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Switzerland Pesses Ahead With Stricter Bank Rules
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As it finalised legislation to go to parliament, the Swiss cabinet said the general thrust of a draft law it issued in December was unchanged but it had made a few minor changes following a consultation period.
"The proposed package of measures is designed to prevent the state from having to use tax revenues in the future in order to bail out systemically important banks," it said in a statement.
"While the costs for systemically important banks will increase in the short term, investor confidence will increase over the long term, constituting a competitive advantage for Switzerland's financial centre and the institutions affected."
The government has proposed both big banks will need an equity Tier 1 capital ratio of at least 10 percent, versus the 7 percent minimum set under the Basel III global standards which begin to take effect in 2013.
Both UBS and the powerful right-wing Swiss People's Party (SVP) have warned the plan risks making UBS and Credit Suisse less competitive, raising questions about whether the rules might still be watered down during the legislative process.
The government addressed concerns raised by the SVP and others players about powers proposed for the FINMA regulator in a crisis, saying the big banks would be free to formulate an emergency plan if threatened with insolvency.
Switzerland is at the forefront of a global push to increase oversight of the financial industry after bailing out UBS during the financial crisis. UBS and Credit Suisse together have balance sheets more than twice the size of the Swiss economy.
The government proposed publishing a report on international developments every year to address concerns about Switzerland forging ahead of other countries with its tough rules.
Britain too is considering implementing capital standards more stringent than Basel III, though these would apply only to big retail banks.
The comparatively more lenient treatment of investment banks by Britain is providing further ammunition to those lobbying to lessen the so-called "Swiss Finish".
UBS Chief Executive Oswald Gruebel has said the stiff Swiss standards could force UBS to move units abroad.
In contrast, Credit Suisse has termed the proposed standards "tough but doable" and has already started issuing contingent convertible bonds (CoCos) that can count towards a requirement that the banks must hold a further 9 per cent of capital.
Heleva analyst Peter Thorne said the fear the rules would make Swiss banks uncompetitive was "a gross exaggeration" but they would have to cut their investment banking businesses, particularly in fixed income, currencies and commodities.
"Implementation of the rules should see CS and UBS downsize their investment banking operations, especially FICC, and this should liberate capital which is probably not earning its cost of capital for the benefit of shareholders," he said.
The government said parliament could vote on the matter before the end of the year so the plans could come into force by the start of 2012 at the earliest, with a transition period up to 2018 to allow implementation.
Yet with Switzerland gearing up for elections on Oct. 23, the question of how much capital banks should hold and the future role of financial industry will probably be subject to heated debate and the proposals may still be amended or delayed.