The Swiss authorities have become the first to extend the capital adequacy requirements for its banks beyond those laid out by Basel III.
The Swiss global banks—Credit Suisse and UBS—will have to hold capital in excess of new international standards to minimise systemic risk. The new rules were laid out by a government-appointed commission, comprising regulators, bank executives and other industry leaders.
The commission said that the two banks should hold 19% of risk-weighted assets. At least 10% of this should be in common equity and 9% can be in the form of contingent convertibles called CoCo bonds. Such bonds that convert into equity when a bank’s core capital ratio falls below a certain level. This is 3% higher than the 7% requirement laid out in Basel III. (article continues below)
The new requirements include a minimum of 4.5% common equity, plus a buffer of 8.5%, 5.5% of which must be in common equity. There is also a progressive component of 6%, which can be CoCo bonds. The banks have until the end of 2018 to comply.
The banks have until the end of 2018 to comply
There has been some debate as to whether the hybrid CoCo bonds would count towards capital adequacy. The Swiss have set a precedent by not allowing them as part of core capital, but enabling them to contribute to overall capital adequacy.
In order to prevent Swiss banks becoming “too big to fail”, the commission also said that the banks should be organised to allow for an easy break-up in the event of failure. In particular, the areas of the banks that are relevant to the smooth functioning of the economy—payment transactions, deposit and lending businesses—should be divisible from the rest of the bank.
Other measures proposed by the commission including further improvements to bank insolvency law and the introduction of centralised counterparties for over-the-counter derivatives.
The commission’s recommendations are draft law and will be debated in parliament early in 2011.