- ZURICH (Reuters) -The Swiss National Bank said on Thursday that additional work has to be done on capital and liquidity requirements in light of UBS’s acquisition of Credit Suisse, indicating the need for further tightening of Switzerland’s financial rules.
- This fueled worries that the expanded UBS would be hazardous for the Swiss economy, leading the government to suggest more stringent rules for banks that were considered “too big to fail” in April.
- Proposals to increase UBS’s capital holdings were at the center of the strategy, but there is still a lengthy political procedure ahead.
- The Swiss National Bank (SNB) said in its yearly financial stability report that it agreed with the Federal Council, which is in charge, that action on capital requirements, liquidity requirements, early intervention, and recovery and resolution plans is necessary.
- “The crisis at Credit Suisse has highlighted weaknesses in the regulatory framework,” said the study.
- “Before the crisis, the parent bank of Credit Suisse had a greater capitalization than the combined parent bank of UBS. However, the central bank said that the shortcomings of the present system still exist and need to be remedied.
- Specifically, the SNB supported the government’s plans to impose capital restrictions in three areas.
- First of all, it recognized the need to enhance the Additional Tier 1 (AT1) instruments’ ability to stabilize a bank’s ability to operate. If a bank’s capital levels drop below a certain level, AT1 bonds serve as shock absorbers.
- Furthermore, the capital regime for parent banks and the “prudent calculation” of Common Equity Tier 1 capital should be reinforced, according to the central bank.
- “Even with the above-mentioned improvements to the architecture of capital regulation, regulatory ratios remain to a large extent a static measure and should be complemented by elements that contain forward-looking components, such as a bank’s expected profitability,” the SNB said.
- In addition, the SNB backed an examination of the liquidity coverage ratio—a crucial metric for assessing a bank’s capacity to fulfill its cash requirements—because retail deposit withdrawals during the Credit Suisse crisis were more and occurred more quickly than the ratio was predicted.
- The bank saw that market indications, including credit default swap premiums and the share price of UBS, indicated that the market was viewing the bank’s prospects favorably.
- Despite suggestions from the nation’s antitrust authority that the UBS acquisition of Credit Suisse should be given further consideration, Switzerland’s financial regulator FINMA said on Wednesday that it did not raise any competition issues.
- According to the SNB, UBS is now reviewing its crisis preparations in light of the Credit Suisse acquisition and will submit them to FINMA for assessment.
- The SNB announced that new liquidity rules went into effect for systemically significant banks in January. The SNB said that although some of the vulnerabilities that emerged during the Credit Suisse crisis were addressed, others were not.
- It pointed out that modifications might provide sufficient support for sizable retail deposits with high-quality liquid assets (HQLA).
- Because longer-term financing forms do not have to be guaranteed by HQLA, it noted, this might boost incentives for banks to direct short-term client deposits into longer-term kinds of funding, such as by paying greater interest on term deposits.
Source:
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