Fitch: Swiss Bank Capital Rules Confirm Regulatory Drive
The latest announcements set the bar even higher and come ahead of global minimum total loss-absorbing capacity (TLAC) standards, which are set to be finalised for the G20 summit next month. Switzerland is the first country to spell out minimum TLAC requirements: Credit Suisse and UBS will have to hold TLAC equivalent to at least 28.6% of risk-weighted assets (RWA) and 10% of total leverage exposure (a measure of unweighted on- and off-balance sheet exposures) by end-2019. The new requirements are tough compared to the Financial Stability Board's proposals.
TLAC comprises both going and gone concern capital. Ensuring GSIBs hold sufficient TLAC is particularly important because regulators want to make sure they have enough loss-absorbing and recapitalisation capacity to ensure they can continue to provide critical functions after resolution without using tax-payers' money. Under the new rules, minimum levels of gone concern capital will have to match minimum going concern capital requirements.
The leverage ratio requirement has increased to 5% by end-2019. Of this, at least 3.5% must comprise higher quality common equity tier 1 (CET1) capital and up to 1.5% of high-trigger additional tier 1 (AT1) instruments. The 5% ratio is in line with leverage requirements for US bank holding companies but two percentage points higher than Basel III's minimum. Capital ratio requirements on risk-weighted assets (RWA) have also increased. The minimum CET1 component for the two GSIBs remains at 10% of RWA, but the new rules will require more and higher quality additional capital - at least 4.3% in high-trigger AT1 instruments, bringing the total regulatory capital requirement up to 14.3% of RWAs.
Switzerland is the first country to formalise TLAC requirements. We expect that once all the components, such as combined buffer requirements are considered, G-SIBs around the world will need to hold similar amounts of TLAC. Even if regulatory requirements are lower in some countries, investors are likely to set their benchmarks at the higher end of the spectrum. Swiss TBTF legislation includes incentives to create group structures that facilitate resolution, so that if Credit Suisse and UBS improve their resolvability, they could benefit from reductions of minimum capital requirements.
Both Credit Suisse and UBS have already issued large volumes of loss-absorbing contingent capital instruments. Existing instruments that will not be eligible as going concern capital under the new rules can be grandfathered until end-2019 or their call date.
UBS stated last week that it intends to use the four-year period to fully implement the new requirements. It reported a strong fully-loaded 14.4% CET1 ratio and a 3.6% fully-loaded Basel III Tier 1 leverage ratio at end-1H15. Credit Suisse announced plans last week to issue CHF6bn common equity by the end of this year, plus a potential CHF2-4bn to come in 2017 from an IPO of its Swiss bank. Following the capital increase, management expects the pro forma end-2015 fully-loaded Basel III Tier 1 leverage ratio to reach 4.7%.