Higher Swiss Leverage Ratio Could Mean End of Universal Bank

November 4, 2013 Leave a comment

Higher Swiss Leverage Ratio Could Mean End of Universal Bank

Swiss Finance Minister Eveline Widmer-Schlumpf said lenders including UBS AG (UBSN) and Credit Suisse Group AG (CSGN) may have to pull out of investment banking as she called for their leverage ratios to be raised. “Banks would have to consider whether to carry on with investment banking or focus even more on asset management,” Widmer-Schlumpf was quoted as saying in an interview with Schweiz am Sonntag. Banks “must be organized in such a way that the state isn’t ultimately held liable.”The focus on leverage is the latest effort by the government and financial watchdogs to prevent a repeat of taxpayer-funded rescues of systemically important banks. UBS was bailed out in 2008 after booking more than $57 billion in writedowns and losses in the U.S. sub-prime lending crisis. Regulators say the leverage ratio, now 4.5 percent, provides a safeguard against risk-based valuation rules that allow banks to weight assets depending on how they judge their safety.

“We must consider whether the capital-adequacy base shouldn’t be strengthened further,” Widmer-Schlumpf was quoted as saying by the newspaper. “Currently 6 percent to 10 percent are being discussed” as a leverage ratio, she said, adding the present level is “too low.”

Universal Bank

Both UBS, Switzerland’s biggest bank, and Credit Suisse, the second-biggest, have relied on a “universal bank” model in which asset management, wealth management and private banking are combined with the riskier investment-banking business. Still, both lenders have cut investment-banking jobs in recent years, and UBS Chief Executive Officer Sergio Ermotti last year decided to exit most debt-trading businesses at the investment bank to boost returns.

UBS said last week it plans to set up a Swiss banking subsidiary because the country’s too-big-to-fail regulations may lead systemically important banks to change their legal structure.

Raising the leverage ratio to 6% would mean UBS having to raise a further 20 billion Swiss francs ($22 billion) in capital, and Credit Suisse 33 billion francs, the newspaper said, citing its own calculations. At 10% leverage, those figures would rise to 62 billion francs and 81 billion francs respectively, it said, adding it would be “downright unthinkable” the lenders could achieve this.

UBS spokesman Samuel Brandner, speaking by telephone, declined to comment, saying the leverage ratio issue is an industry topic. Credit Suisse spokesman Marc Dosch also wouldn’t comment. Widmer-Schlumpf’s office didn’t respond to calls seeking a response.

UBS said on Oct. 29 it probably won’t be able to reach its profitability goal in 2015 after the Swiss regulator demanded the company hold more capital for risks related to litigation.

“I still think the banks should decide their business areas for themselves,” Widmer-Schlumpf was quoted as saying by Schweiz am Sonntag.

To contact the reporter on this story: Carolyn Bandel in Zurich at cbandel@bloomberg.net

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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