UBS and Credit Suisse would likely cut risk-weighted assets significantly and growth in their investment banking would slow if new Swiss bank capital proposals were implemented, a top Swiss regulator was quoted as saying. Earlier this month a Swiss commission proposed rules for banks deemed 'too big to fail' (TBTF) that exceeded the stipulations of the new Basel III global banking regulations. They would require UBS and Credit Suisse to hold an equity Tier 1 capital ratio of at least 10 percent.
The plan has yet to be made law. "It's to be expected that the growth in investment banking gets slowed down," FINMA Director Patrick Raaflaub said in Saturday's edition of the Finanz und Wirtschaft. Switzerland has led the push for tighter banking regulations, after the near-collapse of UBS at the height of the financial crisis required a government bailout. Together, UBS and Credit Suisse hold more than four times the country's gross domestic product of $540 billion in liabilities on their balance sheets.
In an interview with another Swiss paper on October 6, Raaflaub said the banks would likely test the boundaries of the new framework, a view he echoed on Saturday. "Supervisory work sometimes has the elements of a cat and mouse game," he told the Finance und Wirtschaft. "I expect the banks will take measures to reduce the risk- weighted assets significantly below 400 billion Swiss francs again, for example by giving up some areas of business and by introducing a central clearing house for over-the-counter derivatives."
According to the plan, Credit Suisse and UBS will need to hold a further 9 percent of other capital, which could be contingent convertible (CoCo) bonds. These bonds would be turned into equity if capital ratios fell below pre-defined levels. The Swiss initiative marks a step forward for the asset class, which has failed to find a big fan base among investors. But analysts have said the Swiss plan leaves open the question of who would buy the bonds and how a market for them would be established.