UBS Group AG and Credit Suisse Group AG still need to improve preparations for how they would deal with a hypothetical failure, a regulator said yesterday, as both lenders set their sights again on growth.
While the two systemically important banks have improved compliance with Switzerland’s strict capital rules, they still need to make headway under so-called too-big-to-fail requirements, which are meant to facilitate an orderly liquidation, the Swiss National Bank said in its annual financial stability report.
Switzerland in 2016 increased the amount and quality of capital the banks have to hold relative to their total liabilities, a measure called the leverage ratio. The regulations impose minimum levels of capital to absorb current operating losses and fund an orderly resolution if necessary. The country imposed the first too-big-to-fail rules in 2012 after the government came to UBS’s rescue during the 2008 financial crisis.
Since the peak of the crisis Credit Suisse and UBS have built up capital and cut risk. Between 2006 and 2017, they cut their combined balance sheet by more than half by reducing investment banking activities and legacy assets, according to the report.
“Credit Suisse and UBS’s focus is gradually shifting, away from downsizing and reducing legacy assets from the financial crisis, and towards growth strategies and new business initiatives,” the SNB said. Still, the big banks must demonstrate to the Swiss regulator, Finma, by the end of 2019 that they have credible and workable emergency plans, it said.
The banks are on track to meet rules known as going-concern requirements, which are are designed to stop the lenders getting into financial distress. However, “further improvement is needed” on the leverage ratio, the SNB, said. In an international comparison, the risk-weighted capital ratios of the two are above the average for large globally active banks, whereas their leverage ratios continue to be below average.
The most dangerous potential loss scenarios include a recession in the US, although interest rate shocks, a protracted euro-area recession and an emerging market crisis could also cause losses, albeit at a lower level, the central bank said.
Credit Suisse and UBS must still work out how much capital their material operating subsidiaries will need in case of a bankruptcy, and ensure that there is enough loss-absorbing capacity for those individual units, as well as for the group, the SNB said.
They have until 2020 to issue bonds and build capital to comply with the Swiss rules, among the world’s toughest. The rules are designed to help the two banks withstand dire economic and financial conditions.
UBS and Credit Suisse must work out how much capital their material operating subsidiaries will need in case of a bankruptcy, the SNB said.
