Swiss Central Bank Sees Risks at Credit Suisse and UBS 

UBS Group AG and Credit Suisse Group AG risk substantial losses from a U.S. or protracted euro-area recession, though both lenders are proving resilient amid the pandemic, according to the Swiss central bank

The coronavirus crisis has again demonstrated that massive shocks and unexpected spikes in uncertainty are a recurring feature of the banking business, the Swiss National Bank said in its annual Financial Stability Report Thursday.

Swiss regulators are taking a closer look at the two global giants on its patch after the Archegos saga wounded both UBS and Credit Suisse. The latter is still in crisis mode, suffering a $5.5 billion dollar loss on Archegos coupled with the repercussions from the failure of Greensill Capital in March.

“It’s clear that if you are active in certain business areas that there are risks and it’s also important that you have the necessary capital,” SNB President Thomas Jordan said in an interview on Bloomberg TV. “It’s also important that your risk management is up to the point, that you can also manage those risks.”

Default Event

Strong performance in investment banking and wealth management have helped the lenders absorb losses, the SNB said. The lenders saw a significant increase in provisions for credit losses last year, though the level remains low compared with international peers due to a more diversified income base. Risk-weighted capital ratios remain above average for globally systemic banks, the SNB said.

At the same time, earlier this month the Swiss government said that existing liquidity requirements for both lenders would probably not be sufficient in an emergency or a default event. A working group including the Finance Ministry, SNB and regulator Finma has been tasked with adjusting the requirements.

On macroeconomic risks, the SNB underlines that the loss potential for both is highest in the scenario of a U.S. recession, which would have knock-on effects through the financial system. The main risk stems from losses on corporate loan portfolios and counterparty exposures in investment banking, the SNB said.

“As the Archegos incident has illustrated, large losses may materialize even in the absence of a macroeconomic or system-wide financial shock,” the SNB said in the report. “This underlines that the too-big-to-fail capital requirements are necessary for ensuring adequate resilience at these two banks.”

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