Uncomfortable Truths
Balz Bruppacher on the rescue of Credit Suisse, sanctimonious criticism of Finma, and the consequences of the Swiss financial center’s unresolved dilemma.
25. März 2023 • Balz Bruppacher

A glance at the podium of a remarkable media conference on Sunday evening made clear who was dictating the terms of Credit Suisse’s rescue. Five men and women representing official Switzerland flanked the two bankers standing in for the firms being prodded into a merger that neither want.

Whether the takeover of Credit Suisse by UBS is a bailout, of the sort that has since 2008-09 been considered a regulative failure, is moot. Despite the solemn protestations of the government, central bank, and financial services industry, this is a governmental solution.

None of this would have been possible without the massive intervention of Bern. One can only hope that the financial risks the government and central bank are entering into ultimately do remain “manageable,” as finance minister Karin Keller-Sutter assured.

Bern discussed rescue last autumn

Attempts to distribute blame for Credit Suisse’s downfalls on a burgeoning banking crisis in the U.S. or on social media are hapless. It takes nothing more than a passing familiarity with Swiss banking to realize that Credit Suisse alone is responsible for its ignominious fate. And waited too long before taking decisive action.

The Swiss government appeared last autumn to share this view. Under then-finance minister Ueli Maurer, the seven-member governing council considered a rescue package for systemically relevant banks with liquidity problems, Keller-Sutter, Maurer’s successor, admitted on Sunday. The so-called public liquidity backstop now introduced allows the central bank to inject vast amounts of liquidity, guaranteed by the state, through emergency law.

Months ago, when Credit Suisse began bleeding serious amounts of client money, the government stopped short of this step. Why? Officials feared that the move might destabilize Credit Suisse even further, according to central bank head Thomas Jordan.

Sanctimonious criticism of Finma

Credit Suisse’s precipitous downfall lays bare an uncomfortable truth of banking regulation: 15 years after the rescue of UBS, too-big-to-fail rules elaborately crafted with top representatives of government and industry couldn’t prevent a second bank from requiring a state-led bailout.

The fact that clients could lose trust in a bank despite adequate capital and liquidity padding and spark a devastating bank run simply wasn’t part of too-big-to-fail war-gaming. As usual with finance’s biggest accidents, Swiss financial regulator Finma is being heavily criticized for its handling.

However, blaming regulatory oversight is too simple an explanation. Especially when the same critics were behind efforts to curtail Finma’s authority and tend to use supervision and promoting competition interchangeably.

A strong and independent Finma would be a noble aim for the finance department, which devoted considerable time under ex-minister Maurer to boosting fintech and sustainability.

Financial center faces $64,000 question

Switzerland must ensure its regulatory regime keeps pace with international standards and closes any potential loopholes or potential lines of attack. Namely, subjecting lawyers, consultants, and similar advisors to anti-money laundering requirements. And transparency of beneficial ownership as well as in commodities trading.

As new strategy papers are produced, the crucial question surfaces. "It is an illusion to believe that Switzerland can continue to maintain an international financial center without accepting the risk that goes with it,” business historian Tobias Straumann said after UBS’ crisis during 2008-09. Mistakes in investment banking or in cross-border wealth management can cause enormous damage.

The alternative would be a safety-conscious financial center, unattractive for capital markets business or cross-border wealth management. “Those who would choose this way must be prepared to accept a dramatic shrinking of the Swiss financial center and a loss of international standing,” Straumann observed.

Balz Bruppacher was a correspondent for the Swiss service of the Associated Press (AP) in Zurich and editor-in-chief of the Swiss AP service in Bern. He received the Zurich Journalism Prize for his complete works.