CREDIT SUISSE GROUP AG 
By ZURICH (Reuters) - The Swiss National Bank urged Credit Suisse (>> Credit Suisse Group AG) to improve its capital by halting dividends or issuing shares to raise cash to shield it from the risk of an escalation of the euro zone banking crisis.
"For Credit Suisse, given the low starting point and the risks in the environment, it is essential that it already substantially expand its loss-absorbing capital base during the current year," the SNB wrote in its annual financial stability report, which focuses on the Swiss banking sector.
"Apart from the planned reduction of risk, these improvements can also be achieved in other ways, such as by suspending dividend payments, or even by raising capital on the market through share issuance," the SNB said.
Credit Suisse paid out 0.75 Swiss francs per share to shareholders in 2011, down from 1.30 francs in 2010. Meanwhile, UBS last year paid its first dividend - just 0.10 francs per share - since the financial crisis.
While Credit Suisse was singled out - unusual for the SNB - rival UBS, which had to be bailed out by the Swiss government in 2008, was also cautioned to keep course with its strategy to stow away profits instead of paying cash out to shareholders.
Neither bank are being asked to hold more capital than required under new rules, but instead are being urged to reach higher requirements sooner.
Both hold more capital than rivals according to existing rules, but fall behind under international Basel III rules coming into full force in 2019, the SNB said.
The SNB also criticized that leverage at UBS and Credit Suisse remains "very high", despite cutbacks on risky assets at both banks. UBS and Credit Suisse should trim their balance sheets, and not merely slash risk-weighted assets, the SNB said.
EURO ZONE BANK WORRIES
Chief among the SNB's worries are the collapse of a euro zone bank, the bursting of a bubble in the Swiss housing market as investors flee towards assets perceived as safe, persistently low interest rates, and increased funding difficulties.
Though Credit Suisse and UBS are only moderately exposed to euro zone debt and loans, they both face "substantial losses" should European banks fall further into crisis, due to counterparty links to Switzerland, the SNB warned. "The risk of a major bank failure remains substantial," it said.
The SNB's report highlights that Credit Suisse, an early adopter of the central bank's push for contingent convertible bonds, or CoCos, is at a disadvantage because the instruments aren't likely to be recognized under Basel III.
While Credit Suisse issued CoCos - bonds which aim to absorb losses by converting to equity under certain conditions - UBS has been more cautious about the instruments, saying it did not want to dilute shareholders following repeated cash calls in 2007 and 2008, as it struggled under the weight of more than $50 billion in mortgage writedowns during the subprime crisis.
Credit Suisse and UBS are also in the crosshairs of ratings agency Moody's, which could cut their ratings by as much as three notches in coming weeks as part of a ratings review of global banks. UBS's long-term debt is rated Aa3 by Moody's, Credit Suisse's Aa1.
REAL ESTATE BUBBLE THREAT
The SNB cautioned that a potential collapse of Swiss real estate prices poses a threat to banks with big mortgage books. More personal insolvencies and an uptick in Swiss household debt to gross domestic product highlight banks' increasing vulnerability, the SNB said.
The central bank has repeatedly warned of overheating after a flood of demand in hot spots such as Lake Geneva, Lake Zurich, Zug and ski resorts fuelled a surge in prices.
After repeated warnings to Swiss banks to tighten their lending standards went largely unheeded, the SNB pushed for an emergency buffer. Earlier this month, the Swiss government said it can impose another 2.5 percent additional buffer to underpin mortgage lending if credit growth gets out of control.
(Reporting By Katharina Bart; Editing by Jon Loades-Carter)
By Katharina Bart
