ZURICH (Reuters) – The Swiss National Bank (SNB) issued a stern warning on Thursday, highlighting a highly uncertain economic outlook. This caution comes as global trade and geopolitical tensions continue to escalate, creating a volatile environment for financial markets worldwide. The central bank emphasized the need for Switzerland to address regulatory weaknesses, particularly to bolster the resilience of its largest bank, UBS.
In its 2025 Financial Stability Report, the SNB detailed several risk factors that could significantly amplify the impact of potential negative shocks on global economic and financial conditions. Among these concerns are global public debt levels, which are nearing historical peaks, and seemingly stretched valuations in global residential real estate, corporate bonds, and the U.S. stock market. These factors collectively paint a picture of an economy vulnerable to sudden downturns, urging vigilance from policymakers and financial institutions alike.
Swiss Banking Sector Resilient, But Regulatory Gaps Remain
Despite the gloomy global forecast, the SNB noted a brighter spot in Switzerland’s banking sector. Profitability among Swiss banks saw an improvement in 2024, largely driven by the strong performance of UBS. The report also pointed to broadly stable capital ratios, substantial loss-absorbing and lending capacities, and robust liquidity buffers across the sector, all contributing to its overall resilience. This positive assessment indicates that Swiss banks are currently well-positioned to withstand many financial shocks, demonstrating a robust foundation built on prudent management and strong capital bases.
However, the SNB was quick to highlight persistent regulatory weaknesses that, if left unaddressed, could undermine the financial system’s stability. The central bank explicitly backed the Swiss government’s recent proposals aimed at preventing future financial crises. These measures are particularly crucial given UBS’s expanded role as Switzerland’s sole remaining big bank after its acquisition of Credit Suisse in 2023. The integration of such a large and complex institution necessitates an even stronger regulatory framework to manage systemic risks effectively.
Strengthening UBS: A Key Priority
A major concern for the SNB is the substantial loss potential that UBS still faces under various stress scenarios. To mitigate this risk, the government has proposed that UBS’s participations in its foreign subsidiaries would have to be fully deducted from its Common Equity Tier 1 capital. This is a significant move, as Common Equity Tier 1 capital represents a bank’s highest quality capital, designed to absorb losses. By fully deducting these participations, the proposal ensures that UBS’s core capital is not artificially inflated by investments in foreign entities, making its capital base genuinely more robust. The SNB firmly supports this approach, stating, “From a financial stability perspective, this approach is the best solution.” This move aims to ensure that UBS holds sufficient capital to absorb potential losses from its global operations, thereby safeguarding the Swiss financial system from potential shocks originating within its largest player.
Vigilance on Foreign Currency Liquidity: Mechanisms, Risks, and Global Implications
Beyond capital requirements, the SNB also cautioned that “some banks may also face the risk of liquidity shortfalls in foreign currencies.” This warning underscores the interconnectedness of global finance and the potential for a shortage of key currencies to disrupt banking operations. The central bank stressed the critical importance for these banks to “maintain adequate foreign currency liquidity buffers and that they have sound risk management practices in place to address these risks.” This concern echoes recent reports, including one from Reuters in May, which indicated that the European Central Bank had asked some regional lenders to assess their U.S. dollar needs during periods of stress, highlighting broader anxieties about potential liquidity mismatches on bank balance sheets.
Foreign currency liquidity shortfalls fundamentally occur when a bank or a country doesn’t possess enough readily available foreign currency, such as U.S. dollars or Euros, to meet its immediate short-term obligations. These situations can arise from several complex mechanisms. One primary driver is maturity mismatches, where banks fund long-term assets, like foreign currency loans to businesses, with short-term liabilities, such as foreign currency deposits or wholesale funding. If confidence in the market falters, or if short-term funding sources suddenly dry up and cannot be rolled over, and the long-term assets cannot be quickly converted into cash, a critical shortfall emerges. This scenario is particularly perilous for banks with extensive international operations, whose balance sheets are often highly exposed to various currencies and their respective funding markets.