Switzerland’s largest bank, as well as government, must do their utmost to ensure that the Swiss financial hub fully recovers from the damage sustained by the Credit Suisse debacle. In a piece for finews.first, Beat Wittmann indicates what is needed to make the country, and the sector, stronger than before.

This article has been published on finews.first, a forum for authors specializing in economic and financial topics.

In truth, all of this can only happen if there is a broad public discussion that transparently considers rigorous, fact-based analysis. That would then allow Parliament to take proper steps to ensure that it implements the necessary measures and reforms promptly and efficiently. But what is up for discussion?

1. Bank Failure – Incompetence, Misplaced Financial incentives, Negligence

The unparalleled collapse of Credit Suisse was completely of its own making. The bank had been managing a structurally unprofitable business for years and technically it was nothing more than a zombie bank. The financial markets recognized that precisely signaling and anticipating its demise months, even years, in advance.

Credit Suisse was still salvageable until the middle of 2022 even though management had been running it into the ground for years. The fact that the country’s then finance minister tried to whitewash the situation in December 2022 now looks highly questionable. Finma, the Swiss Financial Market Supervisory Authority, was also just as wrong to just rely on hope in vain, particularly in place of an effective strategy.

2. Government Institutions and Decision-Makers – Unclarity and Failure

It remains an enigma as to why all the responsible authorities collectively failed – and so blatantly. It is something that must be fully investigated and better understood. It is a massive fiasco involving both the government and bank management leading to enormous economic damage for the financial sector, and clear reputational harm for the entire country.

It is now vital that politicians do something beyond the usual empty slogans driven by the upcoming electoral cycle. A current and frequent example of that would be the mantra-like warnings against taking hasty, foregone conclusions.

Ironically, those calls are being made by the same exponents that so miserably failed when it came to the Credit Suisse debacle and then suddenly started to make arbitrary, ad hoc decisions on the weekend of 18-19 March this year, one of those being the careless decision by Finma related to the AT1 bond writedown.

3. Amid the Tumult of a Geopolitical Turning Point

The time since the end of the Cold War in 1989 has been marked by globalization and a peace dividend. Russia’s invasion of Ukraine marks a clear end to that period. The primacy of national security and politics over economy and trade has returned, something that is manifesting itself in the geopolitical tension between the US and China.

That has very fundamental, far-reaching consequences for Europe and Switzerland, including the financial sector and the economy. Switzerland is an integral part of Europe and the West from a historical, economic, and cultural perspective. That brings with it advantages, but also responsibilities.

Going it alone is simply no longer possible when it comes to the economy, financial regulation, monetary and security policy. We face constant pressure from friends and partners in this geopolitically charged, polarized environment. And we will always have to take a clear side in order to avoid being called opportunists and freeloaders.

Swiss policymakers have faced very clear difficulties in foreign policy for years. In fact, they are in a logjam. In hindsight, it appears rather trivial that the country has not managed to successfully engage in any kind of external negotiation simply because, internally, the country has no objectives, no conceptual inkling, no strategy, no mandate and no majority.

4. The Endless Loop of Aimless Governance Must End

It is given that the substance of banking infrastructure, international financial markets, regulation, monetary policy, and macroeconomic matters is extraordinarily complex. They are also in constant movement.

That is why it is critical that the decision-makers in the government and private sectors have specific qualifications and experience while the country has clear standards and rules that are comparable with those of other relevant sovereign bodies.

A comprehensive analysis must be undertaken of the gaps and failures for there to be adequate domestic reform. Parliament must be at the forefront of that.

There is a clear danger, one that could be exacerbated by this year’s elections. Politicians of all stripes might see the current debacle as an excuse to propound specific interests or demand populist measures. They could call for steps outlawing bonuses or ask for capital requirements to be ratcheted up even further. That could lead to unholy alliances forming between those that have nothing but the most basic of denominators to agree on.

Unfortunately, policymakers are in an endless loop of aimless, quasi-nihilistic governance, something that is damaging the Swiss economy. Moreover, it is clearly impacting shared responsibilities such as the support of the financial center, financial stability and the structure of regulation and supervision.

5. Trust, Trust, Trust

The moment a bank loses trust, it is in danger and prone to a bank run that could lead to its collapse. That is true. But the loss of trust is not simply some kind of «Force majeure» that seemingly appears from nowhere. There is always history behind it, and concrete reasons.

Credit Suisse lost trust because of several reasons. A falling share price, higher refinancing costs, expensive and damaging scandals, and countless management changes over a short period. It had an unprofitable business model, an incompetent board and management, asymmetric incentive systems, unprofessional communication, and serious internal governance and risk management failures. Those supervising and regulating it were not qualitatively or quantitively on an equal footing with the bank or foreign regulatory authorities.

There is an oft-used phrase. Trust is good, control is better! The latter term involves transparency and adherence to clear rules. Domestic and international flight routes are highly regulated and proof that clear, generally accepted rules not only engender trust but they allow for the trouble-free operation of a very complex system.

It is not about creating trust in a single bank but ensuring confidence in the wider financial sector, both for the economy and state-owned institutions. In the US and the EU, the responsible authorities have already published analyses of the reasons behind the recent banking crisis. In parallel, a broad public discussion is taking place. Switzerland could take them as examples of transparency and debate.

6. The Key Role of International Financial Markets

The importance of international capital markets cannot be emphasized enough. It is vital that those who have experience in them are professionally represented in bank management and among those supervising the financial sector.

Banks and governments ignore the price and signals of the international share and fixed income markets, as the British government under Liz Truss viscerally experienced at close hand. The constant decline in Credit Suisse’s share price signalized something very accurately over a long period of time. It showed where the direction of travel was.

It is more than astounding that those signals were either ignored or misinterpreted by the Federal Finance Department, the Swiss National Bank (SNB), and Finma. Given that, UBS’s future share price will be the best, unmistakable indicator of the success or failure of bank management and the integration of Credit Suisse.

The global macro-environment will remain a difficult one for the foreseeable future. Central banks will continue to tread the line between fighting inflation and preventing recessionary developments. Banks will be under pressure because of compressed interest rate margins, rising credit losses and higher risk aversion from clients, which will lead to the potential for increased asset and liability mismatches.

7. The Credit Suisse Takeover – a Great Deal for UBS

UBS got a fantastic deal when it rescued Credit Suisse. It has all the things it needs to successfully integrate its former competitor in a reasonable timeframe. But it is important that this new and larger UBS has competent and consequent regulation and supervision. Only then can it become a positive force as a global player for its clients, shareholders, employees and the Swiss financial sector.

With that, it is highly strange that several parties and politicians have made demands of a regulatory and competition policy nature on the institution itself. That should be the responsibility of government authorities and institutions. Moreover, those comments appear to be from the same parties and politicians largely responsible for running down the substance of the financial center itself.

For the hub, and the banking sector, it is critical that the battered levels of trust in the banking system and supervisory institutions be restored. Time will play a key factor in that; not least given the painful situation interest rate and financial market situation we are experiencing currently. Still, competitors and clients of UBS are not going to give it all that much time to integrate Credit Suisse.

8. Finma – Acute Need for Action

Finma must undertake a rigorous analysis of the facts in connection with the collapse of Credit Suisse. After that, it must be unrelentingly severe in its personal and structural consequences.

It has always been clear that Finma has never been on the same level related to expertise and numbers when facing the global systemic banks, particularly compared with its regulatory counterparts in New York, London and Frankfurt. The Swiss regulator very apparently failed across the board when it came to Credit Suisse and they now have to face up to countless questions and implement the necessary reforms, including:

Why was Finma so passive over the past year? Why did it not use all the instruments at its disposal during the crisis? Why in hindsight did Finma maintain that Credit Suisse had not been cooperative and even tolerated that from a global, system-relevant bank when it was facing up against a regulatory body?

What is Finma’s actual mandate and what are the relevant interfaces with the finance ministry and the SNB? How qualified and effective will Finma be when it is tasked with regulating any number of banks that are not systemically relevant and then one giant, very complex one that is? How independent is Finma from the finance ministry? Not on paper but in practice? Not least given that the finance ministry appeared entirely ignorant, almost negligent, in the Credit Suisse case until the very last moment.

It is a fact that every international and national banking crisis has led to a higher concentration in the market by fewer institutions. That is the case here. Even with that being said, it looks as though Finma is even less prepared to deal with the new, more imposing challenge it now faces in the future.

9. SNB – Ensuring Strength and Independence

Credit Suisse’s collapse also prompted a loss of faith in the SNB. In connection with that, the question must be answered how and when the central bank contributed to the country’s financial infrastructure stability. There must be a comprehensive analysis of the pitfalls and its relationship with the finance department.

A discussion also needs to be had as to how and in what form the SNB should be institutionally strengthened in a way that ensures its independence in the future. In connection with that, it needs to incorporate sensible international standards and best industry practices related to term limits, and the expansion of its directorate from five to seven members, while increasing the transparency of its decision-making when it comes to monetary policy and financial stability.

10. Federal Council and Parliament are Responsible

The Federal Council does not have the necessary expertise related to financial markets and banking systems. It must rely on the advice provided by others. But how can this untenable situation be structurally improved in view of the Credit Suisse debacle?

In an election year, it is particularly important that the Credit Suisse failure not only be investigated transparently but that there is a broad discussion of what happened in the general public. Questions need to be answered and lessons learned. Among them, is the ostensible failure of government regulation and supervision so that the banking system can be reformed.

It would be fully negligent if the finance ministry, the SNB and Finma had the same structures and leaderships, with the same resources, when facing up against a new and much larger UBS.

Beat Wittmann is chairman and partner of Zurich-based financial advisory firm Porta Advisors for eight years now. His more than 30-year career in Swiss banking includes stints at both UBS and Credit Suisse as well as Clariden Leu and Julius Baer. He operated his own firm from 2009 to 2015, first independently and more recently under the Raiffeisen Group.

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