The dramatic rescue of the Swiss bank Credit Suisse was a good year ago. What we now know is that the rescue through a forced merger with competitor UBS effectively meant the end of the traditional bank. UBS has decreed that the brand name will only appear until 2025, after which Credit Suisse will have disappeared completely and been absorbed into the new parent company.
On Wednesday, Karin Keller-Sutter – as Swiss Finance Minister, the mother of the merger – emphasized once again how right and without alternative the takeover of the bank by UBS was. At that time, the authorities “succeeded in preventing the uncontrolled collapse of Credit Suisse.” This prevented damage to Switzerland, the economy and taxpayers, said Keller-Sutter.
The minister knows that not everyone sees it that way and that there are also economists who would have found an orderly winding-up of Credit Suisse better. Because now Switzerland only has a single major bank, and one whose balance sheet total is so large that it can accommodate twice the Swiss gross domestic product. Hardly any country has to live with the risk of a comparatively large bank.
Keller-Sutter and her six government colleagues also know this. For this reason, and also because Parliament has given them the appropriate audit mandates, the Federal Council, as the Swiss government is called, reviewed the existing regulation of systemically important banks and on Wednesday adopted a report on banking stability. It includes a package of 22 measures that the Federal Council is proposing to Parliament to close gaps in the existing system. The legislature should at least consider seven further measures. The aim of the package is to “significantly reduce” the likelihood that a systemically important bank in Switzerland will again have to be rescued with emergency government measures.
One goal of the new rules: to hold bank managers accountable for missteps
In its report, the government recommends several fundamental innovations in the areas of management and supervision. On the one hand, the Federal Council is aiming to introduce a “senior management regime”, i.e. the clear allocation of responsibilities for the members of the board of directors and management, and possibly also for other management levels. Other important financial centers such as Hong Kong and London have already introduced such an accountability regime. It would make it possible to clearly identify and hold responsible those responsible for crises and missteps.
The Swiss government is also in favor of new payment rules: There will be clawback clauses and blocking periods for bonuses in the future – but no relative upper limits like in the EU. Credit Suisse’s excesses in variable remuneration, despite the scandals and losses, had greatly affected the Swiss public in recent months. Reclaim clauses have existed in the EU for a long time, but they are almost never used in practice.
In addition, the government writes, the financial market supervisory authority Finma should be allowed to inform the public more comprehensively about its supervisory activities and procedures. This demand has also been around for a long time, including from Finma itself. Many people hope that such a “public pillory” will have a disciplinary effect.
So far, the supervisory authority in Switzerland has not been allowed to impose any fines
When it comes to the capital requirements for systemically important banks, the government wants to change little. Since the financial crisis of 2008, there has been repeated discussion about whether the required equity capital – i.e. the proportion of a bank’s own funds in the total capital – is sufficient to make banks crisis-proof. “Even in the months of its greatest difficulties, the Credit Suisse Group’s equity ratios were always above the regulatory requirements,” said the Federal Council. He only sees a problem in the “short capital resources of the parent company”. In the future, its own resources should be higher.
The Federal Council explicitly rejects a general increase in equity ratios. In doing so, he rejects the wishes of many economists and parliament for significantly higher quotas – and instead accommodates UBS. The bank has repeatedly spoken out against higher capital ratios, which would make it more difficult for it to pay high wages and dividends.
The Federal Council only wants to examine Finma’s ability to impose fines. So far, the supervisory authority in Switzerland has not been allowed to impose any fines. But she wants it so that she can reprimand banks like Credit Suisse more effectively.
The bottom line is that the Federal Council’s proposals certainly result in a certain tightening of the rules. However, they are not a revolution. In the left-wing political camp, the reaction is correspondingly critical. “The measures proposed by the Federal Council are not enough to finally effectively regulate the banking sector,” said Cédric Wermuth, President of the Swiss Social Democrats. “The waiver of stricter equity criteria is absolutely negligent and makes a mockery of taxpayers.” The party wants to fight for higher equity requirements in parliament.
UBS appears self-confident towards the government
Because what the Swiss government presented on Wednesday are only a small part of measures that it can implement itself by ordinance. Most proposals require laws and therefore first have to go through parliament, possibly even before the people in the form of a referendum.
So what happens next with Switzerland and its megabank is relatively open. What is certain is that UBS is becoming increasingly self-confident towards politics – although the takeover of Credit Suisse would probably not have happened without political support and Switzerland will continue to provide government-backed instruments in the future to help weakening banks. Just a few days ago, UBS announced that it would resume the share buyback program that was suspended following the merger with Credit Suisse. Share buybacks are popular with shareholders because they typically increase dividends. And: Such programs do not go well with higher capital requirements.
When asked whether UBS’s announcement had annoyed her, Finance Minister Keller-Sutter said on Wednesday, almost a little helplessly: “UBS is a private company.” How they act is ultimately a matter for their shareholders.