* Big banks will need Tier 1 capital of 10 percent
* Benefit to economy to outweigh costs to banks -govt
* Watch out for competitive disadvantage - bankers group
* Legislation to enter into force in 2012 at earliest
* Parliament could still delay, amend proposals
(Adds reaction, more comments)
By Catherine Bosley
BERNE, April 20 (Reuters) - The Swiss government pushed ahead on Wednesday with plans to make UBS and Credit Suisse reach tough new capital standards, saying the benefit to the economy outweighed costs to the banks.
As it finalised legislation to go to parliament, the Swiss cabinet said the general thrust of a draft law it issued in December was unchanged but it had made a few minor changes following a consultation period.
Finance Minister Eveline Widmer-Schlumpf said Switzerland was compelled to take a tougher line on bank regulation than other countries as UBS and Credit Suisse were so big that any failure could bring down the small Alpine economy.
"There will be adjustment costs for the banks but all in all the net effect will be positive," she told a news conference. "I am convinced that the Swiss banking sector will be the winner."
The government has proposed both big banks will need an equity Tier 1 capital ratio of at least 10 percent, versus the 7 percent minimum set under the Basel III global standards which begin to take effect in 2013.
Both UBS and the powerful right-wing Swiss People's Party (SVP) have warned the plan risks making UBS and Credit Suisse less competitive, raising questions about whether the rules might still be watered down during the legislative process.
Widmer-Schlumpf rejected suggestions the government was rushing ahead with the proposals, saying they had taken more than two years of consultation since the Swiss government was forced to bail out UBS at the height of the financial crisis.
She said the plans had been broadly endorsed by experts and the banking industry -- including Credit Suisse -- and said only the SVP and UBS had expressed fundamental opposition.
Widmer-Schlumpf said the government addressed concerns raised by the SVP and others about powers proposed for the FINMA regulator in a crisis, saying FINMA would only intervene to impose an emergency plan if a failing big bank did not do so.
COMPETITIVE DISADVANTAGE?
The government proposed publishing a report on international developments every year to address concerns about Switzerland forging ahead and Widmer-Schlumpf said she expected other countries would enact similar regulations.
Jason Nason, spokesman of the Swiss Bankers Association, criticised the formulation of the review provision as too vague.
"The Swiss authorities should clearly commit themselves to reviewing and adapting the regulation should Switzerland's two globally-active universal banks find themselves placed at any serious competitive disadvantage," he told Reuters.
Britain too is considering capital standards more stringent than Basel III, though these would apply only to big retail banks and its comparatively lenient treatment of investment banks has provided ammunition to opponents of the Swiss rules.
UBS Chief Executive Oswald Gruebel has said the stiff Swiss standards could force UBS to move units abroad. In response, Widmer-Schlumpf noted the bank benefited from Switzerland's other advantages such as low taxes plus political stability.
Credit Suisse said it wanted to study the proposal in detail before commenting but referred to a recent interview by CEO Brady Dougan in which he reiterated his broad support.
"I fear that people may have forgotten what happened in 2008. The financial system needs to be made more robust and secure," he said, adding he assumed regulators elsewhere would also demand other global banks hold more capital.
"If that is the case, we will see the emergence of a reasonable competitive landscape around the world."
Helvea analyst Peter Thorne said the fear the rules would make Swiss banks uncompetitive was "a gross exaggeration" but they would have to cut their investment banking businesses.
"Implementation of the rules should see CS and UBS downsize their investment banking operations ... and this should liberate capital which is probably not earning its cost of capital for the benefit of shareholders," he said.
The government said parliament could vote on the matter before the end of the year so the plans could come into force by the start of 2012 at the earliest, with a transition period up to 2018 to allow implementation.
However, in a taste of a likely heated debate to come ahead of Swiss elections on Oct. 23, the centre-left Social Democrats and Greens both said they wanted the proposals made still tougher, suggesting they may still be amended or delayed. (Additional reporting by Martin de Sa'Pinto; Writing by Emma Thomasson; Editing by Mike Nesbit and Jon Loades-Carter)