Global Swiss banks UBS and Credit Suisse must hold capital well in excess of new international standards, a government commission said, to limit risk that a bank failure could drag down the economy.
The new rules may crimp the two banks' ability to compete in the field of investment banking, but Swiss regulators want them to focus more on less risky private banking.
The report from the commission of top regulators, bank executives and other industry representatives published on Monday said the two banks should hold at least ten per cent of risk-weighted assets based on new global standards (Basel III) in form of common equity.
In addition, the banks should hold another nine per cent, which could be contingent convertible (CoCo) bonds, taking the current total capital requirements to 19 per cent.
The so called CoCo bonds would be turned into equity if the common equity ratios fell below pre-defined levels. The capital requirements could rise or fall depending on the banks' balance sheets or if their domestic market share increases.
The new Swiss rules go well beyond the recently agreed rules under Basel III, which require banks to hold a minimum of seven per cent in the form of common equity.
However, media reports suggested that UBS and Credit Suisse might have to hold even more top-quality capital, indicating that the final number maybe a compromise between the banks and regulators.
Both banks have voiced confidence that they would meet new domestic and international requirements through retained earnings, though UBS has also said it would probably not pay out dividends over the next couple of years.
Banks should have until the end of 2018 to meet the new requirements, the commission said, which is in line with the timeframe for the new global rules.
The report will be a blueprint for future Swiss banking regulation, though the government still has to discuss it and kick off the lawmaking process in parliament.
Switzerland has led the global push for tighter banking regulations after the government had to bail out UBS at the height of the global financial crisis.
The focus of the commission's report is on UBS and Credit Suisse as systemically relevant banks, which still hold more than four times the country's gross domestic product of $540 billion (342 billion pounds) in liabilities on their balance sheets.
Swiss banks already have to meet stricter requirements for capital and liquidity then their global peers, and regulators – in particular the Swiss National Bank – have left no doubt that rules would be tightened beyond international minimum standards.
The commission said both banks should be organised in a way that would allow for the break out of parts that are relevant for the functioning of the economy in case of insolvency.
But it was up to banks to find the right structure, and regulators would only order structural changes if the banks failed to come up with a convincing framework themselves.
City A.M. Reporter