Swiss Big Banks Risk Substantial Losses

Swiss banking giants Credit Suisse and UBS have relatively low exposure to indebted Euro zone states but risk substantial losses if the economy were to deteriorate, the Swiss central bank warned Thursday.

"Compared to last year, there has been no notable decrease in the level of risk at the big banks," said the central bank in its annual financial stability report.

Credit volumes held by the banks were virtually unchanged, and credit quality in the United States and the Europe has remained low. Therefore "credit risk has fallen only slightly," said the bank.

"Meanwhile, market risk has risen," assessed the Swiss National Bank.

It blamed the increase in risks mainly to UBS, which has raised its risk positions on its trading book.

"As a result, under the adverse scenario, the big banks' potential losses relative to capital could be substantial," it warned.

The bank also warned that the two banks' "economic capital situation is less comfortable" than appeared.

"A considerable portion of both institutions' Tier 1 capital is made up of capital components that proved not to be loss-absorbing during the recent crisis," it said.

Therefore these components could not be taken into account as part of the highest quality capital required under new stringent regulations.

In fact, the bank noted that the level of loss-absorbing capital of the big banks reached less than 2% of total assets at the end of 2010.

"The consequences of any misassessment of risks would be correspondingly severe," warned the SNB.

On a more positive note, the central bank noted that the two banks are little exposed to highly indebted Euro zone countries.

The total exposure of the two banks to these countries fell by 23.3 percent from 60 billion francs to 46 billion francs in 2010, said the SNB.

Of this sum, exposure to Greece and Portugal reached two billion francs each, exposure to Ireland stood at 12 billion francs and that to Italy and Spain was at 15 billion each.

About half of the exposure is against the private sector -- excluding the banking sector, while the rest is equally divided between sovereign debt and banks.

Therefore the exposure to these Euro zone countries are considered low, said the SNB.

Nevertheless, the central bank said that risks must be seen in a broader scope -- that a deterioration of the situation in the Euro zone could lead to wider economic and financial market weakness.