Glaring weaknesses in Swiss financial supervision are making the banking hub, government, and investors pay a very heavy price – even though the approach is what most legislators want.
There was none of that traditional Bernese slowness the Swiss typify as characteristic of the region's citizens on display. Instead, on Tuesday, Postfinance head Hansruedi Koeng readied an unexpected PR salvo on an unsuspecting public, maintaining the state-owned entity was in a much better position than it was, particularly related to its crisis plan, he told the country's leading financial market newspaper «Finanz und Wirtschaft» (German only, paywall).
It became completely clear what he was talking about a day later. The Swiss Financial Market Supervisory Authority (Finma) maintained that Postfinance's emergency plan needed to go back to the drawing board when it published its annual resolution report. Moreover, the regulator said Postfinance had «no plausible plan for reaching effectiveness.»
Nothing Unusual
Postfinance, as a matter of course, was informed about the impending report in advance. Being proactive, at least from the point of communication, while disclosing key elements of the report's findings had been a very conscious step.
After being asked by finews.asia, the bank maintained that nothing was unusual about what was going on. The interview with the newspaper had been scheduled weeks earlier, a spokesperson indicated. «We indicated that we were ready to schedule an interview after the extraordinary session of parliament.» The session discussed issues related to UBS's rescue of Credit Suisse and other things connected to the financial hub, including regulation, the spokesperson indicated. Indeed, when looking at the overall picture, the Raiffeisen banking group had already discussed Finma's resolution report, publicly, back in March.
In Passing
Still. Just imagine them doing the same thing with the US SEC or Germany's Bafin. Doing that would have prompted a severe reaction, even if in a quiet backroom away from the public eye. «We would ask you to contact Finma related to the possibility of consequences», Postfinance maintained.
Finma doesn't discuss the individual banks it supervises. In fact, it is not even allowed to unless there were extraordinary supervisory interests in play. According to others, the regulator is taking the recent events casually, almost in passing. This is even though Finma director Urban Angehrn maintained this past Wednesday that the events leading up to the rescue of Credit Suisse show «how important it is to make concrete preparations for crises».
Charges Levied
Postfinance head Koeng wryly commented on those preparations, saying Finma's view is «a bit outdated» as the resolution report is based on 2021 numbers.
Switzerland's financial supervisor is going to have to develop a thick skin whatever the case. Law firm Quinn Emanuel Urquhart & Sullivan is suing the regulator in the name of Swiss and international investors. The lawsuit is over the 4.5 billion francs ($5.2 billion) in now worthless Credit Suisse AT1 bonds the regulator ordered it to write off as part of its rescue by UBS. Investors who question the Finma's decision include the Migros retirement fund, one of the country's largest.
Call for Fines
Finma's weaknesses are being shown up like never before. It is probably why Finma chairman Marlene Amstad maintained after the Credit Suisse rescue that it needed additional means of punishment, including the possibility of handing out fines and imposing punitive measures on errant managers. She also complained that the regulator was very limited in the way that it was allowed to communicate individual cases – even though those being supervised are more than happy to cite Finma from reports that have not yet been published.
This relative lack of bite, particularly when compared with foreign regulators, is exactly what Swiss legislators want. But that does not mean it does not have consequences as the example of Credit Suisse shows.
On the Back Foot
One of the main reasons for the collapse of Credit Suisse was undoubtedly a lack of trust. The main reason for that was a long list of scandals the bank was embroiled in.
Finma started six different enforcement procedures in the past few years against them and they are the sharpest tool they have.
As Finma chairwoman Amstad indicated, there were other enforcement actions against major banks, but they never went public. In any case, Credit Suisse was visibly recalcitrant, at least during ex-chairman Urs Rohner's tenure.
Appealing to Delay
In practice, Finma had to perform its supervisory duties at Credit Suisse by decree, something that it is seldom forced to do, as Amstad indicated. Another thing to keep in mind is that Rohner couldn't stand Thomas Werlen, the lawyer for Quinn Emanuel Urquhart & Sullivan now representing AT1 investors. At Finma's behest, Werlen was responsible for looking at the «Spygate» affair. The bank put every single possible legal obstruction in his way all the way to the Federal Supreme Court.
The laws and regulations that Finma relies on are very broadly worded, making them subject to interpretation. That is something that Finma itself concedes. That is why appeals, as a tool, are so important. But not all actors use it in the same way. Credit Suisse, already a problem in 2021, decided it would be better to delay an enforcement procedure rather than work on its own risk culture. That is something that came to bite it on the head on the 19th of March.
Who bears the burden for all that now? The government, the national bank, and the employees and investors of both Credit Suisse and UBS.
More Appeals
Postfinance also appealed against the Finma a number of times in recent years. The key bone of contention? Risk concerns. Simply put, it was the amount of additional equity it needed to set aside in order to hedge interest rate risks on its balance sheet. The talk was about $300 million extra. But the Postbank appealed the decision, saying there was no legal basis for the Finma's calculation, and that it contravened international standards.
The matter was handled in both the higher courts and the supreme court. In a recent twist, Postfinance maintained that the Finma directive came from management and not from the board of directors, prompting the upper court to throw out all the institute's complaints in April. But still, Postfinance is still weighing whether to keep going.
Tug of War
In the meantime, the risks the Finma sees are out there, exposed, as they have been for years. When taking a look at past rulings, the first court decision came in March 2018. At the time, Postfinance's business model was heavily pressured by the negative interest rate environment. It became very hard for it to put aside any money for any kind of crisis scenario given its increasingly meager earnings. Things went so far that the government tried to unsuccessfully revise the law saying that in the case of a rescue, it would step in with up to $1.9 billion in capital.
That should send a shiver down the spine of every single taxpayer, particularly given the fact that as part of the rescue plan the government has guaranteed to pay UBS up to $10 billion for any further losses sustained by Credit Suisse.
Wish Fulfilled
Appeal a decision instead of eliminating the actual risk. That could be taken the wrong way in the future. The past shows that new regulation comes in cycles as it is usually a reaction to a current crisis. That makes it likely that Parliament will make at least some of Finma's wishes come true in the next few years.
That is going to weigh on the other 230 banks in Switzerland, most of whom keep to the rules and cooperate with supervisors. It also does nothing for clients, which will have to pay higher fees as a result of the new regulation. In all this, it would have been much cheaper from the start to have a powerful regulator that nobody felt very comfortable toying around with.
