What next for big banks in Switzerland?

Switzerland should resist micro-managing banks and casting the regulatory net too wide as it decides how to reduce the risk of "too-big-to-fail" institutions, argues Rudolf Minsch, chief economist of the Swiss Business Federation, economiesuisse.

The demise of Credit Suisse was met with urgent calls for extra, stricter banking regulations. But regulations were unable to save Credit Suisse, despite having scaled up dramatically after the financial market crisis of 2008.

As part of the too-big-to-fail regulations, capital ratios and liquidity requirements for systemically important banks were significantly increased, while precautions were taken to ensure that it should be possible to wind up such a bank in the event of a crisis. No bank should be allowed to be so big that its bankruptcy could cause entire economies or the global banking system to fail.

Credit Suisse fulfilled these regulatory requirements and had sufficient equity and liquidity. Nevertheless, it got into difficulties at the beginning of 2023, which worsened to such an extent that the Federal Council had to intervene in March 2023. However, it decided not to wind up Credit Suisse in line with the prepared too-big-to-fail regulation, but to have it taken over by UBS.

What lessons should now be learnt from the Credit Suisse debacle and how should banking regulation proceed?

Management responsibility

Let’s start with the main lesson learnt from the Credit Suisse crisis: no regulation in the world can prevent a bank from getting into trouble due to mistakes made by its management. It is the central task of a company’s management to keep it stable in the long term and to steer it through difficult waters.

No regulatory authority can take on this task. Nor can it be responsible for whether a business model works or not. It can only ensure compliance with existing regulatory provisions.

Credit Suisse went under primarily because there was no longer any trust in the company’s management. But even more complex and detailed regulation will not help – and could even obscure the big picture.

It could be argued that extending micro-management and expert discussions outside of the company’s boardroom would amount to a significant investment into compliance. However, there is a danger that this would distract attention away from major risks and lull the company into a false sense of security.

Another major pitfall lurks should regulations be extended to the entire financial market or even the whole economy. Insurance companies, for example, have a less risky business model than banks.

When a bank grants a loan, it creates money, which increases the amount of money in circulation. Insurance companies, on the other hand, do not change the supply of money when they grant a loan. They are therefore much less vulnerable if customers withdraw large amounts of money.

Insurers are not banks

Regulatory expansion would create the acute danger of business areas such as insurance also being regulated more strictly, even though they are neither too-big-to-fail nor do they take on comparable risks to banks.

Finally, the takeover of Credit Suisse by UBS must not lead to a situation where the focus lies solely on avoiding such a crisis in the future. Experience shows that every future crisis – which we hope will not materialise – will play out differently from the previous one.

Unnecessary tightening of regulation in one area can even increase the risk of a crisis in another. It is therefore important to focus on the stability of the system as a whole.

Under no circumstances should the regulatory authority be forced into taking on the role of company management. There must also be no strengthening of micro-management and no extension of regulation to other participants, such as insurance companies. Regulation must focus on future crises and not those of the past.

Global bank essential

The answer to the crisis is therefore not simply more regulation. But while it’s straightforward to clearly formulate what should be avoided, it is much more difficult to highlight what should be done. Here is an attempt at a rough outline.

• Firstly, the possibility should be created for the federal government to take the necessary steps to restructure a systemically important bank without the need for emergency legislation. To this end, the public liquidity backstop, an internationally recognised instrument for providing liquidity, must be enshrined in law.
• Secondly, the regulatory authority must attach greater importance to risk-based management than it has done to date. As explained above, this is not about more regulation, but about exercising supervisory powers in such a way that the supervisory authority deploys the best experts to where the risks to financial stability are highest.
• Thirdly, it is imperative that all adjustments to Swiss too-big-to-fail regulation are harmonised internationally. Switzerland is not an island. If new rules deviate from international standards, Switzerland risks losing its competitiveness.
• Fourthly, the continued independence of the Swiss National Bank (SNB) must be guaranteed. The SNB must not become a pawn of politics, as this would jeopardise monetary policy stability. The SNB’s liquidity supply arrangements must be critically reviewed and, if necessary, optimised as part of an overall approach.
• Finally, clarification is needed on strengthening the responsibility of company management. Managers must feel the consequences of poor business decisions in their own wallets. A response is also required to address the rapid spread of information, rumours and false claims. These can result in a flood of customer withdrawals within a short space of time, which can shake even the healthiest of banks.

But why should we do all this? Isn’t Switzerland – as is repeatedly claimed – too small for a big bank anyway? The answer here is crystal clear: we have every interest in maintaining reliable framework conditions that enable a major international bank to operate out of Switzerland.

A major Swiss bank is of critical importance for the entire economy. Economiesuisse is committed to ensuring that Switzerland will continue to be home to at least one leading international bank in the future. This is essential for many of the services that the rest of the economy depends upon. A major international bank is also a key pillar of the financial centre.

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