In a three-legged chair, a person starts to shiver when one of his legs breaks. The same applies to the economy when a large bank breaks down. That is why the state saved UBS in 2008. In order to reduce the risk of taxpayers in future crises of such “systemically important” banks, the requirements for capital adequacy around the world have been significantly tightened.
This also applies to Switzerland. In the future, the global large banks UBS and Credit Suisse will have to fulfill the following conditions at the group level: for each CHF balance sheet totaling at least 5 Swiss francs for normal operations and about 4 CHF more for unprofitable capital in case of an emergency. In addition, there are capital requirements based on asset risks.
The club of systemically important banks in Switzerland also includes Zürcher Kantonalbank (ZKB), the Raiffeisen group and Postfinance. On Wednesday, the Federal Council adopted a resolution tightening the rules for its own funds for these three institutions. In accordance with earlier decisions, for three banks, a net worth of at least 4.5 and 4.6%, respectively, will be required for normal operations. In addition, capital requirements based on balance sheet assets need to be considered. In addition, the three institutes will additionally have at least 1.8-1.9% of the capital lost for the mortality scenario (“emergency capital”). If banks create this pillow with equity capital, it is enough to add about 1.2% of the book value.
The dispute about the state guarantee ZKB
New rules will come into force gradually from the beginning of 2019 with the transition period until 2025. For ZKB, the emergency cushion requirement will be halved due to a state guarantee. ZKB and the canton of Zurich lobbied for a full loan of the state guarantee and, therefore, for refusing additional capital requirements, but could not do this with the Federal Council; The federal government claims that state guarantees alone in a crisis cannot ensure the rapid availability of emergency capital. Despite this dispute, ZKB already fulfills the capital requirements applicable after the transition period.
This does not apply to Raiffeisen and Postfinance. Raiffeisen needs additional capital – depending on the type of funds – from 1.3 to 2 billion Francs by 2026 to meet the new requirements. According to Raiffeisen, Raiffeisen intends to increase this additional capital, retaining profit and subscribing to additional share certificates by members of the cooperative. Raiffeisen reported a net profit of more than 900 million Swiss francs in 2017, compared with 750 million Swiss francs in 2016.
Under pressure, Postfinance is under pressure. The authorities of the financial market for some time require a special surcharge for the risk of interest rates. And, above all, wages plummeted due to the low interest rates that the Federal Council was forced to flee to the front, and in September decided to lift the ban on credit operations for Postfinance. However, if it is a majority in parliament, it is doubtful.
According to the federal government, Postfinance needs additional funds in the amount of 2.2 billion Swiss francs by 2026 due to new rules regarding capital and the current balance sheet structure. This requirement can be reduced to about 1.5 billion Swiss francs if Postfinance provides this emergency cushion with its own capital, the Federal Council wants to use mostly capital, he explained in September. The focus was on maintaining profit, the additional benefits of the postal group's capital and the “subsequent inflow of funds within the framework of the opening of the association of shareholders”.
UBS and CS again in sight
Two large banks must reckon with new difficulties. Despite the stricter capital adequacy rules at the Group level as a whole and, despite the outsourcing of parts of two large banks, which are considered systemically relevant in Switzerland for the branch of legal entities, the Swiss authorities are still not satisfied. They fear that a large part of the global capital cushion of UBS and Credit Suisse will be reserved for their key foreign countries, such as the United States and the United Kingdom, so during the crisis too little upholstery will be available for Switzerland. For this reason, the Federal Council wants to set up additional capital requirements for emergencies for the Swiss parent companies UBS and CS – although the above-mentioned parent companies are not officially systemically important. But resistance is significant. Therefore, the Federal Council postponed this issue and announced the adoption of decisions in the first half of 2019.