SNB: Credit Suisse and UBS need to take action

From the SNB Stability Report

At the end of the first quarter of 2016, both big banks were fully compliant with the initial TBTF2 phase-in requirements, which come into effect on 1 July 2016. To meet the corresponding look-through requirements by the beginning of 2020, however, the big banks need to take action – particularly in meeting the leverage ratio requirements and the gone-concern requirements. As regards risk-weighted going-concern requirements, by contrast, both big banks are already almost fully compliant.

However, it is likely that RWA will increase in light of the measures drawn up by the Basel Committee. This expected RWA increase has, as far as possible, been factored into the calibration of the TBTF2 requirements.

[…] Moreover, the Basel Committee has confirmed the 3% minimum requirement for the Basel III leverage ratio and is considering the introduction of a higher leverage ratio requirement for G-SIBs. The reforms are due to be completed and published by end-2016.

[…] First, the big banks’ loss potential relative to their capitalisation continues to be substantial, both when measured on the basis of the losses experienced in the last financial crisis and according to the adverse scenarios applied by the SNB. The highest loss potential results from the US recession scenario, followed by the euro area debt crisis scenario and the emerging market crisis scenario. Second, while leverage ratios at both Swiss big banks have improved by international standards, their Basel III Tier 1 leverage ratios are currently still below the average for large globally active banks.

and further on:

Substantial loss potential
According to SNB stress tests, the big banks’ loss potential under the adverse scenarios is still substantial. The highest loss potential results from the US recession scenario, followed by the euro area debt crisis scenario and the emerging market crisis scenario. In general, the loss potential stems primarily from loans in the US and Switzerland, counterparty exposure from derivatives and securities financing transactions, and equity and bond positions. Irrespective of the scenarios considered, losses can also result from operational and legal risks.


My view:

So it is only a question of time before action needs to be taken and a euro area debt crisis (Brexit and more exits…) would cause high loses relative to capitalisation.


SNB definitions:
Euro area debt crisis

The debt crisis in the euro area re-escalates. Sovereign risk premia for southern euro area member states rise abruptly, resulting in widespread financial and banking stress. Confidence declines and a deep recession spreads across Europe, originating from the southern member states. Stress in the euro area banking sector and financial markets also spills over to the US and Switzerland, triggering a fall in share prices and a widening of corporate spreads. Against this backdrop, the normalisation of monetary conditions is postponed further. The severity of the scenario is guided by the global financial crisis in 2008/2009, but is centred on acute banking stress in the euro area. The recession in Switzerland is deeper than in 2009 and leads to a sharp drop in Swiss real estate prices, in both the residential and commercial sector. The scenario is similar to the euro area debt crisis scenario in last year’s Financial Stability Report.


Baseline scenario
Under the baseline scenario, economic conditions for the Swiss banking sector improve. Economic growth picks up moderately in the euro area, but unemployment stays high in many member states. In the US, growth continues to be robust. Growth in China slows further and some major emerging markets remain in recession. In Switzerland, the recovery continues and unemployment begins to decline slowly after peaking in the second half of 2016.

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