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Banks face tougher bailout rules

The Swiss government on Wednesday approved a raft of tougher regulations for major banks that seek state aid.

Published: 20 April 2011 17:34 CEST

The legislation includes a provision that allows regulators to adjust their salary systems or ban bonuses if they seek a bailout.

“At its meeting today, the Federal Council adopted the dispatch on the legislative proposals for dealing with systemic risks of big banks,” the government said in a statement.

“By 2018, systemically important banks should build up more capital, meet more stringent liquidity requirements and improve their risk diversification,” it added.

Parliament will consider the new rules in the coming summer and autumn sittings. If approved, the regulations could come into force in early 2012.

In October 2010, a commission of experts advised the Swiss government to take tougher measures than imposed by Basel III international standards, which require banks to raise their high-quality core common equity to 7.0 percent of assets from the current 2.0 percent.

Swiss experts have called for a 10 percent level as well as an additional stock of convertible bonds, which could be turned into capital in case the bank’s equity fell below a limit.

On Wednesday, the government suggested that tax incentives be made to promote such convertible bonds.

It also approved a bill that “includes regulation of the remuneration of those systemically important banks that have to be bailed out using federal funds.

“In such cases, the Federal Council will be obliged to order that adjustments be made to the remuneration system of the bank in question,” it added.

The adjustments could include a complete ban on bonuses or other forms of variable remuneration.

While the government acknowledged that banks will have to contend with higher costs in the short run in order to meet the new rules, it noted that “investor confidence will increase over the long term, constituting a competitive advantage for Switzerland’s financial centre and the institutions affected.”

Credit Suisse and UBS are regarded as “too big too fail” because of their size and influence on the Swiss economy.

UBS had to be shored up during the financial crisis by a multi-billion dollar state rescue package.

How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year.

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’, Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn.

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment?

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024 about 1 percent below the estimated structural level.

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending?

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”. The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”.

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025.

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023.

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write.

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers.

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.”

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