By Katharina Bart and Silke Koltrowitz
ZURICH (Reuters) - Credit Suisse (CSGN.VX) has set out plans to separate its domestic operations from its more risky investment banking business, as part of post credit-crunch efforts to insulate Swiss taxpayers from costly bank bailouts.
The move puts Credit Suisse's domestic retail, commercial and private banking operations in a "lifeboat" more immune to market vagaries and represents its response to Swiss efforts to avoid a repeat of the 2008 financial crisis, during which the government was forced to rescue rival UBS (UBSN.VX).
In its "living will" announced on Thursday, Credit Suisse said it would set up a Swiss subsidiary from mid-2015 and will begin booking investment banking business in the region it originates.
For example, a U.S. derivatives business currently booked at a London investment banking hub will be moved to the bank's U.S. broker-dealer unit.
Credit Suisse is aiming to win relief from tough Swiss rules, a gold-plated approach bankers have dubbed the "Swiss finish," with the measures.
The bank said its board had backed the outline of the plan but it still must be analysed and approved by regulator FINMA, which can grant a rebate from the capital rules.
The reaction of other regulators outside Switzerland also remains to be seen, given that the plan could mean the investment bank being allowed to go under if it hits problems, exposing creditors and counterparties to the resultant losses.
Swiss banking rules go beyond international standards, demanding banks hold more capital as a proportion of their so-called risk-weighted assets - in effect making it less profitable to stay in that business.
UBS and Credit Suisse retain a free hand on what businesses to remain in, but have incentives for them to either curb riskier trading activities or exit them entirely.
The rules also require emergency plans on how to separate activities in Switzerland, where the big banks' balance sheets are worth many times Swiss gross domestic product.
The move also aims to allow Credit Suisse to issue "bail-in" debt that can be used if the bank gets into trouble, an approach the Swiss regulator favors over asking creditors and shareholders for new funds.
The CS plan comes after UBS said last month it would set up a new Swiss subsidiary by mid-2015 for its Swiss retail, small business banking and some of its private bank activities in the event of another crisis.
FINMA WELCOMES EFFORTS
Swiss financial markets watchdog FINMA, which has worked alongside the Swiss National Bank to put the new rules in place, welcomed both banks' efforts.
"In general, steps to simplify emergency planning and improve resolvability are welcome from a regulatory perspective," a FINMA spokesman said in a statement.
The spokesman didn't comment on any discount either Credit Suisse or UBS could be granted under the Swiss rules.
The Swiss duo's efforts contrast with skepticism from some euro zone rivals. Deutsche Bank (DBK.DE) co-head Juergen Fitschen for instance told a conference earlier this week that he failed to see how a separation of investment and commercial banking operations safeguarded bank clients or guaranteed a stable financial system.
"I am struggling to understand what sense a separation of investment and commercial banks would make," Fitschen said.
However, ratings agency Fitch said other European banks could mirror Credit Suisse's move.
"Credit Suisse's announcement raises the bar for other large, complex banking groups looking to restructure in the coming years," said Fitch analyst Christian Scarafia.
"We expect several other large European banking groups to make changes to their structures because of various legal and regulatory requirements to strengthen capitalization and improve their resolvability."
It is not just capital Swiss banks have to worry about: impromptu comments from Switzerland's finance minister earlier this month raised the specter that UBS and Credit Suisse might be subject to a "leverage" ratio of between 6 and 10 percent, against the 3 percent for global banks under rules that come into force in 2018.
Since the collapse of U.S. investment bank Lehman Brothers more than five years ago, authorities have been grappling with the question of how banks regarded as "too big to fail" can be recapitalized without causing panic or needing taxpayer cash.
The Swiss rules also encourages both banks to bolster their capital with contingent bonds - debt instruments dubbed CoCos - which both UBS and CS have done, though with varying terms.
(Additional reporting by Arno Schuetze and Edward Taylor in Frankfurt; Editing by John Stonestreet and David Holmes)