Federal authorities in Switzerland's capital of Berne have proposed new liquidity and regulatory approaches for the banking sector, mindful of how to prevent a repeat of the kind of crisis that saw Credit Swiss taken over in 2023 by UBS. The Swiss Bankers Association has criticised the moves.

The Swiss government wants to give the financial regulator FINMA more teeth to protect stability of the financial system. It is also proposing to expand banks' access to liquidity from the central bank. 

The liquidity proposal was welcomed by the Swiss Bankers Association yesterday in its response to the statement from Berne. However, the SBA warned against FINMA becoming a “super-authority.”

Switzerland’s largest bank, UBS, has been at odds with legislators in the Alpine state over proposed requirements to impose capital rules that would, UBS claims, put it under a tougher capital regime than is imposed on its international competitors. At the same time, lawmakers, mindful of how UBS’s emergency takeover of Credit Suisse in 2023 has left the country with only one universal bank, want to avoid further financial crack-ups. 

UBS offices in Zurich

The “shotgun wedding” of UBS and Credit Suisse more than three years ago dented Switzerland’s image as a stable financial jurisdiction, adding to pressure on a country that, about 10 years before, saw the end of secret cross-border accounts. 

A core worry for Switzerland and other countries has been that banks have often become so large that they are “too big to fail.” That knowledge can breed complacency among bank leaders who presume that states (ie, taxpayers) will rescue them. Such a mindset, so it was argued post-2008, created a “moral hazard” problem. As a result, countries such as the US, Switzerland and the UK have sought to rein in banks’ risk-taking.

However, a fear is that regulatory zeal might damage Switzerland’s competitive edge. The SBA spoke to WealthBriefing earlier this year about the matter. A report by Boston Consulting Group said that Hong Kong has, at least for the moment, overtaken Switzerland as the world’s largest cross-border financial centre. 

Swiss banks and the wider financial sector, including sectors such as insurance, wealth management and investment, account for 9 per cent of total GDP, according to data from the State Secretariat for International Finance. That figure has been in slow decline.

Going too far?
The SBA said it is concerned about potential regulatory over-reach. 

“The crisis at a single bank does not justify across-the-board tightening of regulations for other banks,” it said, in an indirect reference to the Credit Suisse affair. “Regulation must focus on areas where actual risks exist and where it makes a proven contribution to financial stability. The SBA also warns against FINMA becoming a ‘super-authority’, particularly with regard to its vastly expanded powers concerning early intervention, sanctions and the ability to intervene in normal business operations.”

The SBA said that it welcomed the government’s proposals on central bank liquidity, however.  

Consultation
Yesterday, Switzerland’s Federal Council launched the consultation on amendments to the Banking Act and the Liquidity Ordinance. 

“The proposed measures complete the overall package aimed at strengthening the stability of the financial centre. The requirements on bank governance and on crisis preparations for systemically important banks are to be increased,” the government said in a statement.  

The “systemically important” banks are UBS; PostFinance (which is the financial services arm of Swiss Post); Raiffeisen Group (Switzerland's largest cooperative banking group), and Zürcher Kantonalbank (ZKB), the cantonal bank of Zurich, one of the largest retail and commercial banks in the country.

“The tools and powers of the Swiss Financial Market Supervisory Authority (FINMA) are to be extended, and banks' access to liquidity from the Swiss National Bank (SNB) is to be expanded,” it said.

Offices of FINMA

Following the Credit Suisse crisis, on 6 June last year the Federal Council set out principles to strengthen the Swiss financial centre. 

“The measures based on these parameters are intended to close the gaps which the Federal Council and [Parliamentary Investigation Committee] have identified in the existing too-big-to-fail (TBTF) regulations, thereby reducing the risks to the state, taxpayers and the economy even further,” the statement continued. 

The consultations will run until 19 November.

The statement from Berne said planned measures applied to “systemically important banks” will be handled in a “targeted “ way. “These measures are designed to be proportionate wherever possible or will only have a direct impact on supervised entities in the event of misconduct or a breach of supervisory law.”

Senior managers regime
The government statement said it intends to introduce a “senior managers regime” for more complex banks (those with 250 or more employees). 

“Affected banks must define in a document who is responsible for which decisions. This creates a clear division of duties at senior management level and reinforces the personal responsibility of managers. In the event of breaches, either the banks themselves or FINMA can take targeted action at the right level,” it said.

The government said “new general principles on risk mitigation and moral hazard will apply to all banks.”

“Specifically, for the most senior or most highly paid, managers at systemically important banks, retention periods for variable remuneration components, as well as clawbacks will apply additionally. FINMA will also be accorded greater powers of intervention in this area,” it said. 

FINMA's supervisory powers will be strengthened so that the regulator can impose measures earlier and more effectively where risks are apparent.