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OECD: Swiss bank reforms should go further

Tuesday 24 January 2012 – by [email protected]

Essential Swiss reforms regulating the country’s two largest banks should be brought forward to help ensure financial stability in the country is maintained, according to the OECD.

Draft legislation must also impose a stricter leverage ratio requirement on Swiss banks, the OECD said in a report released on Tuesday.

While the group welcomes the tough new banking laws, which could force lenders to hold 19 per cent of risk-weighted assets, it says that the requirements must be accelerated ahead of the Basel III reforms.

Under the proposals the country’s ‘big two’ – of Credit Suisse and UBS – would be forced to hold a common equity ratio of 10 per cent, with up to another 9 per cent of funding coming from instruments such as contingent convertible bonds, called CoCos, by 2018.

However the OECD argues that while the pair have only a small exposure to the eurozone crisis, they must be forced to speed-up the strengthening of their reserves because their balance sheets remain “exceptionally large” compared to the size of the country.

Although the duo have deleveraged since 2007, the pair’s balance sheets still equate to a combined total of 426 per cent of GDP, the OECD says.

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“The regulator should require the Big-Two to hold more loss-absorbing capital relative to total assets in the near term,” the report says, though it does not recommend any immediate figure the banks should target.

“The need for substantial tightening of capital requirements is reinforced by the absence of an internationally coordinated resolution mechanism which could help avoid the rescue of a failing bank by the government.

“It is crucial that, at the least, the proposed capital requirements for the Big-Two are implemented in full.”

A proposed 5 per cent leverage ratio requirement should also be extended, the OECD says, claiming that the mooted level is only “modest” compared with the risks involved should the banks experience heavy losses.

In its previous survey the OECD had claimed that the leverage ratio should total just 4 per cent.

It adds that “preferably” common equity should also contribute a larger share to the capital requirement, claiming that recent studies have shown that heightened capital requirements “do not generate substantial social costs”.

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