Switzerland’s Too-Big-to-Fail Plan Is Flawed, Ex-BOE Deputy Says

(Bloomberg) — Switzerland’s approach to winding down a globally-systemic bank such as UBS Group AG has features which could worsen the turmoil in a hypothetical future crisis, according to a key architect of global financial rules.

The country’s “Too-Big-To-Fail” regime is too focused on preserving local activities in the event of a break-up, said Paul Tucker, former Deputy Governor of the Bank of England and a current research fellow at the Harvard Kennedy School. 

The Swiss system is currently undergoing significant reform after last year’s near-collapse of Credit Suisse and its subsequent takeover by UBS. The merger created a bank with a balance sheet more than twice the size of the domestic economy.

The government’s road-map for reform focuses on the capital and liquidity rules for systemic banks as well as beefing up financial oversight. However it also keeps in place a plan to wind down banks that envisions re-capitalizing domestic operations while other parts could go into bankruptcy as a last resort.

“If they’re signaling that they will only be lender of last resort to the domestic activities, then UBS would need to re-domicile or restructure,” Tucker said in an interview, adding that the responsibility for large parts of the international business would then need to be placed with foreign regulators in line with what is known as a “multiple point of entry” approach. 

“If I were in London or Washington or Frankfurt, I would say your basic approach to this might have made sense to you, but it absolutely doesn’t make sense for us,” he added. “It needs to change for your big banks to continue having systemic operations here.”

Expert Opinion

Tucker, 66, provided an expert opinion for the post-crisis government reforms, along with six other academics and institutions. He submitted his report on lender-of-last-resort regimes to the government last September, he said. In his former role at the Bank of England, Tucker helped shape financial regulation after 2008, and chaired the Financial Stability Board’s body on cross-border resolution. 

Read more: Switzerland Is Reworking Its Rulebook to Stop Another Banking Meltdown

After the 2008 financial crisis, countries were forced to overhaul their banking rules to try to prevent institutions which were seen as critical to their economies from having to be rescued with public funds. In Switzerland, banks have to provide a so-called ‘Swiss emergency plan,’ in which “only functions that are critical to the Swiss economy are deemed systemically important,” according to financial regulator Finma. 

This includes exclusively domestic functions like deposit-taking, lending and payments, which must be maintained in a crisis. Neither the euro area nor the UK share this strict focus on banks’ domestic operations.

As part of its overhaul, the Swiss government is pressing for changes to capital rules that could see UBS having to maintain as much as $20 billion in extra funds, in addition to a similar sum that they’ll have to build up as a result of their larger size due to the Credit Suisse takeover.

Read More: UBS Is Said to Face $20 Billion Capital Hit Under Swiss Plan

“They are planning to increase the capital requirements of UBS, which can usefully reduce the probability of UBS getting into difficulty,” Tucker said. “What those measures don’t say is: What will you do if, however unlikely, it does get into difficulty?”

While the government aims to “expand resolution options” for big banks, according to its report, the only specific recommended measures are that UBS should stipulate a resolution plan for its parent bank — as distinct from the holding company — and that the legal certainty of a bail-in should be increased.

Do More

On the weekend of March 19, 2023, the Swiss authorities were faced with the choice of implementing a ready-to-go plan to wind down Credit Suisse or pursue the emergency takeover by UBS. Officials ultimately chose the second option on the basis that it posed fewer risks for financial stability. 

The government’s room to maneuver was severely limited by a looming bankruptcy of the firm on the very next day. The Swiss National Bank has said that it couldn’t provide more liquidity as Credit Suisse wasn’t able to pledge more collateral. Tucker criticized the fact that such a shortage could arise in an article for the think tank OMFIF.

“The Swiss authorities’ preparations were, in my view, woefully inadequate in this respect,” he wrote.

His stance on a resolution of UBS contrasts with the assessment of the FSB, which said in January that the current approach would work even if the bank had to be wound down. 

Read More: Bank Resolution Framework Would Work for UBS, FSB Says

Tucker maintained that despite its size, a collapse of UBS is a possible scenario which requires a plan as a takeover by a local rival isn’t possible any more. The bank had a CET1 ratio, a key measure of financial strength, of 14.8% at the end of the first quarter, well in excess of regulatory requirements.

“They’ve got to do more, they’ve got to say what they will do,” he said. “There will eventually be some event — I don’t know whether it’ll be in a hundred years time or sooner — that pulls UBS down. As with any other banking group. The international authorities should certainly plan on that basis given the systemic costs.”

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