Send for the St. Bernard
Central bank reports are not generally supposed to send financial shares tumbling. Yet that is what the Swiss National Bank has achieved by criticising Credit Suisse’s capital ratios and calling for a boost before the end of 2012. It’s a clear signal that Credit Suisse has replaced UBS in the Swiss doghouse.
The Zurich rivals tend to enjoy contrasting fortunes. For much of the last decade, UBS was a model of relative stability, while Credit Suisse grappled with scandals and the fallout from ill-judged acquisitions. But the tables were turned in the autumn of 2007. UBS was the surprise victim of the credit crunch, while Credit Suisse avoided the worst. Almost five years on, there’s another reversal.
The SNB’s criticism, ironically published in its annual Financial Stability Report, is harsh. The central bank believes capital ratios for both the country’s big banks, when measured under new Basel III rules, are too low. Credit Suisse was singled out as the laggard, with a core equity ratio of about 5.9 percent of risk-weighted assets. That’s below international regulators’ 7 percent minimum target, let alone the 10 percent equity ratio that Switzerland has set as a floor for its big banks. The SNB wants Credit Suisse to cut risk, restrict dividends, or issue fresh equity this year. The bank’s shares promptly dropped 10 percent.
Credit Suisse has reasons to grumble. Basel III rules were designed to be phased in during the course of this decade, giving it plenty of time to get up to scratch. The SNB has ignored contingent convertible capital, which adds almost 3 percentage points to Credit Suisse’s ratios. FINMA, the Swiss regulator, not the SNB, has the final word on capital. Besides, singling out one institution for criticism in the midst of a crisis looks reckless.
Nevertheless, the SNB is responsible for protecting Switzerland’s financial system. It has effectively seen off the external threat of excessive capital flows from the euro zone. It is bound to worry that a euro collapse could drag down a too-big-to-rescue lender. As long as it remains the laggard, Credit Suisse can expect an uncomfortable ride.