Challenge for Finma: This is how the financial regulator monitors a superbank like UBS

It all started with a monitor

Monitoring large banks has a short tradition in Switzerland. Until the merger of the banking company and banking association to form UBS was completed in 1998, there was a single person who oversaw major financial institutions. “It’s a joke,” as Basel economics professor Yvan Lengwiler (60) put it. Lengwiler was on the Finma board of directors from 2012 to 2019.

After the merger, five people each handled the two remaining financial giants, UBS and CS. A portfolio that has only expanded slightly over the years. After all, UBS and CS audit teams could always rely on dedicated teams at Finma and other experts. When the end of CS became clear, 40 full-time positions were set aside to oversee UBS and CS. In fact, there are now 60 people directly or indirectly responsible for the audit of UBS, the last major bank. But: “There are definitely not too many people, the number could be higher,” says Lengwiler.

UBS supervisors at Finma have a complete toolbox at their disposal. Start with monitoring tools, on-site inspections and enforcement measures. But as one former major bank executive put it in his interview with Blick, a manager’s most important tool is his personal integrity. “On the audit side, we need people with enough experience to stand up to a dominant CEO.”

“The business needs a backbone”

In addition to the analysis of external and internal data and reports on the bank’s situation, personal interviews are also an important audit tool. Therefore, auditors meet regularly with the bank’s board of directors, management and other decision makers to exchange information.

When the controlling authority puts its finger on the sore points, it takes great courage to remain firm: “Here, the seemingly petty manager from probing Bern, there the powerful boss from Zurich’s Bahnhofstrasse – there is something asymmetrical in such an encounter.” says the former bank controller. “The job of a supervisor requires a spine and strong nerves. “This is the only way to meet on equal terms.”

As can be heard from the financial center, there were always exceptions and relaxations, especially in CS. The bank frequently took legal action against Finma’s orders: “CS was very stubborn towards Finma,” says Lengwiler. “He tried to slow down the supervisor by objecting to the orders.”

Division of labor in auditing

Switzerland, the only major financial center, has a feature: There is also intense shopping with the bank’s auditing company. It even undertakes some regulatory oversight and serves as an expanded arm of Finma. “We are often criticized abroad and we are probably underselling ourselves,” says Oliver Buschan, 51, who is responsible for financial markets and regulation at the Swiss Bankers Association. “But the model is very cost-effective. This is how UBS pays for some of the regulatory controls that affect it.” But Buschan has to admit: “This collaboration is not entirely free of conflict.”

Cooperation with foreign supervisory authorities is also important. Because, like Finma, they have a vested interest in ensuring that everything goes well in foreign banks’ subsidiaries. “During my work at Finma, I was often in London, New York or Hong Kong, where I would monitor investment banking and exchange ideas with local authorities,” says the former executive. “Comprehensive global coverage is possible thanks to this exchange.”

Limit appeal options

If alarm bells ring for the supervisor, the bank will take action. It can conduct on-site inspections, examine the bank’s data in depth and go deep into the identified risk area. “This is a very time-consuming and expensive task for the bank because so many people are on their side,” says the former Finma employee. “This alone has a certain deterrent effect, because no bank is happy to pay these costs. These investigations often have the nature of a bus.”

None of this helped CS. What needs to be improved from Finma’s perspective so that UBS does not suffer the same fate? “The legal process for appeals against decisions should be significantly shortened,” says Lengwiler. “We also need progressive penalties like those known abroad.” These give a bank, for example, ten days to implement a measure. If he does not do this, each day of delay will cost one million francs. This is likely to hurt even a large bank over time.