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Guest Post: Swiss Finish Sets New Standard for Global Bank Regulation
Submitted by Global Intelligence Report
Swiss Finish Sets New Standard for Global Bank Regulation
INCIDENT: The traditional Swiss finishing school taught young women etiquette and social graces, but international bank regulators are talking about something much tougher when they refer to a “Swiss finish” for global banks.
Just how tough became clear last week, 4 October, when a Swiss commission proposed that its two giant banks, UBS and Credit Suisse, be subjected to capital requirements of up to 19%, nearly three times as tough as the 7% capital-to-assets ratio recently suggested by the Basel Banking Committee as a minimum global standard.
SIGNIFICANCE: The ambitious Swiss plan, designed to solve the “too big to fail” problem, will set the standard for megabank regulation as Group of 20 heads prepare for their summit in November. It almost certainly means that other big global banks such as JP Morgan Chase and Deutsche Bank will face capital surcharges from their national regulators.
Swiss National Bank President Philipp Hildebrand left no doubt in an op-ed last week that the Financial Stability Board, mandated by the G-20 to ready proposals on financial regulation, would push for the higher standards for big banks.
“Two years after the demise of Lehman Brothers, the ‘too big to fail’ problem remains unresolved,” Hildebrand wrote in the Financial Times. “The Financial Stability Board (FSB) and its members are committed to proposing measures to the Group of 20 leaders to address the problem.”
ANALYSIS: The FSB, as well as the Basel Committee itself, are international groupings loosely affiliated with the Bank for International Settlements in Basel, Switzerland. The FSB gained new legitimacy when the first G-20 summit in 2008 expanded its representation and called on it to make regulatory proposals for the G-20 leaders.
Resistance a Foregone Conclusion: The push for higher capital requirements will meet considerable resistance, especially from German banks, which have traditionally been undercapitalized. But US and UK banks will also object because capital is costly and so a drag on profitability.
There were some initial skirmishes at the IMF/World Bank meetings in Washington over the weekend. The Institute of International Finance, which groups some 400 of the world’s largest banks, warned against “overreaction” by national regulators seeking to “gold-plate” capital requirements.
Global Standard Obstacles: One obstacle to getting a global standard is that bank regulations are set by national authorities. While the G-20 is attempting to establish some peer review to create pressure for individual members to follow through on joint resolutions, each country must implement the rules individually.
The second problem with the “Swiss finish” in particular is that it relies on a financing vehicle, which, like clean coal technology, has great appeal as a solution to an urgent problem but has never really been tested in practice.
The Swiss requirements rely on contractual contingent convertible bonds, referred to as CoCos, to fulfill up to 9% of the proposed capital requirements, with the other 10% in the form of common equity. CoCos are bonds that would automatically convert to equity if the bank’s capital ratio sank below a certain level.
These convertible bonds would have to have a higher yield to compensate investors for the risk that they would automatically convert to equity, but even so the market for these securities remains largely untested. In the Swiss proposal, some of the bonds would have the trigger point set rather high, increasing the risk that they would be converted to equity at some point, while another segment, designed as a buffer for truly stressful times, would have a lower trigger point.
In his op-ed, Hildebrand warns that without these supplemental measures for the biggest banks, national authorities will face the same dilemma when the next financial crisis strikes – either to accept the financial turmoil from a collapse like that of Lehman Brothers or to once again inject taxpayer money into the banks as with the highly unpopular bank bailouts last year.
The “too big to fail” issue is particularly acute for Switzerland, because the balance sheet of the two big Swiss banks is several times bigger than the tiny country’s GDP. But the Swiss have traditionally maintained a strong capital base to increase their competitiveness in the international market place.
BOTTOM LINE: The Swiss measures, which were agreed to by the two big banks, will create market pressure for other big banks, irrespective of whether their national regulators adopt similarly tough requirements.
Hildebrand’s tough stand on the capital requirements marks the emergence of a relatively young central banker. A former swimmer who just missed the cut for the 1984 Olympics, the 47-year-old Hildebrand took over the top spot at the Swiss central bank at the beginning of this year.
His leadership on this issue could position him as a possible successor to the current FSB chairman, Bank of Italy governor Mario Draghi, if Draghi, for instance, were to be selected as president of the European Central Bank next year.
Source: http://www.globalintelligencereport.com/categories/Professional-Level-1
Analysis by Global Intelligence Report staff
The global Intelligence Report is a Private news & Intelligence service for sophisticated news consumers, investors and energy market participants. To find out more please visit: http://www.globalintelligencereport.com/categories/Professional-Level-1
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This makes too much sense, and it's just too practical. Won't work here!
Here's why:
Agreed, it would be similar to converting a pirate ship to naval vessel without changing the personnel.
Good luck.
Worked for GB
Great Britain, George Bush, George Gobel, Gary Busey ??
It seems the former president initiated a false-flag scenario at sea once?
Yea. On the surface it looks like great stuff. But is it just for headlines?
I mean increasing the capital requirement to 19% appears to be fantastic. But by financing it, not by actually increasing the cash in the vault, seems to me like more smoke 'n mirrors.
Maybe they already got the Fed to agree to buy their paper and this is yet another ponzi seedling.
The idea will work here as long as RE delinquencies are not reserved and MBSs are carried as AAA paper and not marked
Precisement. And the Swiss franc is on the hook for a lot of Eastern European real estate...
Orly, wasn't that east european real estate financed by Austrian banks through currency swaps? Wouldn't that make the Austrian banks (Raiffaisen) on the hook?
Yes. But the loans were written in Swiss francs because of the lower interest rate. If everyone scrambles to get out at once, it could get brutal.
http://www.oneradionetwork.com/money%10finance_-_articles/the_economy_-_articles/swiss_banks_-_eastern_europe_appears_to_be_in_real_trouble_financially_20090324902/
Lest I get called dated: http://www.mysuncoast.com/Global/story.asp?S=13263125
And where would you like to put your savings, Sir?
Thank you for your business
BTW the FDIC aren't involved with any of those worthless "guarantees" *chuckle*
I wonder which banks are going to survive?
I never understood at the time (this year? last year?) why Swiss banks buckled under and agreed to divulge names & numbers of their clientele to the IRS and other authorities. How exactly do they figure the benefits outweigh the costs for them with that move - especially in this ever worsening (especially for the non-Swiss of the developed world) financial and economic environment?
The alternative would have been to have a politically well-connected megabank go bust. Some, particularly bankers who played by the rules, deemed this preferrable.
Dollar SLAMMED on Tokyo open.
Ouch. 19% is gonna hurt.
I guess they're saying banks should have 20% down, too, to prevent "liars banking"
"4 to 6 weeks to solve foreclosure gate. 4 to 6 weeks."
And Ben will give 'em the money to make it happen
19% is easy just mark up some more crappy stinky paper.
Chart: DX
Looks like limited downside from here...
http://99ercharts.blogspot.com/2010/10/dollar_13.html
That is if technical matters override fundamentals ... age old discussion
Limited downside? You mean this far above ZERO?
I like purple. Put some more of those pretty lines on your chart.
What the hell are you talking about?
What?...you mean like a real bank from wayyy back with money in it?! What is the world coming to?
A Suisse Finnish? Stick both TBTA (too big to avalanche) CEO's into a Finnish sauna, steam until they are a nice 120C, then roll them into a snowbank while beating them with a nice birch branch no bigger than Philipp Hildebrand's thumb / daumen (Swiss German) / peukalo (finnish). Then rinse them in the frigid waters of some ancient glacial lake and repeat until they have both sworn off MBS, SIV, CDOs usw. forever, or until the next bubble, which ever comes first.
Cheers, AB
"Swiss finish" sounds decidedly un-erotic. Anti-climactic, even.
The term "Swiss finish" actually has a long history. Chrysler used to work with Sauer to assemble KDK's at Arbon. Later they would import Dodge Darts into Switzerland where they would be detailed by Sauer and given a little emblem that said "Swiss Finish". There are still many old Darts in perfect condition to be found here...
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Really this is a great post from an expert and thank you very much for sharing this valuable information with us.
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