Financial Regulatory Forum

Swiss central banker backs universal bank model – paper

By Reuters Staff
January 18, 2010

Jan 16 (Reuters) – Switzerland’s two big banks — UBS and Credit Suisse — should not be forced to split their wealth management and commercial banking operations into separate entities, the new head of the country’s central bank said on Saturday.

Philipp Hildebrand, who took over as chairman of the Swiss National Bank at the start of the month, said the universal banking model provided useful synergies for Swiss banks.

Hildebrand has said repeatedly that major Swiss banks need tighter regulation to deal with the “too big to fail” problem.

But he said in an interview in the Swiss daily Le Temps that something as radical as the Glass Steagall Act, which previously separated investment and commercial bank functions in the United States, would not make sense in Switzerland.

“The universal banking model represents a form of risk diversification,” Hildebrand was quoted as saying.

He recalled that in the 1980s Swiss banks had been able to absorb losses — amounting to some 40 billion Swiss francs ($39.10 billion at today’s rates) in their traditional mortgage business thanks to profits in the investment banking side.

At the same time wealth managers needed to be able to offer their ultra-rich customers the full range of investment banking services, for instance to help with in mergers and acquisitions involving companies they own, he said.

“These services must be offered to clients and used to attract them for wealth management business,” he said.

It is imperative, however, that some activities within the universal banking model, such as proprietary trading, are not allowed to imperil the stability of the financial system, he said.

Hildebrand said that the relatively large weight of the two banks in Switzerland’s economy, compared with banks in other centres, could force Switzerland to regulate more strictly than other jurisdictions.

He said that the strongest selling point for Swiss banks was to be based in a stable financial centre.

“The foundation of our financial centre remains wealth management, for which confidence is essential,” he said.

From the point of view of stability, it is vital that the large profits now being made by banks , and which in part are due to central bank policies or intervention, do not disappear into bonuses, dividends or share repurchases but are used to strengthen the capital of the bank, he said.

He noted that the authorities in Switzerland as in many other countries had the power to intervene in banks’ dividend distribution policies. (Reporting by Jonathan Lynn; editing by Patrick Graham) ((jonathan.lynn@reuters.com; +41 22 733 3831; Reuters Messaging: jonathan.lynn.reuters.com@reuters.net ))

($1=1.023 Swiss Franc)

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