Wednesday , June 16 2021

The Federal Council adopts stricter rules: Refinancing and Raiffeisen need more capital

The Federal Council adopted stricter rules for large domestic banks. In addition, the government announced additional tightening of capital requirements for UBS and Credit Suisse.

Hansueli Schöchli

The club of systemically important banks in Switzerland also includes Zurcher Cantonalbank (ZKB), Raiffeisen Group and Refinancing. (Picture: Peter Clauser / Trapeze)

The club of systemically important banks in Switzerland also includes Zurcher Cantonalbank (ZKB), Raiffeisen Group and Refinancing. (Picture: Peter Clauser / Trapeze)

On a three-leg table, the man starts to hesitate when one of his legs pauses. The same goes for the economy when a big bank falls. That's why the state saved UBS in 2008. In order to reduce taxpayers' risk in the future crises of such "systemically important" banks, capital adequacy requirements around the world have been substantially strengthened.

This also applies to Switzerland. Global large banks UBS and Credit Suisse will have to meet the following conditions at the group level in the future: for an amount of 100 CHF in a total amount of at least CHF 5 for normal operations and about 4 CHF for capital for loss transfer in the event of an extraordinary condition. In addition, there are capital requirements based on the risks of assets.

The club of systemically important banks in Switzerland also includes Zurcher Cantonalbank (ZKB), Raiffeisen Group and Refinancing. On Wednesday, the Federal Council adopted a decree to tighten the rules for own funds for these three institutions. Due to previous decisions, the three banks will require a ratio of at least 4.5 and 4.6% equity capital, respectively, for normal operations. In addition, capital requirements based on the balances of the balance sheet assets must also be taken into account. In addition, the three institutes should additionally possess at least 1.8 to 1.9% of the capital that brings loss to the mortality scenario ("emergency capital"). If the banks create this pillow with capital, a supplement of about 1.2% of the total balance sheet is sufficient.

The dispute over the state guarantee of the ZKB

The new rules will come into force gradually from the beginning of 2019, with a transitional period until 2025. For ZKB, the requirement for emergency cushions will be halved due to state guarantee. ZKB and the Zurich canton lobbied for full crediting of the state guarantee and thus for canceling an additional capital requirement, but failed to do so with the Federal Council; the federal government argues that only the state guarantee in crisis can not ensure fast availability of emergency capital. Despite this dispute, ZKB already meets the capital requirements that are applied after the transition period.

This is not the case for Raiffeisen and post-financing. Raiffeisen needs additional capital – depending on the type of asset – from 1.3 to 2 billion francs by 2026 to meet the new conditions. According to Raiffeisen, Raiffeisen intends to raise this additional capital by retaining profits and subscribing to additional certificates of shares by members of the co-operation. Raiffeisen announced a net profit of over 900 million CHF for 2017, compared with about 750 million CHF in 2016.

Under pressure, post-financing is under pressure. The Financial Market Authority called for a special interest surcharge payment for some time. And above all, earnings power crashed so sharply because of the low interest rates that the Federal Council was forced to escape from the front, and this September decided to abolish the ban on credit transactions for refinancing. However, whether this will be the majority in parliament, it is debatable.

According to the federal government, post-financing requires additional funds of 2.2 billion Swiss francs by 2026 due to new capital rules and the current balance sheet structure. This requirement may be reduced to around CHF 1.5 billion if the Refinancing provides this urgent shareholding suspension, the Federal Council wants primarily to capitalize, as he explained in September. The focus was on retaining the profits, the additional capital gains of the postal group and the "subsequent inflow of assets as part of the opening of the shareholders' association".

UBS and CS are back in place

The two big banks have to deal with new difficulties. Despite stricter capital adequacy rules at Group level as a whole despite the outsourcing of the parts of the two major banks considered to be systemically relevant in Switzerland to separate legal entities, the Swiss authorities are still not satisfied. They fear that much of the global pillow of UBS and Credit Suisse will be reserved for their key foreign locations, such as the United States and the United Kingdom, so that in the crisis there will be little upholstery for Switzerland. For this reason, the Federal Council wants to foresee additional capital requirements for emergencies for Swiss parent companies of UBS and CS – although the previously mentioned parent companies are not officially systemically important. But the resistance is significant. So the Federal Council postponed the issue and announced decisions for the first half of 2019.

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