Swiss Probe of Credit Suisse Nears With UBS Capital at Stake

(Bloomberg) — Switzerland is nearing publication of a landmark political inquiry into the causes of Credit Suisse’s 2023 downfall, a report which is likely to apportion blame for the crisis and set the tone for the future regulation of UBS Group AG. 

The commission working on it — known in Switzerland by its acronym PUK — has said it wants to finish before the end of this year, paving the way for legislative proposals and new regulatory ordinances by the spring. 

The government has already put forward a raft of suggested changes to the country’s financial regulation, including sharply higher capital requirements for UBS, its biggest bank by far. The PUK’s stance will help determine how far Switzerland goes in tightening oversight of banks, with the main banking lobby group warning of the risk of damaging competitiveness at a time when many global peers are easing off.

What’s a PUK and What Does It Do?

Installing a PUK — short for parliamentary investigation commission in German — is the most powerful tool Swiss lawmakers have at their disposal and one they have only wielded five times in history. Established by both houses of parliament, the panel can subpoena witnesses and access all secret documents relevant to the question it investigates. In this case: What went wrong in the Credit Suisse crisis?

In the 18 months since it’s been set up, the committee has questioned more than 60 people including those who were at the table when the emergency sale to UBS was brokered: the finance minister, the heads of Swiss National Bank and regulator Finma as well as relevant leaders at both banks. In May, the PUK said in a statement that its fact-finding is largely completed. Since then, lawmakers have been writing their report.

As the committee’s mandate focuses mostly on how the authorities behaved, the question of which management failures led to Credit Suisse’s demise will likely only be touched on in passing. Instead, details could emerge on whether the takeover was actually the best option — as the government maintains — or on how Swiss regulation allowed the buildup of the crisis. The report could also shed light on what interventions the government tried before the bank was finally forced into the arms of its local rival.

What’s at Stake?

The investigation can be expected to significantly influence public opinion in Switzerland, and previous PUKs have not been shy in passing out blame. The report of the last one — in 1996 — noted that the finance minister at the time “definitely bore the main responsibility” for a scandal at a state pension fund — and that certain things he told the rest of the government “bordered on willful deception.” The findings have the potential to end political careers.

In Switzerland’s very deliberative political system, the clout a PUK carries has also proved powerful in influencing legislation. Lawmakers on a panel in the 1980s successfully pushed for the separation of the federal police from the Attorney General’s office. This year, the government has said that it wants to await the investigation’s outcome before finalizing its proposals for financial-sector reforms — including by how much capital requirements for UBS will rise.

How Will it Affect UBS?

A worst-case scenario for UBS is that the government and parliament back the regulator Finma’s call to force it to hold 100% capital backing for its foreign subsidiaries — an outcome that could mean an extra $25 billion in capital is needed. That would likely place UBS at a disadvantage to its global competitors in terms of its ability to generate profits and return them to shareholders.

UBS is already engaged in reworking its emergency planning to ensure that it could safely be wound down should a crisis like Credit Suisse ever strike it directly. The finance minister has said that this process will help determine how much extra capital the bank will need to maintain, suggesting that there’s some room for maneuver. 

The Swiss Banking Association has also argued that a wave of regulation would weaken the Swiss economy and that Swiss capital requirements are already strict compared with rival financial centers. UBS Chairman Colm Kelleher and Chief Executive Officer Sergio Ermotti have repeatedly pushed back against the 100% capital backing scenario, though they’ve said they broadly support most of the rest of the government’s agenda. 

“We hope that the necessary transparency will be provided on the reasons that CS went down,” Ermotti said in a Bloomberg Television interview on the sidelines of Abu Dhabi Finance Week on Monday. “We do believe that it’s absolutely crucial to understand that before moving into any changes of regulation or any steps that could undermine the competitiveness of the financial center.”

 

Who Else Is in the Spotlight?

As the only senior official still in the same post as she occupied during the build up to the crisis, the work of Finma President Marlene Amstad will be closely examined. The agency has faced criticism, including from the banks, for allegedly failing to intervene early and forcefully enough at Credit Suisse. Swiss newspaper Blick reported at the weekend that Finma is likely to receive the sharpest criticism from the PUK. Finma officials including Amstad have previously argued that the watchdog didn’t have the legal power to do more.

Former finance minister Ueli Maurer will likely also be scrutinized. He went on television three months before the bank toppled to say he’s “convinced CS will get its act together” and that the public should “just leave it alone for one or two years.” 

The fact that the PUK extended the time they are looking at as far back as 2015 — covering his entire time in office — could indicate a focus on him. His successor as finance minister, Karin Keller-Sutter, might be able to sidestep blame as she only started in 2023, even though she had a leading role when the takeover was negotiated.

As one of the most powerful figures in Swiss finance for over a decade, former central bank chief Thomas Jordan may also find his role examined. The SNB was criticized for insisting on a too-restrictive definition of acceptable collateral when Credit Suisse requested emergency liquidity, which it denies. Since then, the institution has said it will expand its liquidity regime and is discussing with Finma and the finance ministry an obligation for banks to permanently hold sufficient collateral. Martin Schlegel, who was responsible for financial stability at the SNB until earlier this year, is now the SNB President. 

Spokespeople for the finance ministry, the SNB, and former finance minister Maurer declined to comment for this article. A spokesperson for Finma said the enforcement measures the agency took against Credit Suisse were more severe than those against any other Swiss bank and were effective “within their legal possibilities.”

What Happens Next?

As the PUK works strictly behind closed doors and keeps a very tight lid on its work — the panel already filed two criminal complaints following leaks in the local media — it’s unclear when exactly the report will be published. Lawmakers around centrist chairwoman Isabelle Chassot have only said it will be before the end of the year.

Based on the findings, the finance ministry is expected to present its final reform proposals to parliament around the end of the first quarter. Around the same time it will likely also put forth the draft for an updated ordinance detailing new capital requirements for UBS. 

–With assistance from Levin Stamm.

©2024 Bloomberg L.P.