The Swiss crypto treatment is generous

Prudential regulators around the world have mostly confined themselves to pieties when it comes to cryptocurrencies, warning of the need to monitor markets, avoid stifling innovation, but making few concrete moves.

  • By Owen Sanderson
  • 06 Nov 2018
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Their colleagues in securities regulation have moved much faster, cracking down on the more obviously fraudulent schemes and casting a stern eye over crypto distribution. But until now, there has been little guidance on how banks ought to book crypto assets on balance sheet.

That’s changed for the Swiss firms, which still hope to establish a thriving hub for crypto business. Canton Zug, for example, is still busily branding itself “Crypto Valley”, and the first “crypto banks” appear to be growing on Swiss soil.

On Tuesday, though, Finma, the Swiss regulator, took a stab at defining just how banks ought to think about cryptocurrency from a regulatory perspective. It falls far short of the hopes of the true believers, who may have wanted it to be treated like currency — but crypto fans should be glad nonetheless.

The main features of Finma’s plan are as follows — 800% risk weight, a limit to 4% of assets, and no possibility of using crypto as part of a liquidity buffer.

Those who hoped the last factor wouldn't come under consideration were being somewhat optimistic. Regulatory liquidity buffers are a crucial part of the bank’s protections against default; the main innovation of the post-crisis regulatory architecture. While furious lobbying managed to squeeze RMBS in (and covered bonds, on more generous terms), big banks still largely hold cash and government bonds in their buffers, which are typically run well above the regulatory minimum.

Credit Suisse, the largest and riskiest of Finma’s charges, has run a buffer more than double its required minimum size for the last year or so.

If cryptocurrencies were indeed currencies, this might make them eligible High Quality Liquid Assets (HQLA). But the definitions are tightly drawn, being limited to coins and banknotes, and central bank reserves which can be drawn in times of crisis. Alternative forms of money like instruments are excluded by implication.

The Basel Committee, drawing up the rules, said HQLA assets should exhibit low risk, ease and certainty of valuation, low correlation with risky assets, an active and sizeable market, low volatility, and destination status in the event of a flight to quality. With the possible exception of low volatility, cryptocurrencies exhibit none of these characteristics. Bitcoin has been remarkably stable for the past three months or so, but regulators are looking for a more impressive track record than that.

Finma’s other two prescriptions, however, look generous to the nascent market. A limitation to 4% of assets sounds low, and will certainly bind on institutions wanting to build themselves around doing crypto business. But it’s a huge volume for big banks and it represents a lot of risk tolerance for Finma.

Credit Suisse, for example, has around Sfr800bn of assets, giving it a cap of Sfr32bn in crypto ($31.8bn). With bitcoin’s market cap around $111bn on Tuesday, and all cryptocurrencies around $216bn, that’s a major chunk of change for just one big bank.

It’s also a big chunk of risk. Taking Credit Suisse again, the bank’s reported capital ratio is 12.9%, a relatively bountiful cushion on normal metrics, close to the average for a big European-headquartered bank. But its leverage ratio is 4% — meaning if a crypto holding up to 4% of assets turns out to be worthless, so is Credit Suisse equity.

No bank this size is likely to race up to its 4% holding limit immediately — not least because liquidity in the market won’t let it — but Finma allowing a cap this high means implicitly accepting the crypto industry’s argument that its tokens are worth something rather than nothing. It implies a price target for bitcoin not far below its level today.

The 800% risk-weight also seems generous to the industry. Unusually, this is supposed to capture both credit and market risk in a single metric (these are usually treated separately, depending on where and how a given asset is booked).

But, again, it implicitly accepts that cryptocurrencies are worth something. If the regulator thinks there’s a chance that an asset with be worthless, it should require a capital deduction — that is, full holding of quality loss-absorbing equity for every penny-equivalent of crypto currency.

For some banks — Credit Suisse, with 12.9% CET1 for example — the 800% risk-weight comes out close to equivalent to a capital deduction. In fact, for a bank running this ratio, an asset risk-weighted at 775% would be equivalent to a deduction.

But smaller firms may not have the mesh of systemic add-ons, countercyclical buffers, and so on which Credit Suisse is required to apply. Setting a hard risk-weight, even one above 100%, still implies some value to the assets — and, in any case, the constraint on the big banks is not their risk-weighted capital, but their leverage ratio.

So while Finma hasn’t rolled over entirely to the crypto fanatics, for those backing the market’s development, it’s a generous beginning.

  • By Owen Sanderson
  • 06 Nov 2018

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 330,488.64 1282 8.09%
2 JPMorgan 322,584.56 1394 7.90%
3 Bank of America Merrill Lynch 296,928.01 1015 7.27%
4 Barclays 249,873.33 927 6.12%
5 Goldman Sachs 220,211.32 736 5.39%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
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1 BNP Paribas 46,112.22 182 6.98%
2 JPMorgan 44,545.29 93 6.74%
3 UniCredit 35,639.50 153 5.39%
4 Credit Agricole CIB 33,211.72 160 5.03%
5 SG Corporate & Investment Banking 32,419.80 126 4.91%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 13,792.73 61 8.96%
2 Goldman Sachs 13,469.15 66 8.75%
3 Citi 9,716.40 55 6.31%
4 Morgan Stanley 8,471.86 53 5.50%
5 UBS 8,248.12 34 5.36%