Tightened capital rules for large Swiss Banks
What do the revised capital rules mean for UBS and Credit Suisse?
On 27 November 2019, the Federal Council announced a number of amendments to the Swiss capital ordinance, effective 1 January 2020. What does this mean for the systemically relevant banks in Switzerland?
In a nutshell:
- Material additional gone-concern capital requirements for parent bank companies of UBS and CS result in excess total loss-absorbing capacity (TLAC) needs for both banks at group level. The additional capital need is estimated at around 24bn CHF of bail-in bonds in total for both banks, leading to additional financing costs of around 180mn CHF per year
- Formally, the capital requirements for UBS and Credit Suisse at consolidated Group level remain largely unchanged
- The capital requirements for entities carrying out system-relevant functions, i.e., UBS Switzerland AG and Credit Suisse Schweiz AG, are better aligned with the capital requirements of domestic systemically relevant banks introduced a year ago
The above changes in more detail:
- Large bank Groups have typically to conform with capital requirements at both consolidated Group level and at the level of individual bank entities. In the past, the capital requirements for UBS and Credit Suisse have effectively been determined by the consolidated Group requirement which always exceeded the sum of the legal entity requirements. However, this changes now with the announced amendments of the Swiss capital ordinance.
The parent entities UBS AG and Credit Suisse AG become newly subject to material gone concern capital requirements. Both parent entities have not only to meet similar gone concern requirements as the Group but require also the full underpinning of their TLAC holdings from internal transfers to subsidiaries and an extra buffer in the amount of 30% of their consolidated gone concern requirement. To meet this new requirement, both banks are forced to issue significant amounts of TLAC eligible bail-in bonds. As a consequence, the amount of bail-in bonds to be issued by both banks exceeds the amount of TLAC needed to meet the gone concern requirements at consolidated Group level, i.e., the requirement for both banks is now effectively determined by legal entity constraints.
- The capital requirements for UBS and CS at consolidated Group level were already decided in June 2016 and will be fully implemented by 1 January 2020. In addition to a going concern base requirement of 12.86% of risk-weighted assets (RWA) and 4.5% of the total exposure for the leverage ratio (LRD), Swiss systemically relevant banks are subject to surcharges according to their size and market share in the domestic market. The buckets for the size surcharge are regularly updated to account for GDP growth. With the latest update, UBS and CS fall into a lower size bucket, resulting in a 0.3% and 0.125% lower surcharge for RWA and LRD, respectively. This results in slightly lower going concern requirements of 13.9% for RWA and 4.875% for LRD. As the gone concern requirement equals 100% of the sum of the base requirement and the surcharges, the gone concern requirement reduces to 13.9% and 4.875% accordingly.
- Since 1 January 2019, non-international systemically relevant banks, i.e, Raiffeisen, ZKB and Postfinance, are subject to a gone concern capital requirement of 40%. To better align with this requirement, the two Swiss entities UBS Switzerland AG and Credit Suisse Schweiz AG are newly subject to a gone concern capital requirement of 62%. However, there are no capital rebates possible anymore, consistent with the treatment for the non-international system relevant banks.