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The Swiss
government pushed ahead on Wednesday with plans to make UBS (UBSN.VX)
(UBS.N) and Credit Suisse (CSGN.VX)(CS.N) reach tough new capital
standards, saying the benefit to the economy outweighed costs to the
banks.

As it finalised
legislation to go to parliament, the Swiss cabinet said the general
thrust of a draft law it issued in December was unchanged, but it had
made a few minor changes following a consultation period.

Finance minister,
Eveline Widmer-Schlumpf, said Switzerland was compelled to take a
tougher line on bank regulation than other countries as UBS and Credit
Suisse were so big that any failure could bring down the small Alpine
economy.

“There will be
adjustment costs for the banks but all in all, the net effect will be
positive. I am convinced that the Swiss banking sector will be the
winner,” she told a news conference.

The government has
proposed both big banks will need an equity Tier 1 capital ratio of at
least 10 per cent, versus the 7 per cent minimum set under the Basel
III global standards, which will start to take effect in 2013.

Both UBS and the
powerful right-wing Swiss People’s Party (SVP) have warned the plan
risks making UBS and Credit Suisse less competitive, raising questions
about whether the rules might still be watered down during the
legislative process.

Ms Widmer-Schlumpf
rejected suggestions the government was rushing ahead with the
proposals, saying they had taken more than two years of consultation
since the Swiss government was forced to bail out UBS at the height of
the financial crisis.

She said the plans
had been broadly endorsed by experts and the banking industry –
including Credit Suisse – and said only the SVP and UBS had expressed
fundamental opposition.

Ms Widmer-Schlumpf
said the government addressed concerns raised by the SVP and others
about powers proposed for the FINMA regulator in a crisis, saying FINMA
would only intervene to impose an emergency plan if a failing big bank
did not do so.

Competitive disadvantage?

The government
proposed publishing a report on international developments every year
to address concerns about Switzerland forging ahead and Widmer-Schlumpf
said she expected other countries would enact similar regulations.

Jason Nason, spokesman of the Swiss Bankers Association, criticised the formulation of the review provision as too vague.

“The Swiss
authorities should clearly commit themselves to reviewing and adapting
the regulation should Switzerland’s two globally-active universal banks
find themselves placed at any serious competitive disadvantage,” Mr
Nason told Reuters.

Britain too is
considering capital standards more stringent than Basel III, though
these would apply only to big retail banks and its comparatively
lenient treatment of investment banks has provided ammunition to
opponents of the Swiss rules.

UBS chief
executive, Oswald Gruebel, has said the stiff Swiss standards could
force UBS to move units abroad. In response, Widmer-Schlumpf noted the
bank benefited from Switzerland’s other advantages such as low taxes
plus political stability.

Credit Suisse said
it wanted to study the proposal in detail before commenting but
referred to a recent interview by CEO, Brady Dougan, in which he
reiterated his broad support.

“I fear that people
may have forgotten what happened in 2008. The financial system needs to
be made more robust and secure,” he said, adding that he assumed
regulators elsewhere would also demand other global banks hold more
capital.

“If that is the case, we will see the emergence of a reasonable competitive landscape around the world,” he added.

Helvea analyst,
Peter Thorne, said the fear the rules would make Swiss banks
uncompetitive was “a gross exaggeration” but they would have to cut
their investment banking businesses.

“Implementation of
the rules should see CS and UBS downsize their investment banking
operations … and this should liberate capital, which is probably not
earning its cost of capital for the benefit of shareholders,” Mr Thorne
said.

The government said
parliament could vote on the matter before the end of the year so the
plans could come into force by the start of 2012 at the earliest, with
a transition period up to 2018 to allow implementation.

However, in a taste
of a likely heated debate to come ahead of Swiss elections on October
23, the centre-left Social Democrats and Greens both said they wanted
the proposals made still tougher, suggesting they may still be amended
or delayed.

Reuters