* Central bank urges UBS, Credit Suisse to reduce debt
* Cautions on Swiss housing market, mortgage lending
* Welcomes capital-building moves at UBS, Credit Suisse
* SNB stops short of calling for dividend restraint (Adds comment from SNB, detail)
By Katharina Bart
ZURICH, June 20 (Reuters) - Credit Suisse and UBS must cut debt levels that still top international rivals, the Swiss National Bank (SNB) said on Thursday, stopping short of making any recommendation on their shareholder payout policy.
Swiss banks have pruned assets, raised capital and cut their investment banking arms to meet stricter rules spawned by the global financial crisis, and Swiss authorities added extra regulations after the Swiss state had to bail out UBS in 2008.
They also face fines following scandals including rigging benchmark interest rates and helping rich Americans avoid tax.
The central bank urged Credit Suisse and UBS - major contributors to Swiss GDP - to stay on course with planned measures that it said are likely to lead to a “substantial” improvement in leverage, or debt-to-equity ratios by year-end.
“Given the prevailing risks in the environment and the losses incurred in the recent financial market crisis, the SNB still considers current leverage ratios at the Swiss big banks to be low,” the SNB said in its yearly stability report.
UBS and Credit Suisse both reported a leverage ratio of 3.8 percent at the end of the first quarter. The Swiss financial market regulator requires 4.3 percent by 2019.
UBS said its leverage ratio stands just short of 2019 requirements. Credit Suisse declined to comment.
Last year’s SNB stability report sent shares in Credit Suisse to their lowest since 1992 by suggesting it halt dividends or issue shares to bolster capital. Credit Suisse has since outlined measured to bolster capital by more than 15 billion Swiss francs ($16.31 billion).
In October, UBS said it would fire 10,000 staff and largely wind down its fixed income business in favour of returning to its private banking roots.
The SNB also warned it could take further action to prevent what it sees as lax mortgage lending in Switzerland.
In February, the Swiss government said it would require banks to hold additional capital against their mortgage books to restrain an overheating real estate market and “exorbitant” mortgage debt.
The central bank stopped short in its report of making any recommendation on shareholder payout policy this year.
Credit Suisse paid a 2012 dividend of 0.75 francs per share, with only 0.10 francs in cash and the rest in shares. It flagged a return to an all-cash payout after it meets key capital ratios, expected by mid-2013.
Last year, UBS raised its dividend to 0.15 francs from 0.10 in 2011, its first payout since the financial crisis.
Credit Suisse is among more than a dozen Swiss banks under formal U.S. investigation for helping wealthy Americans evade tax, and is expected to face a heavy fine to settle the affair.
SNB Chairman Thomas Jordan said on Thursday it is vital that Switzerland take all possible steps to avoid a bank being indicted in the U.S. probe. Swiss lawmakers on Wednesday nixed a draft law aimed at protecting Swiss banks from criminal charges.
UBS in December paid $1.5 billion for its part in a multi-year scheme to manipulate Libor and other benchmark interest rates, but remains open to other lawsuits linked to the matter.
On Thursday, former UBS trader Tom Hayes appeared in a London court to face eight fraud counts linked to the Libor rigging. UBS was one of 20 banks censured by Singapore’s central bank last Friday after it found more than 100 traders there tried to rig key borrowing and currency rates. ($1 = 0.9194 Swiss francs) (Editing by Louise Ireland)