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* Banks on track to meet too-big-to-fail capital rules
* SNB says more progress required on loss-absorbing capacity (Adds comment from UBS and Credit Suisse)
By Joshua Franklin
ZURICH, June 15 (Reuters) - Swiss banks UBS and Credit Suisse have been told by the central bank that they still need to draft credible plans for potential insolvency as part of the country's efforts to prepare for a banking crisis.
After the financial crisis in which UBS suffered billions of dollars in losses and took a government bailout, Switzerland introduced new regulations designed to protect the economy from a possible banking collapse.
The Swiss National Bank (SNB), which helps to oversee the stability of the country's financial system, said on Thursday that the two biggest banks are on track to meet the new capital requirements but more work is needed.
"As a means of resolving the 'too big to fail' issue in Switzerland, it is essential that further progress be made in drawing up robust resolution plans," the SNB wrote in its annual financial stability report.
UBS and Credit Suisse, the combined balance sheets of which are more than two-and-a-half times the size of the Switzerland's economy, have already set up Swiss subsidiaries that house functions crucial to the country.
However, they still need to demonstrate how they would be able to maintain these systemically important services when faced with impending insolvency, the SNB said.
They will also need to bolster capital set aside in case a bank must be wound down following insolvency.
Both banks are on track to meet updated too-big-to-fail (TBTF) capital requirements by the end of 2019, the SNB said, though it cautioned that they still need to improve their total loss-absorbing capacity for leverage ratios.
The TBTF rules include a headline requirement for UBS and Credit Suisse to hold core capital representing 5 percent of total assets, known as the leverage ratio. At least 3.5 percent of the leverage ratio is to be made up of high-quality common equity tier 1 (CET1) capital.
They will also need to meet a CET1 ratio of 10 percent. The CET1 ratio of capital to risk-weighted assets is a closely watched measure of balance sheet strength.
After raising about 4 billion Swiss francs ($4.1 billion) this year, Credit Suisse said it would have a CET1 ratio of 13.4 percent and a leverage ratio of 5.1 percent, based on first-quarter reported numbers.
UBS had a CET1 ratio of 14.1 percent at the end of the first quarter and a CET1 leverage ratio of 3.55 percent.
Spokesmen for UBS and Credit Suisse said they welcomed the SNB's recognition of their efforts to bolster their capital positions. ($1 = 0.9709 Swiss francs)
Additional reporting by Brenna Hughes Neghaiwi; Editing by Amrutha Gayathri and David Goodman