The industry expert says the country's increasing isolation since the 1990s has led to the current situation – and that deep structural reform is needed in domestic governance and regulation of finance.
Beat Wittman believes that Switzerland, as a country, is not in a good place. The country's second-largest bank, Credit Suisse, had to be rescued by UBS early this year and much of what is going on is due to its isolation, something that started in the 1990s but whose effects have become increasingly apparent.
This has led to an economy hampered by insufficient competition, low growth, and little innovation. Below, he discusses what needs to change:
1. Prices Show the Way
As ever, the most reliable indicator to assess any situation and its prospects, at any point in time, are share prices and fixed-income yields. UBS is no exception and it made headlines recently by issuing AT1 bonds for the first time since the government-prompted rescue. In connection with that, it should be noted that finance has neither a memory nor a capacity to regret.
There is another problem related to UBS. The Swiss constellation of policymakers comprises the Ministry of Finance (EFD), the Swiss National Bank (SNB), and the country's regulator, Finma. All of them lack institutionalized resources and processes to analyze capital market price signals and their implications. That is why they were caught off guard when it came to Credit Suisse's collapse. They didn't understand the signals the troubled bank’s ever-declining stock price and sharply rising refinancing costs were giving.
The best guide to measuring progress
Since then, the UBS share price has told a different story. It acquired Credit Suisse at a rock-bottom price. For the bank, it was the «deal of the century». Moreover, it gives the country as a whole a safe haven bonus, particularly in light of its positive flows of net new money now enhanced by the sheer size and stability of the newly combined financial institution. This seems to be an added bonus in times of geopolitical turmoil.
The challenge for the new UBS, however, is the difficulty of digesting Credit Suisse. The latter has a vastly different corporate culture and its own set of complex technological platforms and operations. Large-scale integrations are an area in which neither Swiss nor European banks have excelled so far. Although it is far too early to judge the progress of the restructuring, UBS's share price will clearly be the best guide to measuring progress, even if it is a lagging indicator.
The relevant benchmark in terms of growth, profitability, and valuation for UBS and its leadership under chairman Colm Kelleher and CEO Sergio Ermotti is Morgan Stanley – or Kelleher’s former employer.
2. Structural Policy Reforms Are a Must
Swiss policymakers seemed to engage in wishful thinking all the way until the infamous merger agreement was signed. The Credit Suisse collapse was a painful wake-up call. Incompetent, wrongly incentivized Credit Suisse leadership, albeit approved by the Finma, led to a shotgun marriage helped along by emergency laws on the policy side that required the sourcing liquidity from the Federal Reserve (Fed) and the complete wipeout of AT1 investors at the same time.
Ermotti recently stated in an interview with «CNN» that his sense of duty towards Switzerland and loyalty to the bank leave no room for failure. We couldn’t agree more – failure is not an option for UBS or Switzerland. But here is the crux of the matter. If Swiss policymaking and institutions don't change, we risk another failure. What happened this year is not a single, isolated incident. There was the UBS/SBC merger in 1998, the UBS-LTCM crisis in 1998, and now Credit Suisse in 2023. A new and larger UBS in difficulty is an existential risk for the country at large.
3. No Reforms Mean Downsizing or Moving Abroad
Swiss policymakers have so far not managed to create and implement a successful framework that can provide large global banks with a sustainable future. The new UBS requires urgent fundamental reforms in the country’s policy framework and Switzerland cannot afford to have UBS fail. The necessary measures are simple and straightforward:
- the quality and quantity of resources, processes, and governance must match that seen internationally
- without reforms, the size and business model of UBS must not be allowed to become too big to fail
- no reforms and no downsizing leave one option only – UBS will need to be placed under European Central Bank (ECB) supervision
4. Where are the Relevant Reforms?
Although the rescue took place early this year, there has been no thorough analysis, public discussion, or any kind of exercise in trying to learn what the lessons were from the collapse of Credit Suisse.
Many would like to believe it is an isolated event and move on. What should be done instead is to address Switzerland’s insufficient and flawed regulatory and supervisory framework.
In many ways, Swiss policymakers seem even more at odds today than in the run-up to the Credit Suisse collapse. Politicians and political parties alike seemed to veer away from any public discourse ahead of the Swiss parliamentary elections in October this year. And since then, they have been singularly focused on narrow policy mandates and special, vested interests.
Political Lightweight
Adequate reforms should strengthen the institutional framework and prioritize the macro over the micro. The government-commissioned report on banking stability, by a reputed expert group, was largely an alibi exercise lacking relevant insights or recommendations. So what, other than the Credit Suisse collapse, could prompt a substantive report with relevant recommendations?
Our hopes rest on the parliamentary commission of inquiry chaired by Isabelle Chassot, even though so far she has turned out to be a political lightweight without relevant experience.
5. Large Banks Are Neither Swiss Nor Wholly Private
Banks play a crucial role in any economy. They secure the flow of money and capital, and as such, enable economic activity. Money and capital flows via banks and capital markets are highly interconnected internationally. Crucial in this context is the Bank for International Settlements (BIS) in Basel, which, among other things, is a cooperative forum for policymakers to secure monetary and financial stability.
It is extremely likely that Swiss policymakers felt tremendous pressure from their respective counterparts in New York, Frankfurt, and London demanding they get ahead of the curve in the weeks and days before Credit Suisse's collapse.
Leading Swiss politicians have generally treated banks at large as private businesses. That conveniently allows them to stay on the sidelines, while distancing themselves from the complexities of a sector they don’t understand or have a particular interest in, particularly as no votes can be had. This hands-off approach has allowed banks to repeatedly privatize gains but socialize losses, damaging Switzerland’s reputation as a financial center given the numerous scandals.
6. The Swiss Financial System is not National
Banking and finance is a highly complex and interdependent global business. It is not a Swiss domestic or private enterprise. The country cannot play a relevant role in the global financial sector with the prevailing, politically self-centered, and nationalistic mentality preached for decades by Switzerland’s biggest and most isolationist party, the National Conservatives (SVP).
Switzerland is a small country with an oversized banking sector. The SNB, as a central bank, is not in the «whatever it takes» league of the Fed and the ECB. It is uncontested that the Fed and the American Treasury are the heart and lung of the world financial system and the dollar its blood. The ECB ranks next in importance. The rest of the world follows when it comes to the setting of rules and prices.
In consequence, Switzerland must adhere to internationally recognized regulatory and supervisory best practices with adequate resources and processes that would allow for professional and constructive engagement with respective international counterparts. This is the only way for the country to continue to play in a league with global systemically important banks. As just one example of what went wrong early this year, when it came to the Credit Suisse collapse, Finma failed to engage with the ECB when it came to the AT1 write-off.
7. The Swiss National Bank (SNB) and Leadership
In previous banking crises, the SNB has taken leadership - and it should have done so in March when the rescue took place. Unlike the finance ministry and Finma, it is the only institution with the necessary technical expertise, experience, and international relationships.
Concerted analysis, decision-making, and international cooperation were needed at the time, but the trio of policymakers remained divided. They focused on their individual mandates and failed at important junctures when they needed to work on tasks together and coordinate at critical points.
The SNB also needs to improve governance, and its ability to discuss matters internally, its succession planning, transparency, and accountability. Moreover, it needs to be in a position to more comprehensively engage with Finma and the finance ministry.
8. Finma's Failure
At no point in time did Finma fulfill its mandate. It didn't in terms of leadership or in the quality, quantity, and effective allocation of resources and responsibilities. This was particularly apparent when it came to supervising globally significant institutions. The only argument in favor of the regulator is that key political parties have never wanted to have a strong supervisor in the first place.
Inexcusably, it also didn’t apply the vast tools and powers provided by the country's banking law when it came to Credit Suisse. Even at the peak of the crisis, Finma appeared to be the weakest link in the policy chain of command, and it was partly due to its lack of engagement, in a timely fashion, with relevant international counterparts.
9. Finance Ministry – Complacent and Conflicted
The Swiss finance minister Ueli Maurer of the National Conservative Party sat out his last term in 2022 with little more than a wait-and-see attitude. He hoped that the Credit Suisse situation would solve itself, despite the ongoing collapse in its share price and spiking refinancing costs, repeated failures in bank leadership, and the numerous scandals.
In 2023, the incoming finance minister Karin Keller-Sutter of the liberal democratic party inherited an already calamitous situation. Still, she wasted precious time. She was at the helm when ruling out the possibility of a foreign buyer and also decided against the application of the too-big-to-fail recovery and resolution plan. That resulted in Credit Suisse being handed over to UBS at extremely favorable terms and conditions.
Last-Minute Actions
It remains to be seen whether the finance ministry will continue to focus on lobbying and public relations or will instead show leadership, and substance. It also has to learn the lessons from Credit Suisse's collapse, particularly for the day when they need to be applied. But we don't have much hope at this point given how Keller-Sutter currently portrays her role in the Swiss media as the savior of the world financial system.
It should be remembered that it was global policymakers led by the US and the global capital markets that put pressure on complacent and uncoordinated Swiss policymakers. They were the ones who forced them into overdue, last-minute actions. And, again, it was the Fed that supplied the necessary liquidity to the SNB that facilitated the UBS rescue of Credit Suisse.
10. Outlook – Courage to Reform, Not Denial and Vain Hope
In our view, it is politically desirable and economically beneficial for Switzerland to have a globally competitive financial center, with UBS remaining a leading global financial institution.
But it is also a fact that Switzerland already lost two of its three global financial institutions in recent decades (SBC in 1997 and now Credit Suisse). The country also ranked as a top five international financial center three decades ago. It does not now make the top twenty. This is largely self-inflicted and the drop in position and competitiveness has not prompted Swiss policymakers into long-overdue corrective actions, at least not so far.
Today, Switzerland lacks any outstanding leaders and internationally respected personalities such as former Federal Councillor Kurt Furgler and former SNB President (1974-1984) and BIS President (1982-1984) Fritz Leutwiler.
Before becoming a Federal Councillor, Kurt Furgler presided over Switzerland’s first parliamentary commission of inquiry dealing with the «Mirage-Affair» which investigated the scandalous procurement of French Mirage fighter jets for the Swiss Air Force in the 1960s. Furgler’s delivered a damning report, not only leading to resignations in the highest echelons of the Swiss Army and Government but to structural reforms in the armed forces.
Time to Show Bravery
Fritz Leutwiler was a preeminent and highly respected central banker of his time who ably navigated the oil and sovereign debt crises and stagflationary period in the late 1970s and early 1980s. He was as much an academic as he was a practitioner, holding holistic views of the ever-shifting global political, economic, and monetary environment.
It is time for Switzerland to show bravery and engage in structural reform. This needs to encompass the general economy just as much as the banking sector, given the latter is only part of the overall picture. Today’s ills and casualties are very much the result of Switzerland’s isolation. This has resulted in limited competition, little innovation, low growth, and a less prosperous society.
The federal elections are over. It is time to shift attention away from domestic populism and prioritize a renewed institutionalized relationship with Europe. It should not only be for financial services but also other critical infrastructure such as communication, technology, defense, food, healthcare, transport, water, energy, science, and higher education.
Beat Wittmann has been chairman and partner of Swiss-based financial advisory firm Porta Advisors for nine years now. His more than 30-year career in Swiss banking includes stints at both UBS and Credit Suisse as well as Clariden Leu and Julius Baer.
