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Mr. Kaufmann, Credit Suisse has gone bankrupt. How would you classify this historically?
Daniel Merchant: It was not possible to save a systematically important bank and keep it as an independent institution. This is an innovation of this scale. When the federal government extended a helping hand to UBS in 2008, it remained an independent bank. This time it didn’t work: UBS had to take over CS.
A failure for the authorities?
NO Of all the bad options on the table, the takeover of UBS was probably the best.
One of these options would be to liquidate Credit Suisse – as the Swiss banking regulations de facto stipulated. Why didn’t this work?
The solution plan was missing. There was a plan for how the Swiss business of CS would be split and continued. On the other hand, how to send the global part of the bank to bankruptcy or otherwise handle it: There was no viable plan for this.
From where?
Most likely due to coordination and competence issues. Credit Suisse is also systemically important in the US. Logically, American tax authorities want to have a say in whether a subsidiary of CS there goes bankrupt or needs to be bailed out. This is understandable as a CS sinking will have global repercussions. Therefore, even if that was perhaps the case with the crisis plans of the major banks here, it was impossible to abandon the global business of CS to its fate.
Switzerland thought it could decide on its own financial regulation. An error?
The regulatory principles that Switzerland adopted and promoted in international organizations such as the Financial Stability Board were absolutely correct. But you have to be realistic: Bankrupting a major global bank could trigger a financial crisis. Switzerland did not want to take responsibility for this alone.
Why did CS’ bankruptcy have such bad effects?
Credit Suisse’s collapse may have sparked a global financial panic similar to that of 2008. The main reason for this is that the financial system is interconnected. Banks lend money to each other: they have payment obligations arising from loans and a wide variety of financial products. If one bank goes bankrupt, other banks suffer financial losses. Fear of it has an additional destabilizing effect. In a chain reaction, the entire financial system could go into a crisis.
The second option, the takeover of the state, was also rejected by the federal government. From where?
In principle, the federal government could take over the CS business in Switzerland. This business is relatively safe and profitable, and the federal government could sell it for a profit after a while. The problem was the riskier international parts. The federal government should have taken over it too. I suspect he is reluctant to take the risks involved.
The UK nationalized two financial institutions in 2008: Northern Rock and the Royal Bank of Scotland. Why shouldn’t this be possible in Switzerland?
Switzerland is a small country. And CS is a huge bank. But perhaps it also has to do with the fact that government interventions here are viewed quite critically.
So is CS not only “too big to fail” but also “too big to be saved”?
Yes, you can say that. UBS is now taking on the task of liquidating the risky parts of Credit Suisse. It can probably do this better than the Swiss state.
So is legislation “too big to fail” for the trash?
NO. Some things worked well, for example, the write-off of so-called coconut bonds – that is, bonds that could be used to cover losses in the event of a crisis. This should have significantly simplified the deal with UBS. The higher liquidity buffers imposed on large banks after the financial crisis also worked well. Without these bumpers, the situation would likely have escalated last fall. In any case, the financial market supervisory authority was already involved at the time.
Should the federal government have taken command of the CS back then?
In retrospect, probably. But it is extremely difficult to predict when a state will have to force a bank to fail. In the fall of 2022, it was not possible to know with certainty that there would be a bank attack in the spring of 2023. Such a step would have been difficult to publicize back then. Back then, Credit Suisse had a chance to recover on its own…
… and the rest is history. What should change now in the banking regulation?
One possible leverage is personal liability within a bank. Finma may be empowered to personally fine certain directors if they detect abuse or inadequate structures in the bank. This is not possible today.
Should Finma also limit bonuses?
Authorities can indirectly influence a bank’s business policy through its compensation policy. Without big bonuses, managers have no incentive to take big risks in investment banking.
Banks will say: This will make us less competitive.
Some teams in New York investment banking will actually prefer to work in another bank than in a Swiss bank. Whether Switzerland will remain attractive as a global financial center is ultimately a political decision. However, this would be advantageous for financial stability in Switzerland. But something similar can be achieved with other regulatory tools.
How come?
For example, with stricter capital requirements. If banks have to back certain transactions with additional equity, those transactions become less attractive. In other words, banks exit these agreements of their own accord. By the way, this is what the big banks themselves were saying after the financial crisis. Higher capital will make the global business less profitable.
Would more equity in Credit Suisse keep the bank from going bankrupt?
Probably not in the last form the bank presented itself.
What good are higher capital ratios then?
A bank with more capital is a fundamentally different bank with a different strategy, a different risk profile and a different reputation. More robust, more reliable, more conservative.
Is Switzerland the right place for a major global bank?
This question is very valid. UBS is now becoming the strongest bank ever to exist in Switzerland. Sure: less risky than Credit Suisse lately. But it is an illusion to believe that bank failures or banking crises will never happen again in the future. The next crisis is certain to come.
And then?
Then Switzerland has a big problem. Today, we know that the federal government does not want to abandon or nationalize a major bank should the worst happen. Apparently, it cannot afford the former for concerns about international financial stability and the latter for financial or political reasons. Ultimately, the only remaining option would be to try to sell the big bank abroad.
Source :Blick
I’m Tim David and I work as an author for 24 Instant News, covering the Market section. With a Bachelor’s Degree in Journalism, my mission is to provide accurate, timely and insightful news coverage that helps our readers stay informed about the latest trends in the market. My writing style is focused on making complex economic topics easy to understand for everyone.
