• 4 minutes 2nd Annual Great Oil Price Prediction Challenge of 2019
  • 7 minutes Nucelar Deal Is Dead? Iran Distances Itself Further From ND, Alarming Russia And France
  • 10 minutes Don Jr. Tweets name Ukraine Whistleblower, Eric Ciaramella. Worked for CIA during Obama Administration, Hold over to Trump National Security Counsel under Gen McCallister, more . . . .
  • 13 minutes Shale pioneer Chesepeak will file bankruptcy soon. FINALLY ! The consolidation begins
  • 25 mins EU has already lost the Trump vs. EU Trade War
  • 5 mins More dumbed down? re Hong Kong Act of Congress
  • 16 hours Impeachment S**te
  • 45 mins Pope Proposes New Sin: Thou Shalt Not Destroy The Harmony Of The Environment
  • 3 hours Article: Did Exxon only make $39 Million onshore U.S. last quarter ?
  • 23 hours 55.00 WTI
  • 7 hours Visualizing Pennsylvania Oil & Gas Production (Through September 2019)
  • 4 hours U.S. Shale To Break Records Despite Bearish Rhetoric
  • 1 day Water, Trump, and Israel’s National Security
  • 1 day Everything You Need To Know About Trump
  • 2 hours Last I Checked
  • 2 days IEA predicts oil demand will grow annually at 1 million barrels a day for the next 5 years
  • 2 days Pioneer's Sheffield in Doghouse. Oil upset his bragging about Shale hurt prices. Now on campaign to lower expectations, prop up price.
  • 36 mins Petroleum Industry Domain Names
  • 40 mins What are the odds of 4 U.S. politicians all having children working for Ukraine Gas Companies?

Breaking News:

China’s Hunger For Coal Is Growing

Alt Text

Chevron To Buy Anadarko In $33B Deal

Chevron announced that it has…

Alt Text

What Beijing’s Retaliation Means For Oil

China has fired back against…

Alt Text

The Billion Dollar Bet On An Oil Price Crash

Mexico’s billion dollar oil hedge…

Jen Alic

Jen Alic

 

More Info

Premium Content

Swiss Finish Sets New Standard for Global Bank Regulation

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.

By. Jen Alic




Download The Free Oilprice App Today

Back to homepage



Leave a comment
  • Anonymous on October 16 2010 said:
    Hmm. My finance students were given two pieces of advice early in the course. If you are asked a general question and don't have the answer, say SEX AND MONEY. If it is an economics question, then the answer is SUPPLY AND DEMAND. Supply and demand is relevant here. The way the international economy is shaping up, there is going to be a lot of money - a lot - moving through the international financial system, and the Swiss are going to make sure that much of it finds a home in Swiss financial institutions.Swiss banks would have done fine without riasing capital requirements, but raising these requirements and telling the world about it will enable them to do even better. I worked in Switzerland for three years, and as far as I am concerned, there was no place like it. Those people loved money, and they give it the respect it deserves. That's one of the main reasons why the standard of living there became - and may still be - the highest in the world.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play