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Switzerland Reinforces Banking Oversight: Usher in a New Era of Accountability


Benjamin Hughes

April 4, 2024 - 04:19 am


Sweeping Regulatory Changes: Switzerland Bolsters Banking Supervision Post Credit Suisse Crisis

In the wake of the Credit Suisse debacle, Switzerland is accelerating its efforts to revamp its system of banking regulations. This historic move aims to provide those tasked with enforcement greater authority, marking a critical juncture in the Swiss financial sphere, previously renowned for its stability.

In mere days, the Swiss government is slated to present eagerly awaited legislative proposals that promise to encompass the core aspects of bank surveillance. These include reformed capital and liquidity protocols and measures to enhance control over governance. As the sole globally systemic bank remaining in the nation, UBS Group AG, now surpassing twice the domestic economy's size, will face intensified regulatory scrutiny.

A primary objective of the reform is the fortification of Finma, the Swiss financial watchdog. Recent events have illuminated Finma's struggle to curb the series of poor management decisions that led to Credit Suisse's downfall and inevitably put to risk the nation's long-standing reputation for financial stability. This pivotal overhaul is underscored by the appointment of Stefan Walter, a seasoned European bank supervisor, as Finma's new CEO.

The Changing Guard at Finma

Enter Walter, whose impressive résumé boasts crucial roles in shaping financial oversight on a global scale. As a key figure in establishing the European Central Bank's supervisory branch, Walter has spent the previous decade strategically navigating the complexities of managing institutions such as Deutsche Bank AG. Furthermore, his tenure as the secretary-general of the Basel Committee on Banking Supervision and a senior vice president at the Federal Reserve Bank of New York signifies his profound impact on the domain of financial regulation.

During his time at the ECB, Walter championed a proactive assessment of bank risks—a stance that persists in the institution's rigorous scrutiny of leveraged lending in major banks like Deutsche Bank and BNP Paribas SA. His narrative is a testament to the shifting ethos of bank regulation in Switzerland, as he brings a formidable legacy of accountability to Finma.

Swiss Financial Regulation: A Historical Perspective

Switzerland has traditionally adopted a more consensual approach to financial regulation, diverging from the more punitive frameworks prevalent in other jurisdictions. The argument that hefty penalties could shatter the collaborative ethos resonates within the Swiss regulatory philosophy. This mindset extends to Finma's operations, which, despite overseeing a mammoth financial sector, operates with a comparatively lean team of under 600 employees.

However, the unfurling Credit Suisse catastrophe, rendered worse by the bank's unresponsive attitude towards Finma's warnings, posed a significant challenge to the pre-existing status quo. It has generated a consensus among key players—ranging from government departments to the Swiss National Bank, and even Finma itself—on the necessity for regulators to wield greater powers.

The Push for Reform

The impending legislative proposals could revolutionize the financial sector. Chief among these reforms is the debut of a senior managers regime that holds individuals accountable for their choices. Variations of this system have seen success in the UK and Hong Kong and enable regulators to pinpoint those responsible for missteps.

This approach indicates a seismic shift towards amending the risk-taking culture within Swiss banking, as illustrated by the wake-up call from Julius Baer Group Ltd's staggering $700 million exposure to one client. The aftermath of this event culminated in the bank's CEO stepping down amid apologies from the chairman, Romeo Lacher. This serves as an alarming reminder of the peril of concentrated risks and the lapse of internal controls within the banking industry.

The introduction of a regime steering bank managers towards prudence is championed by experts like Nina Reiser, Associate Professor for Financial Markets Law at the University of St Gallen. Her support underscores the importance of enforcing explicit, recorded responsibilities for bank managers, a measure that could influence their decision-making processes if adequately monitored by Finma or audit firms.

Tethering Bonuses to Oversight

Another potential lever for regulatory reform involves the contentious issue of bankers' bonuses. The current legislation permits Finma only to advise on bankers' remunerations, a stance considered too tepid by figures such as Urban Angehrn, a former chief executive of Finma. There is a growing clamor for the law to empower Finma to decisively influence bonus pool decisions, a motion strongly supported by Marlene Amstad, the current chair of Finma.

The Impact on UBS

UBS, which plays a pivotal role in managing private wealth globally, now comes under even closer watch due to its escalated significance in the Swiss financial landscape. Following the absorption of the beleaguered Credit Suisse, Finma has expanded its team monitoring UBS and plans to conduct two stress tests on its balance sheet within the year.

The situation fuels an ongoing debate regarding the sufficiency of existing capital and liquidity prescriptions for an institution of such systemic relevance. The Swiss National Bank has called for a reevaluation of capital progression and a rework of liquidity norms recently found wanting amid the Credit Suisse fiasco.

Revisiting the 'Swiss Finish'

The prospect of adding layers of regulation on top of international standards, reinvigorating the custom of the 'Swiss Finish', kindles controversy. This term refers to Switzerland's history of surpassing global regulatory requirements, an approach which has previously irked bank leaders. It now sparks concerns about potential pushback should it figure prominently in the government's proposed revisions.

The Stability of the Swiss Financial Landscape

Despite the near-collapse of a systemic banking institution, a substantial uptick in profits has been cushioned by a surge in interest rates, which might be masking more profound issues within the Swiss financial system. The financial sector's impressive gains from lending have somewhat alleviated the recent stresses.

Nicolas Veron, a senior fellow at the Peterson Institute for International Economics in Washington and Bruegel in Brussels, suggests that these events, while significant, do not necessitate a complete overhaul of Swiss financial regulations. Instead, he views the Credit Suisse collapse as a valuable lesson, urging refinement of existing systems to be better prepared for future challenges.

In conclusion, Switzerland is on the cusp of a regulatory transformation that seeks to fortify its financial sector against the perils of mismanagement and systemic risks. The country is poised to usher in a new era of robust financial oversight, imbued with the vision of fostering a culture of accountability and prudence among its banking executives. As the government, regulatory authorities, and the financial industry collectively embrace these reforms, it remains to be seen how this paradigm shift will reshape Switzerland’s reputed financial landscape.

Source: European Banking Federation, Financial Conduct Authority (UK) Prudential Regulation Authority (UK), Swiss Bankers Association, Finma (Switzerland)

For further details on the report, please visit the European Banking Federation's website, the Financial Conduct Authority's page, the Prudential Regulation Authority's homepage, the Swiss Bankers Association's site, and the Finma (Switzerland) portal.

Swiss Financial Regulation Reform

©2024 Bloomberg L.P., further reporting by Nicholas Comfort, William Shaw, and Myriam Balezou.