Financial market stability

The G20 countries have committed to subjecting the global financial system to far-reaching reforms. Numerous measures have significantly increased the resilience of systemically important banks.

International efforts

Financial stability is a global issue, and global coordination is crucial. However, the relevant legislative and regulatory changes are largely being implemented at national level. An important link in this process is the international Financial Stability Board (FSB), which works closely with national regulators.

Strategic directions

Three main objectives are being pursued in the area of financial stability: making financial institutions more resilient, solving the too-big-to-fail issue and strengthening regulations in connection with shadow banking.

A number of efforts linked to resilience are underway at the international level; these are aimed at strengthening the stability of financial institutions.

The core element is the Basel III regulatory framework, which builds on the Basel II regulatory framework issued by the Basel Committee on Banking Supervision (BCBS). This committee has established the principles of effective banking supervision. In addition, Basel III also sets out stricter requirements for the risk-weighted capital of banks and supplements this with the leverage ratio: a simpler, non-risk-based measurement. A third element are new standards that define the minimum requirements for liquidity. These measures strengthen the resistance of the individual institution and the entire banking sector to a crisis.

In a high-profile speech in November 2014, the Governor of the Bank of England, Mark Carney, estimated that the capital requirements for the majority of banks have increased seven-fold over the past seven years. The requirements for the major global banks have increased ten-fold over the same period. However, many of these companies will have implemented the new requirements ahead of time.

What is our view: The Basel Committee on Banking Supervision published a discussion paper in the second half of  2013 to initiate discussion on the future design of the regulatory framework. In its paper titled "The regulatory framework: balancing risk sensitivity, simplicity and comparability" the Committee makes a number of suggestions on how to simplify capital standards and improve the comparability of results. UBS made comprehensive comments on the discussion paper. The answer describes UBS's view on prudential regulation.

In the fall of 2014 the Basel Committee published the timeline for the implementation of the individual measures during a G20 meeting.

Additional requirements apply to financial institutions that are classified as systemically important due to their size, significance for the market and connections. In particular, systemically important banks must develop workable measures that, in the event of a crisis, will ensure that the bank can be stabilized or – if this does not work – liquidated without the involvement of the taxpayer. 

In order to reduce the risks for the financial system and strengthen systemically important institutions, the following measures have been taken at international level, among others:

  • Measures for the identification and valuation of systemically important institutions
  • Creation of loss-absorbing instruments in order to strengthen the resilience of the relevant institutions and to provide sufficient capital in the event of liquidation
  • Stricter supervisory measures in the areas of governance, risk tolerance and stress tests
  • Effective liquidation mechanisms that enable banks to be liquidated in a systematic way
  • A more stable financial market infrastructure (see also under “Financial market regulation”).

In November 2015 the Financial Stability Board (FSB) issued the final Total Loss-Absorbing Capacity (TLAC) standard for global systemically important banks (G-SIBs). The TLAC standard has been designed so that failing G-SIBs will have sufficient loss-absorbing and recapitalisation capacity available in resolution for authorities to implement an orderly resolution.

UBS supports international efforts to increase financial stability and avoid the risk of banks that are systemically  'too big to fail' (TBTF), requiring future taxpayer bailouts.

Switzerland responded promptly and comprehensively to the TBTF challenge. In its evaluation report of February 2015, the Federal Council stated that, by international comparison, the assessment of the Swiss approach is positive overall.

  • Major banks now have to hold more capital, and that capital must be of a higher quality
  • New organizational measures ensure easier restructuring and liquidation in the event of a crisis
  • Stricter requirements in the area of liquidity and risk distribution ensure better crisis resistance

The Swiss TBTF regulations have proven to be effective and efficient:

  • UBS has built up its capital considerably, reduced risks significantly and greatly reduced its balance sheet. UBS is one of the best capitalized major banks in the world (UBS Investor Relations).
  • UBS has introduced the necessary organizational measures to ensure continuation of the functions that are of systemic importance for Switzerland in a potential crisis.

New legal structure: In order to increase the Group’s resolvability, UBS has established a Group holding company based on a 1:1 share swap. Certain parts of the Swiss business will be transferred to a new Swiss subsidiary, UBS Switzerland AG. Further information is available here.

In October 2015 the Swiss Federal Council adopted the parameters for amendments to the current too-big-to-fail provisions. The resilience of systemically important banks will thereby be further enhanced. In this context the Swiss regime is now by far the most demanding in the world on a relative basis.

  • The basic requirement for the leverage ratio is 4.5%, and 12.9% for risk-weighted assets. For the two big banks this results in going concern requirements of 5% overall for the leverage ratio and 14.3% overall for risk-weighted assets.
  • The going concern requirements are mirrored in that the two big banks must fulfil additional gone concern requirements of an added 5% for the leverage ratio and 14.3% for risk-weighted assets. The gone concern requirements are fulfilled in principle with bail-in instruments.

The new requirements must be met by the end of 2019.

In November the Financial Stability Board (FSB) also issued the final Total Loss-Absorbing Capacity (TLAC) standard for global systemically important banks (G-SIBs).

The FSB defines shadow banking as “credit intermediation involving entities and activities (fully or partially) outside the mainstream banking system.” This definition covers two areas. First, it relates to companies that operate outside the regular banking system and carry out one of the following activities:

  • Acquisition of assets with deposit-like characteristics
  • Execution of maturity and/or liquidity transformation
  • Credit risk transfer
  • Use of direct or indirect financial leverage effects

Second, it relates to activities that could represent important sources of funding for non-banks, including securitizations, securities lending and repo transaction

The FSB has focused on five specific areas in which policies are needed to mitigate the potential systemic risks associated with shadow banking:

  1. to mitigate the spill-over effect between the regular banking system and the shadow banking system;
  2. to reduce the susceptibility of money market funds (MMFs) to "runs";
  3. to assess and align the incentives associated with securitisation;
  4. to dampen risks and pro-cyclical incentives associated with securities financing transactions such as repos and securities lending that may exacerbate funding strains in times of market stress; and
  5. to assess and mitigate systemic risks posed by other shadow banking entities and activities

In August 2013, the FSB developed its final policy recommendations for Shadow Banking which have two elements:

  • A monitoring framework to track financial sector developments outside the banking system. The FSB has established an annual monitoring exercise to assess the global trends and potential risks of the shadow banking system to the stability of the financial system.
  • Policies to strengthen oversight and regulation of the shadow banking system.

Prudential regulation

An overview of regulation in the areas of capital and liquidity.


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