Switzerland is accelerating efforts to reform its banking regulations a year after the collapse of Credit Suisse – and giving more power to those who enforce them.
The government will unveil long-awaited legislative proposals in the coming days that are likely to affect all key pillars of banking supervision, from capital and liquidity rules to corporate governance controls. UBS Group AG – the country’s only remaining globally systemically important bank, which is now more than twice the size of the domestic economy – is facing increased scrutiny.
A key point is strengthening Finma, the banking regulator, which failed to prevent years of poor management at Credit Suisse that threatened the country’s historic reputation for financial stability. That task will be bolstered this week by the arrival as Finma’s new chief executive of Stefan Walter, a veteran European banking regulator who has spent a decade on par with the likes of Deutsche Bank AG.
“I wouldn’t call the Swiss authorities toothless, but there are certainly some things that should be changed,” said Yvan Lengwiler, a professor at the University of Basel and head of a panel of experts created for this purpose Reform proposals. “Finma definitely needs more resources to be on an equal footing with the banks.”
The face of this renovation is 59-year-old Walter. The German played a key role in setting up the European Central Bank’s supervisory body when it began monitoring lenders in 2014 in response to the bloc’s sovereign debt crisis.
Walter is also former Secretary General of the Basel Committee on Banking Supervision and Senior Vice President of the Federal Reserve Bank of New York, two of the most prominent bodies in the world of financial regulation.
He helped set up a system at the ECB that challenged banks about the risks they took. This approach can still be observed, for example in the recent raid through the leveraged lending business of Deutsche Bank, BNP Paribas SA and others.
The Swiss have long favored a more consensual approach to financial supervision than is common in other jurisdictions. The inability to impose fines was partly justified on the grounds that it would destroy the cooperative climate.
The philosophy of lean management is also reflected in the relatively small size of the regulatory authority: almost 600 employees at Finma are responsible for the supervision of a financial sector in which more than 230,000 people are directly employed.
But the rapid loss of confidence in Credit Suisse after a series of missteps and losses and the subsequent emergency rescue by UBS have clouded this previous consensus. Finma itself has complained that while it recognized the decay at Credit Suisse’s core, its appeals for change were virtually ignored.
The government, including the Finance Ministry, the Swiss National Bank and Finma, broadly agree that an expansion of regulatory powers is necessary. Even the banks, including UBS, have signaled their support for large parts of the reform agenda.
In addition to the possibility of imposing fines, a central component of the new approach is a so-called senior manager regime, which makes individuals directly responsible for their decisions. Such a system, which exists in various forms in the UK and Hong Kong, among others, allows regulators to identify the culprit. According to Thomas Hirschi, head of banking supervision at Finma, Switzerland is likely to go its own way.
“Swiss regulation has always been and probably will continue to be principles-based rather than rules-based,” Hirschi said in an interview. However, specific provisions are needed for an effective management system for executives, he said. “If you just have principles, then we’re actually going to stay in the current system where it’s going to be difficult to enforce the law.”
It’s about changing the culture of risk-taking among Swiss bankers. The need for such a change became clear late last year when it was revealed that Julius Baer Group Ltd, a global asset manager, had built a $700 million exposure to a single client – Austrian real estate tycoon Rene Benko.
The bank’s internal controls had failed to stop the concentration of risk, and the resulting write-down when Benko’s conglomerate Signa filed for bankruptcy wiped out half of the lender’s annual profits. The CEO resigned; the chairman, Romeo Lacher, he apologized.
Proponents of a senior manager regime want to “strengthen bank managers’ sense of responsibility in advance,” said Nina Reiser, associate professor of financial market law at the University of St. Gallen. “If there is documentation that clearly states what I am responsible for, that is approved by Finma or auditing companies, then I will consider my decisions more carefully.”
There is another adjustment that some advocate: bonuses. Current legislation only allows Finma to formulate “guidelines” on how much bankers should be paid. That’s not strong enough, says former Finma boss Urban Angehrn.
Finma must have influence on “that”. Bonus pool Decisions made by the big banks,” Angehrn told Bloomberg Television last month. Marlene Amstad, the current president of Finma, is also pushing for this to be enshrined in law.
It is clear that UBS will be in the spotlight even more. The Zurich-based bank, the largest private asset manager outside the United States, is already facing higher capital and liquidity requirements due to its increased size. Finma has expanded its team working with the bank and is planning two Stress testing in its balance sheet this year.
Nevertheless, a debate arises about the appropriateness of what exists Capital and liquidity requirements, given the systemic importance of the bank. The SNB spoke out last month, saying a review of the “progress” of capital rules depending on size was needed. She also argued that an overhaul of liquidity rules, which proved inadequate during the Credit Suisse crisis, is needed.
Adding an additional layer of capital and liquidity rules on top of the current global standards set after the 2008 financial crisis raises the prospect of a return of the so-called “Swiss finish”. This overreaching approach by domestic regulators has angered bank executives in the past and would likely lead to greater opposition if it becomes a central part of the government’s approach.
The sharp rise in interest rates last year may have helped mask the underlying malaise in the Swiss financial system. Even though one of the country’s systemically important institutions was on the verge of failure, banks still hid a record amount of profits from lending.
“I don’t see many reasons to fundamentally change the Swiss regulatory system,” said Nicolas Veron, senior fellow at the Peterson Institute for International Economics in Washington and Bruegel in Brussels. “What happened wasn’t a big failure like ‘The world will never be the same again’. It’s more of a ‘lessons learned’ kind of thing, let’s do better next time.”