On 19 March 2023, the UBS Group AG agreed to buy Credit Suisse for CHF3 billion in a deal brokered by the Swiss Government and the Swiss Financial Market Supervisory Authority (FINMA).
This extraordinary last minute deal, followed on the heels of yet another banking collapse in California, USA, where Silicon Valley Bank customers withdrew a staggering US$42 billion of deposits in one day, ultimately signalling the end for the bank.
The rapid intervention of the UBS Group, FINMA and the Swiss Government in the perceived Credit Suisse disaster, ultimately prevented a banking collapse in Switzerland, the scale of which would have been unprecedented. However, now the dust has settled somewhat, there are still some unanswered questions remaining, and the political debate in Switzerland is still divided. In this post we take a look at what is being discussed.
The Social Democratic Party in Switzerland spearheaded by Prisca Birrer-Heimo (Luzern, Switzerland) has now managed to get three interventions to tighten the rules for bankers accepted. But the Council of States still has to approve them.
These motions were tabled long before the demise of Credit Suisse (CS). Ironically, this was at the time when CS dropped its prime brokerage unit and reduced its investment banking services. This after vast losses associated to the collapse of both hedge fund Archegos, and financial services firm, Greensill occurred.
The hunt for new business lines and the associated bonuses can, and has caused serious harm to banking customers and shareholders alike. And the question of what business banks are really in, has been raised again. Some argue that if banking executives at CS had focused on core domestic business rather than risky international new revenue streams, working with unknown and unproven non-Swiss partners, the bank founded in 1856, would have survived and continued to grow. And if they had concentrated on meeting customers’ needs, rather than on selling their new products, that they would still be in business.
According to the financial brand web publication, the concept of myopia is a major problem facing banks today. The problem is about “misunderstanding how the business is changing. It is not about being digital, but about understanding how business is changing and what business they need to be in, and how the business model needs to adapt”.
According to Mrs Prisca Birrer-Heimo the recent banking events clearly demonstrate the urgent need for action. She has reminded MEP’s that they cannot wait for reports any longer, and action needs to be taken now, stating that it is the taxpayers, who ultimately pay for banking risks. Her motion calls for an outright ban on bonus payments to the senior management.
- According to the member of the Socialist Party in Luzern, Mrs Birrer-Heimo, bankers get rewarded for their deals when they go well, while taxpayers carry the risks if they don’t. So the first initiative is to ban bonus payments for senior managers.
- The second change is to require higher capital ratios of at least 15% for banks of systemic importance. Some would like to see even higher capital requirements.
These two proposals were accepted. And in addition there were calls to strengthen FINMA, Switzerland’s financial regulator. Mrs Birrer-Heimo would like the Swiss regulator to be able to sanction banks with fines and public sanctions in future.
One opposing political party, the FDP or Liberals, led by Federal Councillor Karin Keller-Sutter is of the opinion that all these issues had been discussed at length in April and that the Federal Council had been instructed to report back within a year on all these aspects. And in her opinion, “they should not anticipate”. The plenary rejected this view however.
Finally in the special session, parliament gave the task to government to examine all aspects that led to the bankruptcy of Credit Suisse. This initiative was supported by all parties in Swiss parliament.
So while rapid action carried out by UBS in tandem with the Swiss Government and FINMA, the Swiss Financial Regulator, certainly prevented a major financial disaster from happening in March 2023, there are still open questions and debate is ongoing. The biggest ones appear to be the question of bonuses for what in essence are risk-taking strategies. And secondly the ability of the Swiss Regulator to be able to fine guilty parties should further cases occur in future.
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