According to a proposal made by the Swiss government committee this Monday, Swiss banking giants UBS AG (UBS) and Credit Suisse Group (CS) will need to retain more capital in reserve. The proposal, which is supported by the Swiss National Bank and the country’s financial regulator FINMA, would now require the parliament’s approval. The requirements are said to exceed the levels set by the international standards, Basel III.
Capital Requirements
As per the proposal, UBS and Credit Suisse need to hold reserves of 10% in common equity and 19% in total capital. This includes 4.5% as the base requirement and 5.5% as a cushion. The companies need to keep another 9% in capital based on their current size, which may be held in contingent convertible (CoCo) bonds. Banks have until the end of 2018 to meet the requirements.The levels exceed the international standard requirements of 7% for common equity and 10.5% minimum for total capital.
A CoCo bond is a convertible bond in which the price of the underlying stock must reach a certain level before any conversion is allowed. Here the CoCo bonds would turn to equity if the capital ratios of the banks fall below a pre-determined trigger level. With changes in the bank’s balance sheet and market share in the domestic market, the capital requirements would also alter.
In addition, banks need to have leverage ratio of at least 5%. Banks should also formularize a right structure and regulators would suggest changes if they fail to provide a proper and convincing structure on their own.
Our Take
The recent crisis jeopardized global financial institutions and had some substantial impact on these Swiss banks. This led the governments to look for tighter regulations across the world. International standards like Basel III should help in ensuring that banks have enough capital to overcome any economic risk.
It could result in fewer bank failures and reduce the usage of taxpayers’ funds in saving the troubled financial institutions. However, we believe that the implementation of such rigorous measures would require the banks to change their business structure in the upcoming years.
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