Switzerland’s two largest banks, UBS and Credit Suisse, are likely to need to raise billions of Swiss francs in bonds to meet new capital rules, the Swiss National Bank (SNB) said on Thursday.
Regulations aimed at preventing Swiss banks becoming “too-big-to-fail” (TBTF) and requiring taxpayer bailouts in the event of failure means large lenders must hold capital equivalent to 5 percent of their total assets while healthy by the end of 2019.
Solving the TBTF problem has been a priority for U.S. and European regulators after several banks, including UBS, were rescued by the state during the financial crisis.
The leverage ratio aims to curb bank risk-taking by putting a cap on debt levels, and at least 3.5 percentage points of this leverage ratio must be made up of high-quality Tier 1 common equity (CET1), the SNB said.
It warned UBS and Credit Suisse in its annual financial stability report that this means they could need additional going-concern capital of around 10 billion Swiss francs ($10.3 billion) each.
Tier 1 capital is loss-absorbing on a “going concern” basis, when the financial institution is solvent.
“The big banks could cover the bulk of this capital requirement by issuing high-trigger CoCos, as both of them already almost meet the 3.5 percent CET1 capital requirement,” the central bank wrote in the report.
Contingent convertible bonds, known as CoCos, can be converted into a bank’s equity in a crisis.
UBS and Credit Suisse, which the SNB considers systemically important to the Swiss economy, must also meet a 5 percent “gone-concern” leverage ratio, which applies where a bank must be wound down following insolvency.
For this the pair could also each have to issue instruments totalling 20 billion to 25 billion Swiss francs or replace debt that falls due with bail-in instruments, the SNB said.
Credit Suisse said it already had a programme underway to replace some of its existing capital stock with higher-quality assets that would meet the new rules.
Meanwhile, UBS said in a statement that it disagreed with a number of depictions in the SNB report, which it said “does not point out anything materially new”.
The SNB said the new national requirements made Switzerland one of the leaders internationally for imposing a “regulatory loss-absorbing capacity” on its banks.
Switzerland prides itself on having more stringent rules than other countries and will often gold-plate international rules with a “Swiss finish”, which helps it to sell itself, and its banks, as a safe haven for the world’s wealthy.
The SNB said UBS and Credit Suisse had improved their capital situation further over the past year on both the risk-weighted capital ratio side and the leverage ratio side.
Under Chief Executive Tidjane Thiam, Credit Suisse raised around 6 billion francs in fresh capital last year.