FINMA has regularly and systematically conducted stress tests to ascertain the potential for loss in the large Swiss banking institutions in case of a further serious deterioration in economic conditions. In the case of the two large systemically relevant banking groups, FINMA requires that they have higher than normal capacity in order to absorb, at any time, unforeseen shocks. According to recent analysis, it was identified that even after the effect of a severe stress event they would still maintain a stable capital base with a Tier 1 capital ratio over 8%. The ECOFIN Council and the Committee of European Banking Supervisors (CEBS) yesterday announced details of a coordinated EU-wide stress testing analysis.
FINMA has been conducting various stress tests at Swiss banks since 2008, in light of the persistently harsh conditions in the financial markets and difficult economic outlook. The tests are designed to assess the impact that a sharp deterioration in economic conditions might have on Swiss banks. The ECOFIN Council and the Committee of European Banking Supervisors (CEBS) yesterday published details of a coordinated European wide stress testing analysis. Results of a similar analysis performed in the USA were announced in May of this year.
Since the beginning of 2009, FINMA has stepped up these stress tests at the two large banks Credit Suisse and UBS with the introduction of a regular Loss Potential Analysis. Analyses of this kind are a key component of the regulator's supervisory activities. The last analysis related to the situation was at end of July 2009. It should be note that results of stress tests are based on a number of critical assumptions which are subject to many sources of uncertainties.
The framework of this stress test has been generated from a scenario developed by the Swiss National Bank. It encompasses a deep, worldwide recession, accompanied by a significant deterioration in the finance and property markets. The stress test is similarly strict to that performed within the European Union.
Assessing cumulative loss potential and the impact on the capital situation in the event of a sharp deterioration in key economic parameters is particularly vital in the case of the two large banks, which are important to the Swiss financial system. The aim of the analyses is also to identify significant risk sources at the large banks and to confront the banks with the findings.
FINMA requires Credit Suisse and UBS to have exceptional resilience to shock events and expects them to have the excess capital and liquidity needed to absorb such shocks at any time. The large banks are expected to demonstrate after application of the abovementioned scenario a Tier 1 ratio of above 8%. Non-compliance with these requirements would trigger discussions between FINMA and the bank concerned on reducing its risk position and/or strengthening its capital base. Both large banks currently meet FINMA's requirements, which are rigorous by international standards.
Despite the positive nature of this result, FINMA still expects the large banks to continue in their efforts to both improve their capital base as well as the reduction of their leverage.
Tobias Lux, Media Spokesperson, Phone +41 (0)31 327 91 71, firstname.lastname@example.org