With outrage over the Credit Suisse debacle unleashed during an extraordinary session of the Swiss parliament, the Swiss financial industry is left to pick up and mend the broken shards. This will require a sober assessment grounded in reality in the view of finews.com.
The extraordinary session of the Swiss parliament called after the government-forced UBS takeover of Credit Suisse did not cast Switzerland in a good light. Political parties gave the Federal Council a resounding slap by rejecting the emergency aid package for the bank merger, damaging confidence in political institutions. Politicians preferred posturing ahead of upcoming elections rather than dedicating themselves to fulfilling their duties which previously have been praised for stability and legal certainty.
A seemingly nonchalant rubber stamping of the decree to fully write off Credit Suisse's subordinated AT1 bonds to the tune of 16 billion francs ($17 billion), provoked outrage not only in Switzerland but around the globe.
Becoming a Banana Republic?
Judgment from abroad was harsh and prompt, with commentators calling Switzerland a financial banana republic without apparent irony.
So long as negative headlines remain limited to brief episodes, the reputational damage to the Swiss financial industry will likely be limited. However, if the clamor of critical voices doesn't subside shortly, the long-held view of Switzerland as a much-vaunted haven of stability is likely to suffer permanent damage.
Close Scrutiny From Abroad
The country's reputation as a reliable financial center could suffer if the rule of law is watered down after the extraordinary session. There is currently an ongoing and self-destructive discussion about Swiss neutrality and how to deal with frozen assets of Russian origin which could become a sensitive issue. It would be a bold and unprecedented move for Switzerland to expropriate blocked assets and earmark them for war reparations for Ukraine's reconstruction.
Another test will come when a parliamentary commission of inquiry (PUK) is established this year, which would start this summer at the earliest. Despite all the justified demands for a thorough investigation into the role of the various players in the Credit Suisse debacle, a PUK must not lead to a politicized solution.
Taming a Monster
In addition to politics of symbolism instead of substance, politicians made it clear during the extraordinary session that the combined UBS results in a large bank with a de facto state guarantee, which is more of a burden than a relief for the financial industry over the long term.
Concerns were directed primarily at the Swiss banking industry. Accusations were raised from many sides that the combined UBS would dominate the market and elevate itself to a dominant position.
Competition Commission's Key Role
Limiting outsized influence and influencing what the bank will look like is a task for the Competition Commission (Weko). The authority has strong sanctioning powers, ranging from a heavy fine on UBS to the spinning off of entire divisions.
Even so, Weko is not the one with the final say, but the Federal Council. Under Article 11 of the Cartel Act, it can approve mergers previously prohibited by Weko at its discretion. Because of this structure, political pressure on the Federal Council is likely to increase among those wanting to see a spin-off of Credit Suisse's Swiss unit on the pretext of it being in the interest of a robust financial industry.
A Delicate Balance
As a further measure to tame an overpowering UBS monster, parliament debated higher capital adequacy requirements. An increase in ratios doesn't come at zero cost, and will inevitably burden the banking industry and lead to spillover effects.
If banks had to set aside more equity capital for granting mortgage loans, this would severely affect Switzerland as a country with a very high level of mortgage debt by international standards. In a worst-case scenario, that could trigger a real estate crisis. Adding to the burden is the international competitiveness of the banking industry suffering if Switzerland went it alone.
Failure Cannot be Prevented
No matter how hard the screws are tightened, and with the strictest capital ratios in the world, no bank is safe from going bust as Credit Suisse's demise vividly demonstrated. It collapsed not because of insufficient capital, but because confidence in the strategy developed by the board of directors and in the operational skills of management was lost.
The bitter truth for a market economy is that a failure is an option and sometimes a necessary outcome for thriving innovation and prosperity.
Sweeping Denunciations
In addition to the regulation debate, the special session was characterized by populist undertones, with malice at times being heaped on an entire profession. Sweeping attacks are likely to have unjustly hurt at least some of the many thousands of Credit Suisse and UBS employees.
Until proven otherwise, conscientious employees in the trenches like requirements engineers specializing in asset management applications and regulatory business analysts, do not have to answer for the entire debacle.
Still, they are put in the barrel with the bad apples and now too must endure ridicule. One might be tempted to think the profession as a whole can emerge humbled from these trying times and realize that serious bankers should not be above society but amidst it. As some are incapable of self-reflection, it remains to be seen if this transpires.
Reaping the Whirlwind
Bank managers who collected huge bonuses despite misconduct were rightly castigated. Bank boards failing to recognize the signs after the government bailout of UBS in 2008, and sticking to a toxic bonus culture further sowed the seeds of discontent. They are now reaping a whirlwind as anger and resentment grow.
Now that the mismanaged Credit Suisse had to be rescued with state tax guarantees, even politicians previously supportive of banks can no longer tolerate this self-serving mentality with a clear conscience. After myriad management failures of banks politicians must now ensure, by capping bonuses for one, that false incentives are eliminated and losses are also borne by managers.
Avoid Quick Fixes
Despite all the criticism in recent days, whether justified or not, politicians should keep their cool and beware of scattershot legislation resulting in a «Lex UBS». Otherwise, in addition to the loss of a second major bank, the Swiss financial center, which is particularly characterized by system stability, will be relegated from the top league.
