A year after the Credit Suisse collapse, Switzerland is accelerating efforts to reform banking regulations, handing more power to those who enforce regulations.
The government is expected to announce its long-awaited proposed legislation in the coming days, which is likely to touch on all the key pillars of banking supervision, from capital and liquidity regulation to governance controls. UBS Group AG, the only global systemic bank in a country more than twice the size of the country's economy, has come under intense scrutiny.
A key plan is to strengthen banking watchdog Finma, which has failed to prevent years of mismanagement at Credit Suisse, which threatens the country's historic reputation for financial stability. That task will be helped by this week's appointment as Finma's new chief executive, Stefan Walter, a veteran European banking supervisor who spent a decade with Deutsche Bank and other companies.
Ivan Lengwiller, a professor at the University of Basel and chairman of an expert committee set up to recommend reforms, said: “I'm not saying that the Swiss authorities are incapable, but there are some things that need to change.'' That's for sure,” he said. “Finma definitely needs more resources to be on equal footing with banks.”
Walter, 59, is seen as the face of this shakeup. The German played a key role in building the European Central Bank's supervisory arm when it began monitoring lenders in 2014 as part of its response to the sovereign debt crisis.
Mr. Walter is also the former Executive Director of the Basel Committee on Banking Supervision and a senior vice president of the New York Fed, two of the most important institutions in the world of financial supervision.
He helped build the ECB's system for contesting risks taken by banks. This approach continues to be seen, for example in the recent crackdown on leveraged loan businesses such as Deutsche Bank and BNP Paribas SA.
The Swiss have long favored a consensual approach to financial supervision over that common in other regions. The lack of ability to impose fines is sometimes justified on the grounds that it destroys the cooperative atmosphere.
The lean management philosophy is also reflected in the regulator's relatively small size, with just under 600 staff at Finma overseeing a financial sector that directly employs more than 230,000 people.
But confidence in Credit Suisse quickly evaporated after a series of missteps and losses, and the subsequent emergency bailout by UBS shattered the previous consensus. Finma itself complains that despite identifying corruption at the heart of Credit Suisse, its calls for change have been virtually ignored.
Governments, including the Ministry of Finance, the Swiss National Bank and Finma, are largely in agreement on the need for greater regulatory powers. Even banks, including UBS, have expressed support for key parts of the reform agenda.
Alongside the ability to impose fines, a key part of the new approach is the so-called senior management regime, which makes individuals directly responsible for their decisions. Such systems exist in various forms in jurisdictions such as the UK and Hong Kong, allowing regulators to determine who is at fault. Switzerland is likely to take an independent approach, said Thomas Hirschi, head of banking supervision at Finma.
“Swiss regulation has always been, and probably always will be, principle-based rather than rules-based,” Hirschi said in an interview. However, he said certain provisions were needed for an effective senior management structure. “If you just have principles, you actually stay within the current system and make it harder to enforce the law.”
The key is to change the culture of risk-taking among Swiss bankers. Late last year, it was revealed that the Julius Baer Group, a globally active wealth manager, had inflated its exposure by $700 million to a single client, Austrian real estate mogul Rene Benko. The need for such changes was emphasized.
Banks' internal controls have not stopped risk concentrations, and writedowns from Benco's conglomerate Cigna going into bankruptcy wiped out half of the lender's annual profits. The CEO resigned. Chairman Romeo Latcher apologized.
Nina Reiser, an associate professor of financial markets law at the University of St. Gallen, said supporters of the senior management system wanted to “strengthen the sense of responsibility of bank managers in advance.” She said: “If there is a document that clearly states my responsibilities and it is approved by Finma or an audit firm, I will consider my decisions more carefully.”
There's an additional screw that some people insist on turning. That's a bonus. Current law only allows Finma to draw up “guidelines” on the amounts payable to bankers. According to former Finma chief executive Urban Angheen, this is not enough.
Angean told Bloomberg TV last month that Finma needs to be able to influence “big banks' bonus pool decisions.” Finma's current chair, Marlene Amstad, is also calling for this to be enshrined in law.
It's clear that UBS will attract more attention. The Zurich-based bank is the largest private wealth manager outside the United States, but it already faces higher capital and liquidity requirements as a result of its expansion. Finma has expanded the size of its team working with banks and is planning two balance sheet stress tests this year.
However, given the systemic importance of banks, debate has arisen about the adequacy of existing capital and liquidity requirements. Last month, the Swiss central bank added a statement calling for a review of “progress” in capital controls based on size. He also called for a review of liquidity rules, which were found to be inadequate during the Credit Suisse crisis.
Adding further capital and liquidity rules to current global standards set after the 2008 financial crisis increases the likelihood of a return to the so-called “Swiss finish.” Such over-the-top approaches by domestic regulators have frustrated bank executives in the past, and if they become a key part of the government's approach, they are likely to provoke an even stronger backlash.
A sharp rise in interest rates last year may have helped mask the underlying recession in Switzerland's financial system. Even as one of the country's institutional institutions was on the brink of collapse, banks continued to conceal record profits from loans.
“I don't see much reason to fundamentally change the Swiss regulatory system,” said Nicolas Veron, a senior fellow at the Peterson Institute for International Economics in Washington and the Bruegel Institute in Brussels. “What happened wasn't a huge failure where you said, 'The world will never be the same again.' It's more like, 'We learned our lesson, let's do better next time.'”
