Page 1 of 2

With outrage over the Credit Suisse debacle unleashed during an extraordinary session of the Swiss parliament, the Swiss financial industry is left to pick up and mend the broken shards. This will require a sober assessment grounded in reality.

The extraordinary session of the Swiss parliament called after the government-forced UBS takeover of Credit Suisse did not cast Switzerland in a good light. Political parties gave the Federal Council a resounding slap by rejecting the emergency aid package for the bank merger, damaging confidence in political institutions. Politicians preferred posturing ahead of upcoming elections rather than dedicating themselves to fulfilling their duties which previously have been praised for stability and legal certainty.

A seemingly nonchalant rubber stamping of the decree to fully write off Credit Suisse's subordinated AT1 bonds to the tune of 16 billion Swiss francs ($17 billion), provoked outrage not only in Switzerland but around the globe.

Becoming a Banana Republic?

Judgment from abroad was harsh and prompt, with commentators calling Switzerland a financial banana republic without apparent irony.

So long as negative headlines remain limited to brief episodes, the reputational damage to the Swiss financial industry will likely be limited. However, if the clamor of critical voices doesn't subside shortly, the long-held view of Switzerland as a much-vaunted haven of stability is likely to suffer permanent damage.

Close Scrutiny From Abroad

The country's reputation as a reliable financial center could suffer if the rule of law is watered down after the extraordinary session. There is currently an ongoing and self-destructive discussion about Swiss neutrality and how to deal with frozen assets of Russian origin which could become a sensitive issue. It would be a bold and unprecedented move for Switzerland to expropriate blocked assets and earmark them for war reparations for Ukraine's reconstruction.

Another test will come when a parliamentary commission of inquiry (PUK) is established this year, which would start this summer at the earliest. Despite all the justified demands for a thorough investigation into the role of the various players in the Credit Suisse debacle, a PUK must not lead to a politicized solution.

Taming a Monster

In addition to politics of symbolism instead of substance, politicians made it clear during the extraordinary session that the combined UBS results in a large bank with a de facto state guarantee, which is more of a burden than a relief for the financial industry over the long term.

Concerns were directed primarily at the Swiss banking industry. Accusations were raised from many sides that the combined UBS would dominate the market and elevate itself to a dominant position.

Competition Commission's Key Role

Limiting outsized influence and influencing what the bank will look like is a task for the Competition Commission (Weko). The authority has strong sanctioning powers, ranging from a heavy fine on UBS to the spinning off of entire divisions.

Even so, Weko is not the one with the final say, but the Federal Council. Under Article 11 of the Cartel Act, it can approve mergers previously prohibited by Weko at its discretion. Because of this structure, political pressure on the Federal Council is likely to increase among those wanting to see a spin-off of Credit Suisse's Swiss unit on the pretext of it being in the interest of a robust financial industry.

A Delicate Balance

As a further measure to tame an overpowering UBS monster, parliament debated higher capital adequacy requirements. An increase in ratios doesn't come at zero cost, and will inevitably burden the banking industry and lead to spillover effects.

If banks had to set aside more equity capital for granting mortgage loans, this would severely affect Switzerland as a country with a very high level of mortgage debt by international standards. In a worst-case scenario, that could trigger a real estate crisis. Adding to the burden is the international competitiveness of the banking industry suffering if Switzerland went it alone.

Failure Cannot be Prevented