Unstable financial system creates more harm than good

Switzerland's biggest banks need to be tamed with more potent regulation to prevent a potential catastrophic impact on the economy, says Centre Party parliamentarian Peter Hegglin.

The collapse of Credit Suisse shook the global banking world. In this case, the takeover by UBS prevented the worst-case scenario. But the danger that further existential crises will drag the financial sector and the real economy into the abyss in future is real – and indeed foreseeable.

This raises various questions. Are such crises caused by half-baked systems? Or a lack of regulatory requirements? Or must we accept such crises because money brings positive effects and the financial sector makes a significant contribution to prosperity?

In my view, a system that causes constantly recurring financial crises is worse for our economy overall than the interim financial and economic benefits.

We therefore need stabilising regulations that answer the following questions: How can our economy be protected from the uncontrolled collapse of a major bank? How should we deal with bank runs in the future? What additional powers does the financial supervisor need? To what extent should the state and the Swiss National Bank support failing banks? And what should the legal mechanisms for controlling this support look like?

Catalogue of crashes

I would like to start my considerations with a look back.

The major financial crises of the last hundred years all originated in the United States: the 1929 crash, followed by years of global economic crisis, the stock market crash of 1987 with the subsequent Swiss property crisis of the 1990s, the major financial crisis of global debt in 2007/8, the end of which is not yet in sight, and the renewed instability of the US financial system, which was at least partly triggered by the takeover of Credit Suisse by UBS in 2023.

In retrospect, it can be said that the European financial sector once had far more stable structures than the American system. Until the 1980s, financial institutions had up to 20-30% equity and were therefore very robust – and also responsible.

With the increasing entry of Swiss banks into the US financial centre and US-style investment banking, the American business model was also gradually adopted – including its bonus culture.

While the US is better able to absorb such shocks thanks to its economic strength, the high level of professionalism in the Wall Street power centre and the American mentality, this is much less the case for Europe and Switzerland.

Protect banks and employees

A financial system with sporadic financial crises – which experience has shown the US can handle more easily – is extremely dangerous for our economy. The financial sector in Switzerland urgently needs to adapt and return to Swiss values, especially with the current concentration risk of UBS. If this does not happen, our financial and economic centre will be highly endangered in the future.

A Swiss financial centre with a business model based on our Swiss strengths of quality, stability, integrity, innovation and the rule of law – combined with tried-and-tested institutions and an internationally respected democratic system – would prove a long-term success story, and unique worldwide. In the context of global changes and the desire of more and more people for sustainability and security, this model would also entail hardly any risks.

If we fail to act, we will rob the entire economy of stability and durability. It is essential to protect the financial sector and its employees. Of course, the usual economic cycles in a market economy can hardly be prevented. However, it is a matter of breaking the cycle of irresponsible boom-and-bust phases and resultant global distortions.

Menu of options

I therefore consider it worth examining the following options for systemically important banking institutions:

• Investment banking should be restricted to what is absolutely necessary – with a ban on proprietary trading – or, if necessary, outsourced.
• Banks’ equity capital must be increased even further, even if it was apparently not a lack of equity capital that brought down Credit Suisse. The target for systemically important banks should be 10% share capital to total assets.
• The Financial Market Supervisory Authority (FINMA) needs significantly stronger instruments and recognised banking experts and more clearly defined responsibilities. FINMA must be able to penalise those responsible with personal fines, exempt or ban them from the industry, for example, by influencing and controlling the risk management of the institutions. The introduction of leading indicators for credit default swap (CDS) spreads, the price performance of ATI bonds and the credit rating of rating agencies with a legal obligation to intervene.
• Reviewing the overregulation of non-systemically important smaller banking institutions in parallel with any reduction in FINMA staff. This should lead to a concentration of human resources on systemically important institutions.
• A particularly high level of integrity is required of decision-makers in the financial sector. The bonus incentive system for managers must be directed into sensible channels.
• The current “too-big-to fail” legislation does not work. It must be improved so that it applies in every circumstance, regardless of the causes of a bank’s collapse.  
• Legal measures against willful and negligent mismanagement must be tightened. Offences in the financial services sector must no longer be viewed as “gentlemen’s offences”.
• Ensuring a greater proportion of deposits at banking institutions with notice periods (deadline regulation) and deposits that customers cannot withdraw at short notice.
• In the event of an international bank run, the withdrawal of deposits should be temporarily restricted by the state (similar to actions performed by Greece and Cyprus with success).
• Risk coverage of “too-big-to fail” guarantees in the form of a compensation fund with annual payments to the institutions based on an insurance premium.
• Reviewing and, if necessary, expanding the responsibilities of the Swiss National Bank with clear regulations.

The views expressed in this article are solely those of the author and do not necessarily reflect the views of SWI swissinfo.ch.