The Financial Times gives prominent play to a story that I suspect will go largely unnoticed in the US, that of the way that the Switzerland’s bank regulator, the Swiss National Bank, has forced its two biggest banks, UBS and Credit Suisse, to shed risk in a serious way and shrink.
It took a while for the central bank to impose conditions, but the proximate cause was the bailout of UBS during the crisis. As we discussed in ECONNED, UBS went full bore into bonus gaming, not only keeping its own AAA CDO tranches, but also buying them from other banks, then partially hedging them with credit default swaps. That created very large and easy “profits” for the traders. And as we know, that scheme blew up spectacularly.
The Swiss National Bank, unlike any other sugar daddy rescuing reckless banksters, forced UBS to hire independent parties to interview staff and prepare a report explaining in gory detail how the bank blew itself up. Most of this information was made public. Had every other banking regulator followed suit with their wayward charges, it would have provided a vastly better foundation for discussions of regulatory reforms and would have led to much more focused investigations.
The SNB earlier this year had taken the unprecedented step of imposing a 19% capital requirements, which is in line with the recommendations of some academics, like Amat
Admati. This was the outline of the plan, per Eurointelligence:
According to a draft law those two institutions should be required to keep 19% of their capital as a cushion of which 10% has to be core tier one capital. Part of those 19% is a surcharge on big banks of 6% which can be covered by contingent capital (cocos). That measure alone will cost both banks €18bn respectively, the paper claims. The government justified its proposal by saying that nowhere else banks had a comparable weight in the economy as in Switzerland.
Why are the Swiss being so bloody minded? Having two big banks who have not conducted themselves very responsibly when their assets together are 500% of your GDP does tend to focus the mind.
We indicated at the time that the options for these banks were limited:
Now this would seem to put paid the idea that governments need to roll over and play dead when big banks bark. While the heads of some boutiques within firms may be able to bolt, like hedgies and private equity types, anyone too close to the capital market engine is going to be less mobile. You need a credible central bank to back you up (and Japan and China are not about to welcome foreign entrants, thank you very much) and you also need to be close to clients (financial centers have big network effects). You could in theory split the traders off from client facing staff but in practice there is a reason salesmen and traders typically sit in close physical proximity: the information advantages run both ways.
Indeed. UBS apparently looked into splitting off and redomiciling its investment bank; that plan apparently was either operationally unworkable (as in the new entity could not fund itself at competitive rates) and/or no country with a credible central bank would agree to the headquarters change (note that under the prevailing “home-host” rule, even though financial firm are licensed on a national basis and required to obey local bank regulation, the regulator in the home country supervises bank solvency and is also expected to take charge in the event of distress or insolvency).
The Financial Times tells us the outcome:
UBS has outlined long-awaited plans to shrink its business dramatically and refocus on its core wealth management operations, making deep cuts to its investment bank.
The Swiss banking group plans to cut more of its investment bank staff and slash its risk-weighted assets in its investment bank almost by half over the next five years…
The changes will involve streamlining the investment bank to strip out about SFr145bn ($158bn) of assets weighted by risk from the current SFr300bn total, with the bank exiting business like asset securitisation and complex structured products.
That should help to boost the group’s return on equity to between 12 per cent and 17 per cent – well down on pre-crisis goals but still ambitious in the current much tougher trading and regulatory conditions. In the first nine months of this year, UBS achieved an annualised ROE of 10.7 per cent.
“The investment bank will be less complex, carry fewer risk weighted assets and require substantially less capital to produce sustainable returns for shareholders,” said the bank….Rival Credit Suisse this month announced plans to shrink risk-weighted assets in the most capital intensive parts of its investment bank by about half by 2014.
The changes being forced on the two biggest Swiss banks show how ludicrous US bankster complaints about harsh treatment are. The US was the source of not just the high risk, predatory model that became pervasive among the biggest financial firms; it also exported toxic assets on a large scale. The Swiss remember the days when their banks limited themselves to the comfortable, lucrative business of serving wealthy private clients and have chosen to dial the clock back a bit. Banking regulators in other major financial centers should take note.