The Swiss central bank wants to make sure that the government doesn’t have to bail out one of the major banks ever again – 10 years after it jumped to the rescue of UBS. The big two seem to have made a lot of progress.
The financial stability report of the Swiss National Bank (SNB), published on Thursday, concludes that the two biggest Swiss banks, UBS and Credit Suisse, improved their resilience as well as the ability to fold the business in an orderly fashion in a crisis. These two aspects are the core pillars of the too-big-to-fail regulation.
The two banks have improved their capital situation overall, in spite of the deterioration in economic and financial conditions and are close to full compliance with the look-through capital requirements.
Crisis Scenarios
Some work still needs to be done to meet the requirements for possible crisis scenarios. The Swiss finance regulator, Finma, is assessing the two big banks’ liquidity needs under such scenarios and is comparing them with the currently available liquidity reserves. Finma is drawing up resolution funding plans in cooperation with the banks, the SNB, and foreign host resolution authorities.
The central bank warned that the big banks still face big loss potentials in times of external shocks. The most urgent of such risks is a market reaction to a U.S. recession. A downturn in the Swiss property market may also heavily affect the big banks, the SNB said.
Property Market Risks
The Swiss National Bank has repeatedly warned about an overheating of the real estate market in Switzerland, a trend that has been fueled by a prolonged period of negative interest rates. The banking industry would be adversely affected by a sudden disruption in the business.
The SNB welcomes efforts by the industry to tighten the rules for awarding mortgages. The tightening is intended to be enacted by the beginning of 2020. If the industry fails to agree, the government will likely step in and order the mortgage business to lower the risks involved.
