UBS, Credit Suisse Said to Face Tougher Rules on Liquid Assets

Dec. 21 -- UBS AG and Credit Suisse Group AG may have to almost triple the amount of cash they hold in relation to customer deposits under new proposals from Swiss regulators, two people familiar with the matter said.

The two largest Swiss banks may be required to hold 45 percent of customers’ demand deposits in cash or easy-to-sell securities such as government debt, almost three times as much as under current rules, said the people, who declined to be identified because the proposals haven’t been made public. The banks, which are in talks with the regulators, are seeking to soften the requirements, the people said.

Switzerland may be the first country to introduce rules requiring banks to keep more liquid assets on hand following the global credit crisis. Forcing Zurich-based UBS and Credit Suisse to hoard more cash and low-yielding securities against a possible bank run would make them less profitable and may lead them to curb lending, analysts and bank officials said.

“Switzerland has always been stricter with its rules for the banks than other countries,” said Dirk Becker, a Frankfurt- based analyst at Kepler Capital Markets. “Stricter liquidity rules take away the flexibility of the banks in lending. That may lead to fewer loans being made and lower profitability as less interest income is generated.”

Tobias Lux, a spokesman for the Swiss Financial Market Supervisory Authority, said the new rules are aimed at boosting the banks’ short-term liquidity buffers, declining to comment on the details of the proposals.

UBS Rescue

The regulator plans to publish new liquidity management rules in the first quarter of 2010, Lux said. Banks will have to implement them in the second quarter, Swiss National Bank Vice Chairman Philipp Hildebrand said Dec. 10.

The rules as currently envisioned would only apply to the two largest banks, because of concern a collapse of either would endanger the Swiss financial system.

UBS spokeswoman Tatiana Togni and Credit Suisse spokesman Marc Dosch declined to comment.

Swiss regulators have been in discussions with banks to update liquidity rules since before the crisis. The urgency grew when credit markets froze after Lehman Brothers Holdings Inc.’s bankruptcy in September 2008. The Swiss government had to support UBS with 6 billion francs ($5.8 billion) in capital to help it spin off risky assets into an SNB fund.

UBS and Credit Suisse held almost 205 billion francs of customers’ sight deposits, or funds that can be transferred immediately and without restrictions, at the end of September. Another 199 billion francs were held in customer deposits, including call money, with a residual maturity of up to one month, according to central bank statistics.

‘Drag’

The Basel Committee on Banking Supervision last week said it plans to develop a set of minimum standards for capital and liquidity by the end of 2010, with the aim of implementing them by the end of 2012. The committee proposed introducing a minimum coverage ratio to ensure that banks can meet their liquidity needs for a 30-day period in a stress situation, as well as a ratio to measure the amount of longer-term stable sources of funding used by companies.

The new Basel rules “could be a significant drag on profitability,” Credit Suisse analysts Jagdeep Kalsi, Daniel Davies and Guillaume Tiberghien said in a note on Dec. 18. The cost of extending long-term funding and holding more liquid assets could amount to as much as 30 percent of pretax profits at European banks, they said.

In Switzerland, where the two biggest banks control about a third of domestic lending, stricter liquidity requirements would increase the cost of capital and limit the amount of loans, Hans-Ulrich Meister, Credit Suisse’s head of Swiss business, told a conference on Nov. 30.

‘Credit Crunch’

“The risk is really that we create a credit crunch,” Meister said. “Honestly what will happen is that capital is restricted, gets much more expensive and the two big banks will definitely limit their lending, especially unsecured.”

The tougher rules may also put pressure on the banks to raise fees at a time when profitability is already being squeezed at their private banking operations.

Credit Suisse’s gross margin in the wealth management business fell to 125 basis points in the third quarter from 135 basis points in the second, while UBS’s margin on assets invested by international clients declined to 83 basis points from 87 basis points, in part because of lower interest earnings. A basis point is a hundredth of a percentage point.

Leverage Cap

The regulators already introduced stricter capital requirements and a cap on leverage for the two banks. They have said that a stable financial industry is more important for Switzerland than other nations, because banks’ assets are the biggest relative to gross domestic product of any G-10 country.

To cushion the effect on banks from stricter rules, the regulators may expand the list of assets that are considered liquid, one person familiar with the matter said.

“In the last two years, the risks presented by systemically important banks to the stability of the financial system and the economy in general have become only too evident,” Hildebrand, who will become chairman of the SNB’s governing board in January, said on Dec. 10. “Another crisis is inevitable and we must be prepared for it.”