UBS, Credit Suisse Face Leverage Cap, Regulator Says
By - September 03, 2008

UBS AG and Credit Suisse Group AG will have to hold more capital in reserve against their assets following subprime-related losses, the head of Switzerland's Federal Banking Commission said. “We plan to introduce the new rules by the end of the year at the latest,'' Chairman Eugen Haltiner said in an interview at a conference in Zurich today. The commission received the banks' replies to its proposal and is discussing details of the plan, he said. “We are going ahead with the leverage ratio.'' Switzerland's two largest banks may have to cancel dividends, stop share buybacks, shrink balance sheets and raise fresh capital to satisfy new requirements, analysts including Morgan Stanley's Huw van Steenis have estimated. Credit Suisse has said a leverage cap will make Swiss banks less competitive. The regulator is in discussions with the banks over which assets should be included in determining the ratio, and whether off-balance-sheet holdings and government bonds should be excluded from the calculations, Haltiner said. “We are eager to learn the position of the banks,'' he said. “I can assure you that competitiveness will stay in our mind.'' – Bloomberg

Dominant Social Theme: Watch Swiss regulators crack down on their largest risk-taking institutions to preserve the reputation of the Swiss for conservative banking. Impressive!

Free-Market Analysis: The Swiss are doing their best to maintain their reputation as conservative bankers in a world that seems to be seeing one major financial institution after another tottering on the edge of ruin. But the only trouble with the Swiss insistence on retaining tradition is that it seems a bit more like a public relations stunt than the real thing. The idea that the Swiss Federal Banking Commission is going to hold its largest banks "feet to the fire" by insisting that they hold more capital in reserve against assets would be pretty impressive except for the fact that there are no "assets." There are only debt notes. Switzerland went off any kind of official gold standard at the turn of the century.

Yes, we've written about this issue before, but now it's formal – in that the regulators have announced they are moving ahead. That doesn't make it any less hypocritical. There is no fiat currency in the world that does not eventually inflate wildly. It may take more time for the Swiss franc, but that fate awaits it sooner or later.

Nonetheless, the higher-ups in the Swiss regulatory system continue to act as if their current system is similar to their historical one. In fact, putting in place a fiat money system is a lot like getting pregnant. See, you can't be a "little" pregnant, and you can't have a "little" fiat money. Either you are or aren't pregnant. Either you have it (fiat money) or you don't. And if you do – and Switzerland does – then the reporting in the above article, and the additional excerpt below just doesn't ring true.

Under current regulations in Switzerland, banks must hold capital that amounts to at least 8 percent of their assets, weighted according to their risk. Those rules “made a mess in the end'' because they didn't require capital to be held against top-rated assets, including many securities backed by subprime mortgages, Haltiner said. Those investments lost value when the U.S. housing market fell into the worst slump since the Great Depression. UBS took more than $43 billion of subprime-related writedowns and had to raise almost $28 billion of capital from investors. The banking commission doesn't want to “throw overboard'' current rules, “but in addition we need a broader screen to follow what is going on the balance sheets of large banks,'' Haltiner said.

After Thoughts

So now that the Swiss bank regulator is going to mandate that the country's biggest banks must hold capital "weighted according to risk" everyone can breathe a sigh of relief. Don't think so. Fiat money banking is actually very difficult to regulate. It is easy to tell, in hindsight, what a risky investment is, but when markets are heating up, what's safe suddenly looks stodgy and what's hot suddenly looks safe.

So just who is going to stand athwart the next financial boom time and shout "stop?" The Swiss banking regulators? The Swiss politicians? These are the same people who declined to keep Switzerland on a gold standard. Yet they are going to be able to tell what is risky and what is not when it comes to bank practices over time. Public relations is no substitute for an asset-backed currency. Strong words are no substitute for the realities of the market. Fiat money is no substitute for gold. Those are the lessons the Swiss – or at least their biggest bankers and banking officials – need to relearn.

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