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The comments come as eurozone troubles continue to heat up and the Swiss National Bank admitted that economic and financial conditions in the country’s banking and mortgage sectors have deteriorated since June 2011.
“Early signs of a possible recovery in the euro area, which had emerged at the beginning of 2012, have vanished again,” the SNB said in its annual report on financial stability in Switzerland.
While the central bank forecasts a gradual improvement over the next 12 months, it said the risk of a rapid deterioration of Swiss banking conditions remains high.
It urged the nation’s big banks to build their loss-absorbing capital, claiming those stockpiles are still below levels needed to protect them against the tumultuous environment, especially Credit Suisse, which it demanded “significantly expand” capital this year.
The heed spooked investors and spread concerns that Credit Suisse would have to raise substantial amounts of equity and possibly even cut its dividend. Shares of Credit Suisse were down 9.5% to a 9-year low of $17.97 Thursday morning.
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Credit Suisse in April reported a sharp 96% drop in first-quarter profit as it fought to overcome its own debt and broader regulatory and economic pressures.
SNB encouraged UBS to continue raising capital the way it has to meet other standards such as Basel III, but it warned UBS too may have to nix the dividend. Shares of Zurich-based UBS were flat to slightly higher on Thursday.
Building equity reserves and increasing transparency will also help bolster the banks’ competitive positions in their core wealth management businesses and boost general market confidence, the central bank said.
An advantage for UBS and Credit Suisse is that they are both just “moderately exposed to the peripheral eurozone countries” compared with other international banks, which has improved their credit worthiness, SNB said. They also have reduced their risk-weighted assets and expanded loss-absorbing capital to meet Basel III rules compared with a year ago, though SNB said both banks remain highly leveraged.
Switzerland requires its major banks to have capital ratios of at least 19%, of which 10% would be common equity. That’s stricter than the 10.5% capital ratio and 7% of equity required by Basel III reforms.
The Swiss central bank said the ratios of the country's biggest banks are below average compared with other international financial institutions.
“In the event of a renewed escalation of the euro area crisis, although losses on direct exposures to the peripheral countries would be relatively small, the accompanying general deterioration in economic conditions would bring with it substantial losses compared to the banks’ loss-absorbing capital,” SNB said in the report.
SNB said its analysis is partly based on the expectation that it would provide state support to banks in the event of a crisis. The Swiss government bailed out UBS in 2008 when it was exposed to more than $50 billion in toxic securities.