UBS, Credit Suisse Face Tougher Swiss Capital Rules

UBS (UBS) and Credit Suisse Group (CS) will have to almost double their capital holdings because Switzerland has set out to further tighten the reins on its megabanks, requiring them to hold capital well in excess of new international standards agreed upon in the Basel III rules.

Several media outlets reported that a government commission comprising the Swiss National Bank (SNB) and Swiss Financial Market Supervisory Authority (FINMA) issued new rules on Monday requiring the two banks to hold at least 19% of their capital in reserve. Compared to the 7% required common equity ratio the Basel Committee on Banking Supervision announced last month, the Swiss banks will have to hold at least 10% in the form of common equity. They will have to hold another 9% in contingent capital, or so-called contingent convertible bonds.

Less Focus on Investment Banking

"The proposed comprehensive measures build on the Basel III regulatory minimum standards and. . .will significantly mitigate the 'too big to fail' problem in Switzerland and thus reduce the risk for the Swiss economy," said SNB Chairman Philipp Hildebrand in a statement. FINMA Chairman Eugen Haltiner stressed the necessity for all parts of the package to be implemented rapidly, without any concessions.

These new requirements, however, may hinder the two banks' ability to compete in the field of investment banking. But that seems to be exactly the Swiss regulators' aim: They want the banks to focus more on less risky private banking.

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Both banks expect to meet the new capital requirements without having to sell new shares. Although UBS has also said it would probably not pay out dividends over the next couple of years.

Swiss banks account for nearly 8% of Switzerland's gross domestic product. UBS and Credit Suisse contribute a sizable portion of that, according to The Wall Street Journal. The new requirements, which the government must approve, will be a blueprint for future Swiss banking regulation.

Following the financial crisis, many countries attempted to improve financial regulation to avoid another crisis in the future. International efforts were also initiated. In the U.S., the Dodd-Frank Act was passed in July, giving regulators new authority. However, as Yalman Onaran of Bloomberg writes, whether the U.S. implements the Basel changes isn't clear.