Cabinet insists on tougher banking rules

Finance Minister Widmer-Schlumpf says the Swiss banking sector will benefit from rules despite higher costs Reuters

The government is pressing for the country’s two main banks to bolster their capital standards to protect the wider economy from a future financial crisis.

Presenting the bill to be submitted to parliament, Finance Minister Eveline Widmer-Schlumpf told journalists that the set of strict crisis measures was necessary because of the vital role of the banking giants UBS and Credit Suisse for the Swiss economy.

The government was forced to bail out UBS at the height of the financial crisis in 2008.

“The special situation in Switzerland with two financial institutions of such importance justifies and even compels us to take special measures,” Widmer-Schlumpf told a news conference on Wednesday.

She rejected veiled threats by the chief executive of UBS, Oswald Grübel, that stringent Swiss standards could force the bank to move some units abroad.

Widmer-Schlumpf said she was not sure that the bank would find more favourable regulations and economic conditions elsewhere, including political stability and low taxes.

Responding to criticism about hasty and potentially damaging regulations, she said the draft had been more than two years in the making and that both experts and the banking industry had endorsed the proposals.

She said an expert group commissioned by the government had carried out a “thorough examination” and the government had addressed concerns by critics.

“There will be adjustment costs for the banks but all in all the net effect will be positive. The banking sector will be winner,” she asserted.

Key measures

The general thrust of the draft law issued last December is unchanged except for a few minor changes following a three-month consultation period with relevant parties and institutions.

The cabinet wants both big banks to build up a total capital equity ratio of at least 19 per cent, which is above the minimum set by the Basel III global standards.

The bill includes four key measures: Strengthening the capital base, introducing tougher liquidity requirements, a better risk diversification and organisational steps to ensure the maintenance of vital functions – notably payment transactions – in the case of threatened insolvency.

In an amendment to December’s draft bill, the government now proposes to publish a report on international developments every year to address concerns about Switzerland forging ahead of other countries with its rules and the financial sector potentially losing its competitive edge as a result.

Reaction

There was mixed reaction to the bill from the Swiss banking industry and political parties.

While the UBS bank has expressed its fundamental opposition from the beginning, Credit Suisse on Wednesday reiterated its support for the proposed measures.

The Swiss Bankers Association also threw its weight behind the bill in the consultation procedure but it wants the changes in the system to be phased in gradually.

SBA spokesman James Nason, quoted by Reuters news agency, also criticised the terms of the provisions for reviewing the new rules as too vague.

Of the five main political parties, the rightwing Swiss People’s Party rejected the government plans as rushed and potentially damaging for the Swiss economy.

The centre-left Social Democrats and the Greens both said the proposals did not go far enough and should be tightened during the parliamentary debate.

The centre-right Radicals, traditionally known for their close ties with the business community, described the bill as a step in the right direction but they are concerned about Swiss banks losing ground to international competitors.

In a first reaction the centre-right Christian Democrats welcomed the proposals as a reasonable and sustainable solution.

The government hopes parliament will begin discussions on the too-big-to-fail bill in summer, so that the legal amendments could come into force next year, with a transition period of up to the end of 2018 to allow implementation.

However, observers point out that discussion could drag on in the run-up to parliamentary elections on October 23.

Too big to fail

Only in Iceland is the banking sector worth more than the Swiss sector in relation to the total national economy.

In 2007, before the crisis, banks in Iceland were worth 8.5 times the country’s GDP.

In Switzerland this figure was just under eight times GDP.

Despite the financial crisis the combined value of assets at UBS and Credit Suisse alone is currently 3.8 times higher than the Swiss GDP.

The government commissioned a report which was published last September.

In December 2010 an initial draft bill was sent to parties, organisations and institutions for consultation by the end of March 2011.

Parliament is to begin discussions on the bill next June and the amendments could come into force in 2012 at the earliest.