Banking stability

A competitive and stable financial centre is vital to a flourishing economy and Switzerland’s prosperity. It is therefore important and correct to learn the right lessons from the Credit Suisse crisis. The bank’s downfall was years in the making and was in no way caused by a systemic failure, resulting instead from a lack of confidence in Credit Suisse management. The Swiss banking industry, meanwhile, has remained exceptionally robust overall.

This is the background against which the measures put forward by the Federal Council in its report must be viewed. While some of the measures will help to promote stability and competitiveness, others actually put those assets at risk, for example by violating fundamental principles in certain areas. After careful consideration, a range of potential measures needs to be selected for appraisal with a view to targeted and measured implementation, having regard to the bigger picture.

Swiss banks make a vital contribution to Switzerland’s economy and to the prosperity of its population. A regulatory framework that is competitive internationally is key to ensuring that it can continue to do so. The factors that destroyed Credit Suisse’s reputation and confidence in the bank over a long period, ultimately leading to its demise, are now largely understood. Obvious gaps in the existing regulatory framework can be closed with targeted measures. Credit Suisse was a global systemically important bank; the intervention by UBS and the authorities ensured that its demise did not have global repercussions. The following criteria are key with regard to potential measures:

Proportionality: It is essential for the solution to match the problem in each case, meaning that measures must be geared in particular to a bank’s size, complexity, business model and risk profile and must also take account of its legal form (including its ownership structure and the personal liability of partners) and any legislative mandates. For that reason, we see absolutely no need for additional requirements in respect of the vast majority of institutions.
The robustness of the sector as a whole should also be meaningfully improved so that it is better able to absorb external shocks. Attention must be paid in this respect to maintaining and strengthening Switzerland’s international competitiveness. In our view, the main priorities are further expanding the provision of liquidity to the banking system by the Swiss National Bank (SNB), introducing a public liquidity backstop, implementing changes in the areas of remuneration and responsibility, and improving the supervisory activities of the Swiss Financial Market Supervisory Authority FINMA.
However, we believe that the existing capital requirements for systemically important banks are sufficient and see no need for stricter measures across the board. The Swiss requirements are in line with or more stringent than international standards – even more so following the early implementation of “Basel III Final”.

We believe the following overarching principles to be central:

The principle of proportionality plays a key role for all of the measures under discussion and means that each must be clearly necessary for and ideally suited to resolving a specific problem and that its “added value” must clearly justify its cost. Proportionality does not begin with differentiated regulation for various categories or types of bank – disproportionate regulation must of course be avoided for the financial centre as a whole.

Proportionality is especially important in view of the highly diverse nature of the Swiss banking industry. Using the self-inflicted downfall of a single bank as a pretext for a wide-ranging wave of regulation would be unnecessary and wholly unreasonable. We therefore see no need for action or new requirements as regards the overwhelming majority of banks and call for the measures to be restricted to further strengthening financial stability and to be implemented in an appropriate and proportionate manner.

The extent to which the term “proportionality” needs to be clarified in the context of specific measures or topics over and above a standard definition depends on how the individual measures are designed, so there must be further room for manoeuvre in this respect.

No systematic assessment or meaningful cost/benefit analysis of the planned measures has yet been conducted. The individual measures form a complete package, and this must also be assessed with regard to its overall impact in terms of system stability and cost.

Our criticism of the lack of an aggregate impact assessment specifically concerns (but is not limited to) the area of capital requirements, where any “Swiss finish” that goes beyond international standards is to be avoided. The study commissioned by the Federal Council from the consulting firm Alvarez & Marsal looks at the consequences of the proposed capital measures and concludes that the Swiss economy would have to expect significant additional costs in the form of lower tax revenues, job losses and reductions in both lending volume and economic activity. Given the potential repercussions and costs for various market participants and the economy as a whole, the lack of an overall assessment of the expected economic effects is baffling.

We therefore see it as vital for an appropriate, holistic view or a systematic regulatory impact assessment to be presented before any changes at ordinance level are adopted. All measures must be assessed both in their own right and with regard to how they interact, and it must be verified that they are needed for the stability of the financial centre, appropriate and above all proportionate.

The Parliamentary Investigation Committee’s report of December 2024 made it clear that FINMA did not make full use of its existing powers during the Credit Suisse crisis. It is wrong to deduce from this that the supervisory authority did not have a sufficient legal basis to intervene. It is essential to bear this in mind when deciding to extend FINMA’s existing powers or give it new ones, and the question of why it did not exhaust its powers in the Credit Suisse crisis must be meticulously addressed before any such decisions are made. This crucial step has not yet been taken.

There can be no doubt that a strong supervisory authority is in the Swiss financial centre’s interest. However, we view certain measures, such as giving FINMA the power to impose fines, as problematic from a rule-of-law perspective and not expedient in the absence of an evaluation of the need for them. Other measures, such as informing the public in detail about investigations and the opening of proceedings as well as early intervention powers, even have the potential to be counterproductive.

How all of these measures would affect supervision in practice must ultimately be borne in mind. Many of the measures would result in broader and above all more formal proceedings. This would hardly make FINMA more effective, instead leading to protracted proceedings that prove costly for all involved.

Our positions on selected issues are as follows:

The crisis surrounding Credit Suisse has demonstrated the importance of robust, optimally broad-based arrangements to secure liquidity. One element of this is sound liquidity management within banks. Another is that all solvent banks, provided they meet certain conditions, should be able to receive fast and flexible liquidity assistance from the SNB against readily available and transferable collateral, in particular when they are no longer able to refinance their operations on the market. Liquidity provision in this form does not require a state guarantee, makes a vital contribution to safeguarding system stability, and thereby significantly reduces the risks to the nation as a whole. Thirdly, Switzerland should have a PLB available to support the restructuring of a systemically important bank, in the interest of system stability.

The Swiss Bankers Association (SBA) therefore supports the Federal Council’s recommendation to introduce a PLB for systemically important institutions as it complements the existing tools to preserve system stability. Similar instruments are already in place in comparable financial centres, are part of the standard toolkit available internationally, and are recommended by the Financial Stability Board (FSB). Since the PLB is protected by an extensive bankruptcy privilege for the SNB, there is no automatic entitlement to it, and substantial interest and premiums would have to be paid to the federal government by any institution benefiting from it, we see no logical justification for additional lump-sum compensation.

The Swiss capital requirements for systemically important banks, while aligned with international standards, are already strict in comparison with rival financial centres – even more so following the early introduction of “Basel III Final” in 2025. In particular, they are far more rigorous that other countries’ regulations with regard to the leverage ratio.

Adequate capital underpinning strengthens the loss-absorbing capacity, reduces the risk of bank runs in cases of this kind and provides a more solid basis for resolution or turnaround measures. A solid capital base is thus essential in creating trust, providing a buffer and buying time for crisis management. However, it can never offer total crisis protection, especially if the business model is not sustainable and risk management is insufficiently robust.

From a macroeconomic perspective, it should also be borne in mind that substantial increases in capital requirements have a tangible impact on the real economy. They could unintentionally lead to a credit crunch by reducing lending volumes and/or increasing costs.

A significant, across-the-board increase in capital requirements therefore offers no macroeconomic benefits, especially since it fails to address the causes of the crisis in question. It represents a form of “Swiss finish” that curtails the banks’ macroeconomic role, with the concomitant impact on lending in the economy and thus the prosperity of all. It could also result in some of the banks’ business moving to unregulated industries, further exacerbating systemic risks.

Any proposals for measures in this area will have to be assessed with care. It is therefore vital to view all such measures together.

It is crucial to a bank’s risk management that the responsibilities of decision-makers be clearly defined and their remuneration aligned with the risk policy, the bank’s long-term performance and compliance with codes of conduct. We therefore support targeted amendments in the areas of corporate governance, responsibility and remuneration, subject to compliance with the overarching principles set out above. FINMA Circular 2010/1 “Remuneration schemes” already outlines the key principles of a sustainable remuneration policy. To add greater weight to the circular’s content and make it more binding, we support the strengthening of certain legal bases for remuneration systems. As a complement to the existing proper business conduct requirements, we also favour the introduction of a lean, proportionate and pragmatic accountability framework (“senior managers regime”). This regime should be effective but balanced, lean and practically oriented; those with responsibility should be identified as is appropriate to the individual bank’s size, complexity, risk profile and business model (including its legal form, ownership structure, the personal liability of partners and any legislative mandates), and their specific responsibilities documented. For that reason, we see absolutely no reason for additional requirements in respect of the vast majority of institutions.

Effective banking supervision results from a combination of legal bases and specialist expertise with a measured and bold approach to implementation. Merely expanding or tightening up the law will not make up for any shortcomings in the other three areas. Efficient collaboration between the Federal Department of Finance (FDF), the Swiss National Bank (SNB) and the supervisory authority (FINMA) is key. The Parliamentary Investigation Committee worked to establish how far this was the case during the Credit Suisse crisis.

The supervisory authority’s approaches to recovery and resolution in particular must be analysed and updated as necessary. For example, an increased focus on the practical feasibility of recovery and resolution plans in various crisis scenarios is something worth considering.

Conclusion

Firstly, the measures – particularly those concerning capital adequacy – must be assessed in their entirety and must not needlessly restrict competitiveness. Secondly, when considering additional powers and resources for FINMA, ideas on expanding the power to impose fines, early intervention by FINMA at banks, the abolition of legal remedies and the use of audit firms, critical scrutiny is required. Likewise, FINMA’s demand that it should be allowed to publish enforcement proceedings needs to be carefully examined in order to explain why the existing business conduct requirement and the interventions and means of communication it entails are not enough. Thirdly, certain ideas concerning accountability and cost/benefit ratios are potentially much too far-reaching, especially those on strengthening recovery and resolution planning for parent banks. Fourthly, no specific requirements should be introduced for matters where the cause is unrelated, such as those concerning the provision of liquidity information.

The SBA supports targeted measures that demonstrably improve system stability, can be proven to be pertinent to the Credit Suisse crisis and have a reasonable cost/benefit ratio. At the same time, fundamental regulatory and rule-of-law principles, as well as proportionality, must be safeguarded.

All measures must also be evaluated in their entirety. Different timings for different measures cannot be agreed until it is clear which of them are to be implemented and in what form.

As the umbrella organisation of banks in Switzerland, the SBA argues for open and fact-based debate. It is committed to maintaining proportionality, competitiveness and stability, and will continue to contribute constructively to work on evaluating the regulatory framework.