SNB Doubles Minimum Reserve Requirement

The Swiss National Bank (SNB) has announced a significant increase in the minimum reserve ratio, requiring banks to hold more money at the institution. The move, designed to ensure effective and efficient implementation of the central bank’s monetary policy, raises the reserve ratio from 2.5% to 4%. This change will impact Swiss banks’ revenue, with UBS Group AG and others potentially facing a combined loss of 400 million francs ($440 million), according to an estimate by Raiffeisen Switzerland economist Alexander Koch.

UBS Faces Second Regulatory Setback

For UBS, this new development adds to existing regulatory challenges. Earlier this month, the Swiss government proposed new rules that could increase the bank’s capital requirements by as much as $25 billion, as indicated by Finance Minister Karin Keller-Sutter. The additional reserve requirement compounds UBS’s challenges, resulting in a decline in share prices. UBS’s shares dropped as much as 1.99% on Monday, with a 1.4% decrease at 11:42 a.m. in Zurich.

Change in Reserve Requirement Calculation

The SNB’s new rule requires banks to include nearly all liabilities arising from “cancellable customer deposits” when calculating their minimum reserve requirement. Previously, banks were required to include only a fifth of these liabilities. This change, effective from July 1, reduces the SNB’s interest payments, as reserve requirements are not remunerated. The SNB ceased paying interest on minimum reserves last year, and enlarging the requirements further limits banks’ potential earnings on their deposits.

Monetary Policy Implications

SNB President Thomas Jordan indicated in November that revising the reserve requirement was under consideration. The SNB’s statement on Monday emphasised that the changes will not affect the central bank’s current monetary policy stance. The objective is to maintain effective and efficient implementation of monetary policy, even if it means reduced interest payments to banks.

The SNB’s decision contrasts with the European Central Bank’s (ECB) approach. The ECB recently reviewed its operational framework but chose to keep its reserve requirements unchanged at 1%, despite some hawks advocating for an increase to as high as 10%. This decision followed the ECB’s first loss in two decades after an unprecedented ramp-up in borrowing costs to combat inflation, a challenge the SNB also faced with reported losses in 2022 and 2023.

As the SNB’s new reserve requirements take effect, Swiss banks must navigate a more challenging regulatory landscape while ensuring compliance with the central bank’s evolving policies.