Swiss Bankers Association (SBA) position on amending the Banking Act and Capital Adequacy Ordinance (capital backing for foreign participations of systemically important banks at parent company level)

The Credit Suisse crisis showed that the problem with capital requirements was not that they were too low, it was that extensive regulatory concessions had been made over many years, as a result of which Credit Suisse was not compelled to take action in good time. The lesson to be learned here is that it would be better to avoid such concessions in principle going forward rather than massively tightening the capital requirements, which is what the proposed capital adequacy rules would do.

It is vital for Switzerland to stop going it alone instead of adopting international standards and to refrain from any further “Swiss finish”. Insular regulation gives rise to unnecessary costs, places a burden on the real economy and jeopardises the international competitiveness and stability of the financial centre.

Switzerland’s existing capital requirements are already among the most stringent in the world. Basel III Final, for example, was implemented earlier, more extensively and more conservatively in Switzerland than in comparable financial centres such as the EU, US and UK. Additional, tighter capital requirements that only apply in Switzerland would cause a regulatory imbalance, meaning that there would be no level playing field internationally.

As the Federal Council states, only UBS would in fact be directly affected by this measure. However, the negative consequences of the planned massive tightening, for instance in the form of costs being passed on or restrictions on services that only a large multinational bank can offer, would be harmful to the entire banking sector, the financial centre as a whole and Switzerland’s real economy.

Implementing the planned measure would make doing business abroad more expensive, either directly or indirectly, for all banks in Switzerland. It would constitute a significant, long-term disadvantage for Swiss banks intending to build up or expand international operations from a Swiss base.

The Federal Council’s proposal to restrict the measure to Common Equity Tier 1 (CET1) core capital goes far beyond its original proposal from 2024 and is actually at odds with both the Basel standards and international practices. Current Swiss law and the Basel standards define Tier 1 capital as loss-absorbing capital comprising CET1 and Additional Tier 1 (AT1). The de facto exclusion of a significant capital component from capital backing for foreign participations makes no sense.

The Federal Council’s explanatory report rejects alternatives to the chosen maximalist option on purely qualitative grounds. We therefore wish to call once again for a review of expedient alternatives, together with a sound and exhaustive cost/benefit analysis and a transparent account in the dispatch. Attention must be explicitly paid to the achievement of goals in terms of minimising risk as well as the cost of each alternative to the overall economy.

The complete deduction of foreign participations, combined with the other capital measures proposed in the package, would accentuate the “Swiss Finish”.

A holistic view is thus urgently needed to work out all capital measures. This was already called for in the various consultation responses on the Capital Adequacy Ordinance, including those from the real economy. The interdependencies involved are not in doubt and require a balanced solution that strengthens the Swiss financial centre instead of weakening it further.

In times of geopolitical and economic tension with a clear trend towards deregulation in comparable jurisdictions, it should be all the more important to factor competitiveness into regulatory capital requirements. Banking regulation cannot be seen as independent from Switzerland’s efforts to promote itself as a business location.

This is especially pertinent given the Federal Council’s intention to play a part in these efforts by creating regulatory frameworks that preserve Switzerland’s international competitiveness.

The proposed measure regarding capital backing for foreign participations of systemically important banks is extreme, not aligned with international standards and likely to have a disproportionate impact on the Swiss financial centre.

The SBA therefore rejects this proposal.