UBS and Credit Suisse will no longer have to stump up additional capital if they crash through their own risk limits. The Swiss regulator is adopting a crisis measure into a permanent policy.

Switzerland's financial regulator will permanently adopt a crisis relief measure on risk-taking for big banks that was set to lapse at the end of next month, it said in a directive (in German) overnight. The measure had shielded Credit Suisse from additional capital requirements in the first quarter, as finews.com reported last week.

«The easing in the area of backtesting in the form of freezing the number of exceptions at the status of February 1, 2020 will be adopted into supervisory practice,» Finma said. Credit Suisse and UBS are required to demonstrate the accuracy of their own risk controls with daily tests. If these tests produce too many exceptions to the real losses, the banks are required to stow more capital against the risk-taking.

Dealing Rooms Buzzing

Unsurprisingly, market ructions in March sparked outliers at both banks, as dealing rooms buzzed with risk when the corona crisis roiled financial markets. Finma acknowledged that it overlooked some exceptions, provided the lender was able to demonstrate the outliers weren't due to inaccurate forecasting.

Most back-testing exceptions are not due to the banks’ dithering on their math but to massive market volatility. «There was an increased number of exceptions in the most recent phase of market volatility, in which Finma views the non-consideration into capital calculations as justified,» the regulator said. «Thus, the content of this easing measure will apply after July 1 as well.»

Stretched to Capacity

Last month, Finma froze the outliers at the status of February, in a bid to unshackle as much capital as possible for UBS and Credit Suisse. The two the biggest foot soldiers in a government-backed $40 billion lending bazooka. It comes alongside an easing of surcharges on Swiss franc deposits as well – a bid to get money out the door to borrowers as quickly as possible.

So-called value-at-risk measures aren't directly comparable between UBS and Credit Suisse because each is generally permitted to pursue their own methodology. UBS' investment bank was stretched to capacity in the first quarter, leading to a rise in operational errors. The bank said it had begun shifting and clearing the backlog of failures and breakages after the peaks ebbed away.