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Switzerland’s reputation for financial stability has long made it a safe haven for global bankers and the well-heeled. But doubts have been creeping in. Swiss financial authorities are still grappling with the fallout from the collapse of Credit Suisse in March 2023. For the country’s all-powerful “trinity” — the finance ministry, the central bank and the financial regulator, Finma — the failure of its then second-largest bank was an embarrassment. It struck a late deal for UBS, the country’s largest lender, to acquire its beleaguered rival. The bailout has raised concerns over the robustness of Swiss financial regulation, heaped losses on international bondholders, and triggered lawsuits.
It is essential, then, that the “trinity” makes amends by shoring up what has been revealed to be a less stable financial system than thought. Indeed, this is not a one-off. In 2008, when the subprime mortgage crisis broke out UBS was one of the most exposed foreign banks to the US real estate and derivatives market. The merger of Switzerland’s first- and second-largest banks has created a behemoth with a balance sheet almost twice the size of the country’s economic output. If UBS were to falter, taxpayers would not be able to support it, nor would there be another domestic white knight able to take it over.
In April, Finance Minister Karin Keller-Sutter unveiled a set of 22 remedies to improve the country’s too-big-to-fail regulations. This included a number of sensible recommendations, such as raising personal accountability for senior bankers and giving greater powers to Finma. It also, reasonably, asked banks to raise capital requirements for foreign subsidiaries.
Credit Suisse’s failure was not solely due to capital or liquidity issues. It was triggered by a combination of scandals and the US regional banking crisis. But it nonetheless underscored that bigger buffers may be warranted to help insure against a broader set of low-probability but high-risk events, particularly emanating from international business lines.
UBS agrees with most of the recommendations, except on capital. The finance ministry has provided little detail on how the new requirements would be calculated, but analysts estimated it could be an additional $15bn to $25bn in capital for UBS — which is significant. UBS reported common equity tier one capital of $79bn at the end of 2023. Chief executive Sergio Ermotti feels the bank is being unfairly scapegoated after rescuing Credit Suisse.
It is indeed important to ensure capital requirements are calibrated. They should be proportionate to the additional risk the larger bank poses. UBS needs to remain competitive, particularly as it is an even more significant part of the Swiss economy now. Greater transparency from regulators would be welcome.
UBS must accept, however, that its size means it ought to be subjected to greater scrutiny. The complexity of the combined bank’s global operations also makes its supervision more challenging. It has to prove that it has a sound strategy to unwind the bank in case of a crisis. Greater capital buffers play a part in that. The bank has also benefited from the deal that allowed it to absorb its greatest competitor. It bought Credit Suisse for $3.4bn, just 6 per cent of its tangible book value. Its share price has risen 50 per cent since.
With the Swiss parliament voting on the new regulations next year, the very public spat between the “trinity” and UBS is, in part, posturing. Swiss authorities want to show the angered public that they are acting to strengthen the banking system, while UBS wants its shareholders to see that it will drive a hard bargain. It is in all stakeholders’ interests that they find common ground and convince investors that the Swiss financial system will become considerably stronger.