Zurich cantonal bank branded too big to fail

Zurich Cantonal Bank's size could be a problem for the Swiss economy Keystone

Switzerland’s largest cantonal bank is confident it already has a big enough risk-absorbing capital buffer to match tougher regulatory demands after being named alongside UBS and Credit Suisse as a “too big to fail” financial institution.

This content was published on November 11, 2013 - 16:48

The Swiss National Bank (SNB) turned up the heat on the Zürcher Kantonalbank (ZKB) on Monday by upgrading it to a category one “systemically relevant” institution. In other words, ZKB’s collapse would cause more pain than the Swiss economy could bear.

The exact consequences for ZKB have yet to be determined by the Swiss Financial Market Supervisory Authority (FINMA), but it would it would mean the bank having to cover between 14% and 19% of its risky assets with capital reserves. It is currently obligated to set aside enough cash to underpin 13.6% of its more nail-biting trades.

ZKB believes that by currently covering 14.9% of these risky assets, it has already done enough to match FINMA’s future demands.

The bank has calculated that it would have to be responsible for more than one in ten domestic business loans and retail deposits for FINMA to insist on more cash being put aside. ZKB currently enjoys a market share of between 6% and 8%.

Cantonal banks

There are 24 cantonal banks in Switzerland, i.e. one for every canton, with the exception of Solothurn and Appenzell Ausser Rhoden. The cantons either own the bank outright or are the majority stakeholder.
Cantonal banks were founded in the second half of the 19th century. Historically, the role of these banks was to strengthen and support the local economy through the provision of low-cost loans.
Today they offer an extensive range of products and services. Their main areas of business are loans to small and medium-sized companies and retail banking, particularly mortgages.

They have large market shares in these sectors, and many of them are market leaders in their region. Recently, cantonal banks have also made a name for themselves in the investment sector.
They directly compete with other banks and banking groups, and are subject to the same banking regulations as all other Swiss banks. They operate mostly in Switzerland (over 90%, taking the group as a whole).

They account for approximately 30% of the total assets of all Swiss-domiciled banks, and the market share of their domestic operations is about one third, depending on the business area. Together they employ nearly 19,000 people.

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Tax payers’ support

But this still leaves the Zurich canton-owned bank with precious little room for manoeuvre if it wants to invest in new IT or make future acquisitions, vice-chairman Janos Blum told

“Each time the regulatory bar has been raised we have matched those requirements,” he said. “We have increased our capital reserves by 50% to CHF9 billion ($9.78 billion) since the financial crisis hit. We believe we will still be above the new requirements, but we would like some more breathing space.”

To this end ZKB in January asked Zurich’s parliament for an extra CHF2 billion in funding to meet the steadily increasing regulatory demands. The canton is expected to decide next year whether to raise the amount of taxpayers’ money underpinning the bank to CHF4.5 billion (from CHF2.5 billion currently).

The SNB’s announcement on Monday increases the pressure on the Zurich cantonal authorities to stump up the extra cash. Without it, the bank would have to consider retaining earnings and paying less generous dividends to the canton and the municipalities that own it, Blum warned.

ZKB and other cantonal banks are already under some public and political pressure for enjoying state financing whilst competing with privately-owned banks. But the bank was adamant that its taxpayer-backed guarantee would not be affected by its new “too big to fail” status.

“We do not just take without giving something back,” Blum told “We are contractually tasked to support small businesses and agriculture and to help provide affordable housing. No purely commercial bank would service these goals to the same degree.”

US tax strife

The ambitious ZKB has been busily expanding its business in recent times, in particular its wealth management services. But the international push for growth has led to some problems, most notably a criminal investigation in the United States into allegations that the bank helped US citizens evade taxes.

ZKB is among a handful of Swiss or Swiss-based financial institutions that are enduring a full blown probe by the Department of Justice on this issue. The cantonal bank of Basel is the other Swiss state-owned bank on this list.

With a capitalisation of CHF150 billion at the end of last year, ZKB is the fourth largest banking group in Switzerland – behind UBS, Credit Suisse and Raiffeisen. It realised profits of CHF744 million in 2012, employed just over 5,000 staff and managed nearly CHF200 billion of clients’ wealth.

A FINMA spokesman told that the regulator supported the SNB’s decision to name ZKB as too big to fail, but declined to go into detail of how stringent the new capital requirements could be. 

Swiss too big to fail legislation, that came into force last year, also demands that these banks cover at least 4.5% of all assets - no matter how risky - with capital reserves. ZKB said its so-called leverage ratio is already comfortably above this threshold.

The bank must also come up with an emergency plan of how to protect its core functions, such as retail deposits, should it collapse. ZKB said on Monday that it does not anticipate having to change strategy or cut any rsikier operations.


On November 6, a lawsuit was filed by a US attorney in Manhattan asking Citigroup and Bank of New York Mellon for records of US clients of Zürcher Kantonalbank to determine whether those people had evaded taxes.

The US tax authorities (IRS) concluded that “ZKB has used the Citibank and BNY Mellon correspondent accounts to provide offshore banking services to US taxpayers, who in turn have failed to report the existence of their ZKB accounts to the IRS, as well as the income earned on those accounts,” according to a copy of the complaint, known as a John Doe summons.

The complaint comes amid a US crackdown on offshore tax evasion. Last December, three current or former ZKB employees were indicted on charges of helping US clients hide more than $420 million from the IRS.

Since 2009, 38,000 US taxpayers have avoided prosecution by voluntarily disclosing offshore accounts to the IRS, and 371 were ZKB clients, according to the complaint.

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