UBS and Credit Suisse must pony up $70 billion

This is a big story coming from the Swiss German-language paper Sonntagszeitung. I originally saw this story in a derivative report from MarketWatch and then again at Calculated Risk. It’s not getting enough play as yet in the English-language press, perhaps because no one has translated the full story.

The long and short here is that Swiss politicians are looking to compel their financial institutions to be ‘super-capitalised’ in order to avoid writedown risk down the line. As a result, both UBS and Credit Suisse may be compelled to raise huge amounts of additional capital. As this is highly dilutive to existing shareholders, this will be a disappointment in the stock market, particularly for UBS which has already raised record amounts after writing off nearly $40 billion in losses. But, it may also cripple them in the Investment Banking world in the US.

I reported a few days ago that UBS was going to write down additional billions in U.S. losses but that it had over 11% Tier 1 capital equity and needed no further capital. Nevertheless, earlier warnings from the Swiss National Bank that it was going to compel Swiss financial institutions to have higher capital ratios are now being felt. In a post on 4 June 2008, called ‘Deleveraging redux,’ I quoted an article from the Herald Tribune that seems to identify the source of present concerns.

Switzerland’s large banks should increase their capital cushion and cut debt to better face the current credit crisis, the president of the Swiss National Bank said Friday.

“We will firmly support initiatives … to increase the equity of our large banks and to reduce their debt,” Jean-Pierre Roth said at a forum in Geneva.

Swiss banking chief says banks need capital cushion, less debt amid credit crisis, IHT, 23 May 2008

Obviously, the Swiss are worried about the reputation of the safety of their financial sector because financial services is one of Switzerland’s most prized industries (along with watch-making and pharmaceuticals). Now, political pressure inside Switzerland is obviously coming to bear as well. In the IHT article, Roth said the capital requirements were something they would address after the credit crisis. Politicians are obviously looking to move that timetable up as much as possible.

Below is my translation of the story and the original text.

My translation:

Big banks are to be heavily restricted

Politicians have had enough of the billions in losses. Swiss banks will virtually be forced to a withdrawal from Investment Banking in the United States as a result of new rules.

By Othmar von Matt and Arthur Rutishauser

After seeing the big banks write off 60 billion francs because of the U.S. credit crisis, the Swiss Federal Banking Commission (SFBC) has stepped in. According to research by “Sonntagszeitung,” the big banks must have at least 4 percent equity capital in the future. Today, UBS makes do with just under 2 percent and Credit Suisse with about 3 percent.

In addition, the ‘so-called’ tiered capital will have to be increased massively. SVP National parliamentarian Hans Kaufmann says, what this means is massive capital increases: “40 billion for UBS, 30 billion francs for Credit Suisse.” These are the sums he has heard in conversations.

The SFBC confirmed that it has determined specific figures and that the banks have until after the summer holiday to respond. Spokesman Alain Bichsel: “In the autumn we want to release a definitive position.”

He leaves no doubt that the SFBC will not waiver despite any protest from the banks, but that the SFBC is prepared to discuss details regarding implementation and the transition periods.

The big banks, however, are fighting vigorously against the new rules. Credit Suisse spokesman Marc Dosch: “Such measures must be based on the real problem, which in our view is not the case regarding leverage ratios and the capital buffers.”

Even if no capital has to be raised immediately, the banks would practically be shut out of any capital-intensive financing activities – such as the lucrative business of financing takeovers.

This would turn UBS and Credit Suisse into also-rans in the US. Dosch: “Such one-sided actions endanger the international competitiveness of Swiss banks and Switzerland as a financial centre. We will examine the proposals already received from the SFBC closely and discuss them in detail with the authorities.”

Hildegard Fässler, SP-National parliamentarian and President of the Economic Commission STC, sees the measures positively: “Politics is emancipating itself from the big banks. A change of thinking has occurred in the Bundesrat [Senate] as well. The government is now taking a certain critical distance. “

Privately, the Department of Finance also says: “And if Investment Banking goes away, it won’t be any big deal: In the end, UBS has already lost 40 billion.”

Original German-language text:

Grossbanken werden massiv eingeschränkt

Von Othmar von Matt und Arthur Rutishauser

Nachdem die Grossbanken wegen der US-Kreditkrise zusammen 60 Milliarden Franken abschreiben mussten, schreitet die Eidgenössischen Bankenkommission (EBK) ein. Gemäss Recherchen des «Sonntags» müssen die Grossbanken künftig mindestens 4 Prozent Eigenkapital ausweisen. Heute fährt die UBS mit knapp 2 Prozent und die Credit Suisse mit etwa 3 Prozent.

Hinzu kommt, dass auch das so genannt gewichtete Eigenkapital massiv erhöht werden soll. SVP-Nationalrat Hans Kaufmann sagt, was dies bedeutet – nämlich massive Kapitalerhöhungen: «40 Milliarden für die UBS, 30 Milliarden Franken für die CS.» Das habe er in Gesprächen gehört.

Bei der EBK bestätigt man, dass man sich auf Zahlen festgelegt hat und die Banken bis nach den Sommerferien Zeit hätten, sich dazu zu äussern. Sprecher Alain Bichsel: «Im Herbst wollen wir dann die definitive Verfügung erlassen.»

Er lässt aber keinen Zweifel, dass die EBK bei allem Protest der Banken hart bleiben will und man sich allenfalls noch bei den Ausführungsdetails und bei den Übergangsfristen auf Diskussionen einlässt.

Bei den Grossbanken hingegen wehrt man sich kräftig gegen die neuen Vorschriften. CS-Sprecher Marc Dosch: «Solche Massnahmen müssen auf das tatsächliche Problem abzielen, was nach unserem Dafürhalten etwa bei Leverage Ratio und Kapitalpuffer nicht der Fall ist.»

Auch wenn das Kapital nicht von heute auf morgen beschafft werden muss, könnten kapitalintensive Neugeschäfte praktisch nicht mehr getätigt werden – zum Beispiel die lukrative Finanzierung von Firmenübernahmen.

Damit würden UBS und CS in Amerika zu Nonvaleurs. Dosch: «Solche einseitigen Massnahmen gefährden die internationale Wettbewerbsfähigkeit der Schweizer Banken und des Finanzplatzes. Die nun eingegangenen Vorschläge der EBK werden wir eingehend prüfen und mit den Behörden im Detail diskutieren.»

Hildegard Fässler, SP-Nationalrätin und Präsidentin der Wirtschaftskommission WAK, sieht die Massnahmen positiv: «Die Politik emanzipiert sich von den Grossbanken. Auch im Bundesrat hat ein Umdenken stattgefunden. Die Regierung hält nun eine gewisse kritische Distanz.»

Beim Finanzdepartement heisst es denn auch hinter vorgehaltener Hand: «Und wenn das Investmentbanking abwandert,
wäre das nicht so dramatisch: Schliesslich hat es der UBS den 40-Milliarden-Verlust eingebrockt.»

(mz/nos)

Related posts
De-leveraging redux

Source
Grossbanken werden massiv eingeschränkt, Sonntagszeitung

Related German-language article
Rating-Agenturen: Notengeber kommen unter Druck, Handelszeitung
Die grosse Finanzkrise hat eben erst begonnen, Sonntagszeitung (this article is also partially translated here)