Swiss capital rules will prove final straw

FOR all the furore over the rogue trading scandal at UBS, it is Switzerland’s notoriously strict capital requirements – not allegedly unauthorised trades – that is most hurting the country’s banks. That’s why the strategy unveiled by Credit Suisse boss Brady Dougan yesterday differs little from the one being pursued by UBS. The case of Kweku Adoboli is really just a sideshow.

Of course, all banks are suffering from low levels of activity, but Swiss capital rules are proving to be the straw that breaks the camel’s back for UBS and Credit Suisse. While others must adhere to Basel III, which is also stricter than anything before it, these rules leave just enough room for institutions to make a return on investment banking.

Not so for Switzerland’s Credit Suisse, which yesterday effectively announced its exit from the ranks of bulge bracket investment banks. Instead, it will focus on niche investment banking that predominantly supports its private banking arm. UBS is expected to announce a similarly radical withdrawal at its investor day later this month.

Anyone who doubts the scale of Credit Suisse’s move should look at just how drastically it is scaling back activity in fixed income, which historically accounts for roughly two thirds of global investment banking revenues.

Yesterday, Dougan said the bank would reduce by half the risk weighted assets (RWAs) in its fixed income division, as measured under Basel III, by 2014. In notional terms, that will see the firm cut approximately SwFr99bn (£85bn) from FICC, accounting for the lion’s share of 1,500 job losses.

So as bankers worldwide rue the fact that regulators seem to know nothing of unintended consequences, they should consider this. It could be much, much worse.
david.crow@cityam.com