets so for that reason it is right that the SNB is cautious," said BNP Paribas analyst Eoin O'Callaghan. The franc rose against the euro after the SNB said the purpose of its foreign exchange intervention since March had mostly been achieved.
But the franc dropped rapidly against the euro later in the session amid speculation that the Bank for International Settlements was acting on behalf of the SNB to defend the 1.50 franc level. The SNB and BIS both declined to comment. Swiss regulators and especially the SNB have been pressing ahead with tougher regulation for the big banks after record losses at both institutions and a near-collapse of UBS stoked fears of an Icelandic-style meltdown.
UBS and Credit Suisse together 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. The SNB and Obama are not alone in proposing reworking of bank regulations. European Union leaders are set to back tighter bank supervision and Bank of England Governor Mervyn King has also said banks considered too big to fail may be larger than regulators should allow.
"There can be no more taboos, given our experiences of the last two years," SNB Vice-Chairman Philipp Hildebrand told a news conference in Berne. Should the recession deepen further and last longer, the whole banking system's stability would face a considerable threat, the SNB said in a report. Rules on an orderly wind-down of banks should be created on an international level but Switzerland might have to adopt rules on a domestic level if no progress was in sight, Hildebrand 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 SNB said. UBS, Credit Suisse, Switzerland's finance ministry and financial regulator FINMA all declined to comment on the SNB's recommendations. The SNB kept its target band for the 3-month Swiss franc LIBOR at 0.00-0.75 percent, and will continue to aim to get the LIBOR down to 0.25 percent.
In updated forecasts, the SNB saw the economy shrinking 2.5-3.0 percent this year, leaving its March forecast unchanged. The central bank predicted consumer prices would fall 0.5 percent this year, and then rise 0.4 percent in 2010 and by 0.3 percent in 2011. In March the SNB had forecast a 0.5 percent drop in 2009 and near-flat prices in 2010 and 2011.
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