Ex-bank supervisor wants capital requirements trebled

Daniel Zuberbühler and Fabio Canetg Live Fabrik Gmbh

Daniel Zuberbühler, former head of the Swiss banking regulator, has called for an unweighted equity ratio of 10% for big banks and an adjustment to liquidity requirements.

“The current equity regulation is ridiculously low,” Zuberbühler told SWI swissinfo’s Geldcast. He makes the case for banks to hold at least 10% unweighted, hard Tier 1 capital – almost three times more than today. Put simply, this means that a bank with a balance sheet total of CHF1.5 trillion ($1.7 trillion) now needs CHF150 billion put aside to absorb losses, compared to around CHF50 billion today.

Zuberbühler is not alone in calling for banks to hold higher equity. Mattea Meyer, co-President of the Social Democratic Party has already advocated stricter equity regulations. This was after the Federal Council, together with the Swiss National Bank (SNB), the Financial Market Supervisory Authority (FINMA) and the two big banks, staged a partial state rescue of Credit Suisse bank within just a few days in March.

“It was all very improvised,” said Zuberbühler, particularly compared to the UBS rescue of 2008 when Zuberbühler headed FINMA’s regulatory predecessor. At that time, regulators had already drawn up an emergency plan months before the impending collapse of UBS.

Lessons not learned

But Zuberbühler is reluctant to criticise the current FINMA leadership of President Marlen Amstad and Director Urban Angehrn.

He primarily blames Credit Suisse’s management for the bank’s downfall along with a “passive” board of directors. “The case of Credit Suisse demonstrated that there was no rethinking after the financial crisis of 2008.” Under American CEO and investment banker Brady Dougan, the bank failed to reduce risk to the same degree as UBS. “In the end, Credit Suisse had a culture problem.”

In March, the Swiss authorities finally pulled the ripcord, and by doing so, pushed back the boundaries of what was previously considered feasible. The federal government and the central bank have taken on risk of up to CHF259 billion – around a third of Switzerland’s gross domestic product. Some CHF250 billion of this amount is pure liquidity support in the form of repayable loans.

The remaining CHF9 billion is in the shape of a loss guarantee for UBS. The government will start paying this out if UBS records losses of more than CHF5 billion on a designated portion of Credit Suisse investments.

The conditions of the liquidity support are also extraordinary as the SNB usually only grants such funds against collateral from the borrower. Under normal conditions, banks deposit their own securities with the central bank when they receive the money.

SNB independence

This time it’s different, thanks to an emergency law. The central bank is granting UBS and Credit Suisse up to CHF200 billion in liquidity assistance without collateral. The risk is split equally between the Confederation and the SNB with each party assuming CHF100 billion risk of potential default.

Does that curtail the independence of the central bank? “Independence has been scratched a bit,” said Zuberbühler. “It was about preventing a financial collapse.”

It was necessary because Credit Suisse ran out of money in March despite FINMA saying days previously there was nothing wrong with the bank’s liquidity. “The liquidity regulations are also far too lax because they are not geared towards a digital bank run,” said Zuberbühler.