Fool me four times, shame on whom exactly? The Swiss regulators don’t want to find out. In each of the last three global financial crises, a Swiss bank was caught out, causing losses for shareholders and headaches for the authorities. The supervisors think they have spotted a way to head off the next disaster.
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Philipp Hildebrand, in charge of financial stability at the country’s central bank, has hinted that UBS AG and Credit Suisse Groups AG might want to maintain the 5% capital-to-assets ratio used by US commercial banks. The big banks already sport high tier I capital ratios, but might be asked to go higher—perhaps to 14%.
The required changes would be onerous. Morgan Stanley reckons UBS would have to shed something on the order of 1 trillion Swiss francs (Rs41.35 trillion) of assets, or 43% of its current total, to claw its way from 2.1% leverage to 5%.
Alternatively, it could try for a whopping rights issue, or forego dividends and share buy-backs for three years—a course of action the bank’s regulator, the Swiss Federal Banking Commission, has already suggested may be necessary. Credit Suisse has done much better in the current crisis, but would need to take similar drastic measures.
Both banks are hopping mad. Credit Suisse’s chief risk officer said that banks are managed according to Basel II (the arbiter of tier I capital), not Hildebrand I. They have a point. Simple leverage ratios are just too simple. Citigroup Inc. ran with a lower crude leverage ratio than UBS—but got into just as much trouble.
The mooted new rules threaten a key aspect of both Swiss banks’ business model—linking the investment and private banks. Credit Suisse boasted of 1.3 billion Swiss francs of revenue in the latest quarter from its “one bank” strategy, and is targeting far more.
UBS has been touting similar benefits.
Hildebrand says much tougher capital and liquidity rules wouldn’t kill the integrated model. But global brokerage firm and investment bank Keefe, Bruyette and Woods Inc. estimates that return on equity would probably slip by several percentage points, to a range of 11-14%.
Such a loss in profitability may be acceptable to regulators. Shareholders would probably take a different view.