Lessons from the CS debacle: This is how Finma chairman wants to put UBS in a bind

It was also clear to the Swiss Financial Market Supervisory Authority (Finma) that cash payments would further weaken the bank. However, Bern chiefs did not prevent the payments. Bank bosses were able to point out that their capital buffers were thick enough, meaning there was enough money in the till to make the additional payments.

CS could have thrown the money out the window. Because many CS employees still left the bank after special payments. Retention bonuses were not only ineffective, they were also inaccurate. The fact that UBS wants to take back approximately half of these 1.2 million shows this.

Lessons learned from the fiasco

Down Payment Cash Rewards were the latest in a long and inglorious series. The bonuses paid until the bitter end symbolize how negligently CS bosses at Paradeplatz used shareholder capital. The bank earned a net profit of 5.1 billion francs in the fiscal years 2010 to 2022, or 390 million francs per year. During the same period, it paid a total of 39 billion francs in bonuses, 3 billion francs per year or 780,000 francs per employee. Excessively high salaries and bonus payments weakened the CS.

What lessons can be learned from this fiasco? Finma wants to provide information about this issue at the media conference it will hold on Tuesday. President Marlene Amstad, 55, appeared in public again for the first time since the sudden departure of director Urban Angehrn, 58, and other senior staff. He is flanked by interim director Birgit Rutishauser, 51, and two other members of the management team.

What does Finma want?

Finma President will outline his ideas on the new banking regulation. Where does the authority want to start? What new tools does this bank, currently the only major Swiss bank, need to be effectively supervised? Amstad’s call for a so-called regime of senior managers that clearly regulates responsibilities within a bank is well known. If an accident occurs, senior bankers can no longer make excuses and claim that it was decided by committee.

Their desire to impose punishment is also known. Finma also wants to be able to provide more transparent information about bank stress tests and audit procedures for banks and individuals. Today, only every 20th enforcement proceeding can name the parties involved. Most of the names are published in Great Britain.

Intellectual masterpieces

However, another yet unknown point is of vital importance: Finma wants to be able to intervene earlier than before in case a bank goes astray. He wants to be able to impose conditions on the bank if various key figures point in the wrong direction over a few quarters. One possibility is to request an additional equity buffer called Pillar 2. In relation to CS, this could have meant that Finma could have requested provisions for additional capital years before the collapse. In this way, the authority could indirectly make it difficult to pay bonuses or dividends.

Could this have prevented the decline of CS? Credit Suisse’s experience in particular has shown that bank managers can come up with intellectual masterpieces to disguise the bank’s condition in times of crisis. The more complex a regulation, the more loopholes there are for banks and their lawyers. Finma should therefore be interested in rules that are as simple and clear as possible.

The basic principle of banking is this: If a bank generates enough revenue to cover its costs, it will not go bankrupt. So why not oblige banks to pay bonuses only when they make a profit? Finma’s senior management also recognizes that this is an effective way to keep the bank healthy. The question is whether he also has the political confidence to demand this remedy.

UBS opposes “fundamental” changes

Experience from previous banking crises shows that the window of opportunity for tighter banking regulations opens only for a short period of time. UBS has already begun lobbying against tightening regulations. Chairman Colm Kelleher, 66, and CEO Sergio Ermotti, 63, have opposed “fundamental” changes to the rules in recent weeks. Like Finma, UBS is in favor of the introduction of a senior management regime. Since this is already a reality in Great Britain, it does not cost UBS much.

The big bank also sees new tools for Finma’s early intervention as useful. But these go in a different direction. According to UBS’s ideas, in the event of an impending crisis, Finma should intervene directly in the bank’s hierarchy and replace key people in the group management and board of directors. However, Finma will thus assume the role and responsibility of a major shareholder. It is questionable whether this is the duty of a financial supervisory authority.