The Credit Suisse crisis has caught the federal government, the National Bank, and the financial regulator on the wrong foot. Their work is far from done with last Sunday's emergency measures.
For now, the banking crisis, which started in the US, has been sedated with massive liquidity injections from central banks.
In Switzerland, the two largest banks, UBS and Credit Suisse, are merging by decree of the Swiss government and the financial regulator. National Bank President Thomas Jordan made it clear once again on Thursday that there would be no turning back from the takeover.
Low Point
One of the great disappointments of Credit Suisse’s rescue operation is that the too-big-to-fail regulation developed after the financial crisis was not applied last Sunday.
And rightly so: in the case of Credit Suisse there were no capital gaps to plug, as was the case during the 2008 financial crisis. Instead, there was a huge loss of confidence and liquidity.
The «Public Liquidity Stopgap,» ended up being the solution both in the US and Switzerland. The Federal Council decided against this measure a year ago, fearing the market would take such a move as an alarm signal.
Injecting an ailing bank with money might calm the situation in the short term. Long-term it does nothing but raise questions about regulatory policy.
To be sure, banking regulation has reached a low point and will have to take several steps to get ahead. These are the most important challenges:
1. State Involvement
It is part of the irony that the state is heavily involved in Credit Suisse's rescue. After UBS was bailed out in 2008, this should not have been the case and the Federal Department of Finance (FDF), the Swiss Financial Market Supervisory Authority (Finma) and the Swiss National Bank (SNB) took deep risks in forcing UBS to take over Credit Suisse.
The Swiss government is guaranteeing UBS up to 9 billion Swiss francs for possible losses and has agreed to share further potential losses between UBS and the state.
In this context, is not wrong to speak of UBS as the new state bank as «NZZ» (behind paywall, in German) mentioned in a recent article.
Conclusion: Authorities implementing these rules are at least as important as sound regulations. Finma continues to be too closely involved in federal politics and is therefore restricted in its actions. A way to ensure the state from staying out of the next bank bailout is to disentangle politics and supervision even more.
2. Too Big Not to Fail
On paper, the $5 trillion UBS/Credit Suisse behemoth is awe-inspiring. However, the takeover brings together two vastly different corporate cultures, a long list of legacy legal issues, and a market share that ensures that the bank will constantly be in the spotlight.
Add to this the centrifugal forces that result from a takeover of this magnitude, and bankruptcies and breakdowns are inevitable. It can be said: UBS/Credit Suisse is «too big not to fail» - too big to be spared from mistakes.
Conclusion: By keeping the less capital-intensive businesses, such as asset management, and curbing the investment bank, the takeover is headed in the right direction. Where assets and clients cannot be taken over, UBS should allow spinoffs, sell divisions or, if necessary, close them. In the Swiss home market, it makes little sense to operate with two brands, for example with a listed Credit Suisse in Switzerland.
3. National Fences
Foreign countries no longer want to rely on «Ring Fencing,» which came about after the 2008 crisis, forcing bank subsidiaries in other countries to have additional equity capital to protect them from international crises or, from them having to be bailed out.
Finance Minister Karin Keller-Sutter indicated last Sunday that Washington and London feared a contagion in the global financial system, had Credit Suisse gone under.
Conclusion: This part of the too-big-to-fail regulation was useless in the case of Credit Suisse. It also proves that when an international bank fails, it has global consequences. Regulators need to start thinking beyond their front yard and begin coordinating the global fight against such cases. The appropriate forums already exist in the form of the Bank for International Settlements (BIS) and the Financial Stability Board (FSB).
4. Separating the Banking System
A crisis of confidence does not stop at countries, individual institutions, and business models. The idea of separating the interest rate business from investment banking altogether was discussed in parliament in 2014. Politicians have relaunched the debate albeit with little understanding of UBS's plans.
Conclusion: The separation banking system would make UBS/Credit Suisse smaller on paper, but not necessarily safer. More important is that bankers follow the «Chinese walls" between departments in day-to-day operations.
5 . The Power of the «Twitterati»
Not only is news consumed on smartphones but financial transactions are also conducted on mobile devices. As was the case last fall, in the current crisis Twitter and other social media platforms have a role to play in the huge withdrawal of funds that Credit Suisse faced.
Yet Social media storms don’t rank on the supervisory authority's risk monitor. It's certainly time they paid more attention to the phenomenon.
6. Skeletons in the Closet
As of June next year, Swiss companies of a certain size will have to bring irregularities to light as part of their «non-financial reporting.» Business activities will be examined in particular about the environment, social issues, and good business management, as well as labor and human rights and the fight against corruption.
In the case of Swiss banks, the scandals surrounding the Latin American oil companies Petrobras and PDVSA and the Malaysian sovereign wealth fund 1MDB have left their mark. No one at the top of a company gets to wipe their slate clean: reporting must be signed by the board of directors and is subject to criminal liability.
Conclusion: Regulation does not have to come from the sector to become relevant for the banking industry. Good management and consideration for the environment and society will become even more important for the sector.
7. Small is Grand
Many clients may prefer being banked by a boutique bank or an independent asset manager. In fact, small to mid-sized financial companies may become the secret winners of the mega-merger because they promise personalized service and the dispersion of cluster risks. Fortunately, with a vibrant scene of asset managers and fintechs, the financial center is well-positioned for such a trend. But only if the regulation gives these players breathing room.
