Implications of the Credit Suisse takeover
The stability and prosperity of the Swiss financial centre are central to the entire Swiss economy. The takeover of Credit Suisse by UBS and the measures taken by the Swiss authorities have far-reaching implications for the Swiss financial centre. In the view of the Swiss Bankers Association (SBA), they were targeted and effective in ensuring the stability of the Swiss financial centre and building confidence. Switzerland has therefore assumed responsibility for preventing the spread of an international financial crisis and establishing stability. On this page, the SBA comments on the solution found as well as on current political affairs and issues.
The Swiss Bankers Association’s position
Parliament evaluated and approved various postulates (cf. 23.3438 ; 23.3439 ; 23.3440 ; 23.3441 ; 23.3442 ; 23.3443 ; 23.3444 ; 23.3445 ; 23.3446 ; 23.3447) during the extraordinary session in mid-April. These request that the Federal Council present an overview of the events in specific reports. The SBA supports such a review.
Before statements can be made in relation to necessary measures, the events must be analysed comprehensively and without pre-empting the result. The SBA seeks and supports an independent and open-ended review of the events that involves all the relevant stakeholders, using a parliamentary commission of inquiry (PUK) if necessary. An accurate understanding of the processes and procedures is the necessary basis for recommendations designed to improve regulation and ascertain responsibilities. The review should cover all interactions between the bank, the authorities, the applicable regulations and the prevailing market dynamics, both in the context of the events leading up to the crisis and the planning of relevant measures. Recommendations derived from this should be geared towards the targeted development of the existing regulatory system, which is based on proportionality and, accordingly, structured in a nuanced manner.
SBA is committed to an open-ended review of the events and government measures. In particular, this review should examine whether existing regulation was not sufficient to prevent the events that occurred or whether it was not applied in a timely and/or targeted manner. It will show whether and in which areas, if any, there is a need for stricter regulation.
The review should take into account the fact that the numerous and diverse players in the Swiss banking centre have, on the whole, successfully undergone a fundamental regulatory transformation in recent years and have learned the right lessons from the financial crisis. For example, nowadays all banks have significantly larger liquidity and capital buffers. The Swiss banking centre is therefore also well positioned by international standards. It is important to emphasise that the regulations implemented in the last decade and the measures taken have been fundamentally effective. This is demonstrated by the fact that Credit Suisse is the sole bank – albeit a significant one – that has run into difficulties. The other 240 or so banks in Switzerland, on the other hand, are generally stable and robust, and perform good work every day in the interest of their clients.
The TBTF regulations were not fully implemented. The solution found, however, involved individual elements of the TBTF regulations, which helped to avert greater damage. The TBTF regime in place and the associated high levels of capital and liquidity at both Credit Suisse and UBS gave decision-makers the time and degree of freedom needed to facilitate a solution that prevented the spread of an international financial crisis and saved the Swiss economy from lasting damage.
Naturally, this significant event provides important insights into where targeted measures might be taken to improve existing regulation. For that reason, the SBA seeks and supports an independent and detailed review of the events. We need to understand what decisions were made, as well as when, why and by whom, in order to draw conclusions about how the TBTF regulations can and must be further developed.
The SBA supports a swift yet detailed and comprehensive approach. Due consideration must be paid to the large degree of variation in the business models of the various institutions.
The SBA supports an independent, open-ended review of the events that involves all the relevant stakeholders. Recommendations derived from this should be geared towards optimising existing regulation.
Capital requirements have increased significantly in many respects since the 2008 financial crisis: the quality of the capital to be held has increased, additional risk categories have to be taken into account in the calculation, and the ratios have been raised. As far as Credit Suisse is concerned, it met the high capital requirements for systemically important banks and its capitalisation was never in question.
The analysis of the existing TBTF regime and the review of the events will have to determine whether a tightening of capital adequacy regulation is appropriate. From the SBA's point of view, however, it is already clear that the principle of proportionality must continue to apply.
Finally, consideration must be given to the fact that progressive capital requirements are already provided for in the existing TBTF legislation, with the result that increasing bank size leads to disproportionately higher requirements. Banks are thus given an incentive to keep their risks and size small in order to remain profitable and competitive. Accordingly, they have reduced their balance sheet risks in recent years. In any case, the implementation of Basel III Final, which is already planned and will further increase the requirements by 2025, should go forward.
The SBA stands by its position on Basel III Final, as the reforms take the feasibility and integrity of the risk landscape into account. The position taken therefore supports the goal of financial market integrity. It is therefore important to finalise Basel III Final without additional adjustments, and Switzerland should continue to work at an international level to ensure symmetrical regulatory standards.
The SBA supports the introduction of a “public liquidity backstop” as a mechanism for further strengthening the systemic stability of the Swiss financial centre. This new “third line of defence” is intended to complement existing instruments that serve to protect the banks’ liquidity, as well as the SNB’s Emergency Liquidity Assistance (ELA). Comparable instruments are already established in comparable financial centres and are part of the standard package of instruments used internationally to prevent crises.
The idea of a separate banking system was analysed in the aftermath of the 2007/08 financial crisis but was subsequently discarded. Past events have not provided evidence that a separate banking system would bring more stability to the financial system. For example, Lehman Brothers was purely an investment bank, while Silicon Valley Bank was purely a commercial bank (without investment banking). It is therefore not the case that organisational separation of business activities makes the financial system more secure overall.
A bank's risk profile is not per se determined by the business areas in which it is active, but by the types of investments it makes and the claims and obligations it commits to. The subject of regulation must therefore be the risk profile and not the business area. It is crucial that a bank’s business activities are aligned with client needs and that residual risks are clearly identified and kept under control.
The universal banking model, as it is known in Switzerland, offers various advantages, especially for clients. In particular, economies of scope and the corresponding diversification are worth mentioning. On the one hand, clients benefit from a broad and integrated range of services and products from a single source. On the other hand, different business segments lead to the diversification of risks and therefore a reduction of a bank’s overall risk. The differences in earnings from the various business segments help to balance each other out. It is important that investment banking is tailored to the core business.
An investment bank’s services are very diverse and serve the interests of the country as a business location. Investment bank services are both systemically important (e.g. a syndicated loan) and non-systemically important (e.g. a currency hedge for an exporter), but they are nevertheless central to the economy. In the case of an integrated universal bank, companies benefit from these services. If investment banking cannot be carried out inside or outside a Swiss bank, bank clients face related disadvantages. Companies’ access to international capital markets would depend entirely on foreign countries. Globally active Swiss universal banks therefore contribute significantly to the international competitiveness of the entire Swiss economy and also provide important services to other banks.
Credible and effective financial market supervision is key to a successful and morally sound financial centre. The review of the events will have to show to what extent the existing regulation was not sufficient to prevent the events that occurred, or whether it was not implemented in a timely and/or targeted manner. It will show whether and where new or expanded FINMA instruments and powers are appropriate. FINMA already has a wide range of possible instruments at its disposal. For example, FINMA can penalise breaches of the requirement to guarantee irreproachable business conduct ("guarantee requirement") and impose industry bans (Art. 33 FINMASA) or activity bans (Art. 33a FINMASA). With the withdrawal of guarantees, FINMA's powers of intervention already go very far, and it has made increasing use of them in recent years. However, it does not have the power to issue fines (as some foreign supervisory authorities do). The existing FINMA powers (FINMA-Circular 2017/1 Corporate Governance; Circular 2013/8 Market Conduct Rules and Circular 2010/1 Remuneration Schemes) should be analysed, especially with regard to their implementation and enforcement. Accordingly, the Federal Council has recommended Postulate 21.3893 “Lean tools to better hold top financial market leaders accountable” for adoption and is of the opinion that the existing instruments should be subjected to an efficacy analysis within the framework of a report featuring an overview in accordance with the postulate.
To ensure the remuneration system and responsibilities are structured sustainably, a discussion should be held on appropriate measures in order to safeguard the reputation of the entire industry, especially in the context of the effective implementation of the FINMA Remuneration Circular (2010/11) and in accordance with the principle of a culture characterised by integrity, long-term thinking and responsibility set out in the Swiss Code of Best Practice for Corporate Governance.
In the SBA’s view, the principles set out in the circular are already adequate to effectively address this issue. In particular, the requirements for sharing losses and fostering a long-term orientation are sufficiently clear.
FINMA and the Competition Commission (COMCO) are clarifying the possible impact on competition. The SBA is committed to effective competition and open markets. As things stand today, Switzerland, with its approximately 240 banks and generally very open markets for most client groups, is experiencing intense competition for a large number of banking services. If constellations develop for certain activities, such as in the interbank and corporate banking business, whereby questions arise about sufficient access to specific services, it is up to FINMA to make the necessary clarifications together with the Competition Commission.
Switzerland is home to numerous internationally oriented companies that are successful worldwide with their products and services, operate globally and want to conduct their business via the Swiss financial centre. In order to satisfy the trade and financing needs of the Swiss economy as effectively as possible, internationally oriented banks with a broad range of services are needed. Such banks therefore have a high economic value.
Without major Swiss banks, access to the international capital markets for internationally oriented Swiss companies and the banks themselves would depend entirely on foreign countries. This also applies to the availability of highly qualified home-grown professionals with the right know-how to the entire financial sector. In a wide range of sectors (e.g. energy, pharmaceuticals), the crises of recent years have led to considerable efforts being made to bring production capacities back to Switzerland with a view to ensuring security of supply. It is not clear why regulatory intervention should only increase dependence on foreign countries in the banking sector. If Switzerland wants to play the role of an international financial centre, it needs at least one large international bank.
This raises the question of the extent to which politicians and the business community are willing to allow domestic offerings to be supplanted by foreign ones, thereby increasing the number of dependencies and putting the global profile of the financial centre, and therefore the economy as a whole, on the line. It should also be mentioned that the merged bank is about 40 percent smaller than UBS alone was before the financial crisis, while Switzerland's economic output has grown by a quarter in the same period.
Theoretically, strengthening Switzerland’s depositor protection system would also be an option to increase confidence in the banks. Such a measure would address the risks of a bank run and aim to reduce the incentives to participate in one. However, Swiss deposit protection has just been improved by way of the latest revision (system ceiling, payout periods and funding model). The Swiss system of depositor protection is good and robust. It is not clear how another extension of the system could further improve stability. The example of Silicon Valley Bank in particular shows that the risk of a bank run cannot be eliminated in this way.
In a related context, other measures to slow down or “interrupt” a bank run are conceivable, such as introducing the option to (temporarily) “freeze” certain deposits (“suspension of convertibility”). Although such an instrument would directly address the problems that come with crises of confidence, it would also involve drastic encroachments on the “rights” of depositors. Other aspects, such as enforceability on an international level or the inclusion of interbank business, could also be problematic. A more in-depth analysis of such an instrument would be necessary.
Switzerland was extremely quick to take responsibility and managed on its own to prevent the spread of an international financial crisis, which in the worst-case scenario could have been very costly for all major financial centres and economies around the globe. These events demonstrate that the Swiss financial centre is still rock solid. This fact has also been widely recognised and appreciated abroad.
With its very broadly diversified banking environment featuring financial institutions of different sizes and with different business models, Switzerland is still well equipped for international competition and therefore for the future. That is because it boasts a strong Swiss franc, political stability and very high levels of education.