Swiss finance has been breaking its head over what regulations need to change after UBS rescued Credit Suisse exactly one year ago. The only thing everyone agrees on - never again should a major Swiss bank collapse. Yet the gap between now and never is large, Swiss finance professor Teodoro Cocca writes in an exclusive piece for finews.asia.

Right now, it is not even clear if there will be a knight in shining armor waiting outside the city gates should UBS somehow find itself in a similar position to Credit Suisse.

It was actually a stroke of luck in March last year that UBS had been preparing for months for the collapse of what was Switzerland's second-largest bank – and it knew exactly what agreements it needed from authorities to close what was a deal of a lifetime.

Less Prepared Banks

If less prepared banks face the same in the future, Swiss officials are going to have to provide more risk guarantees to entice potential rescuers into a similar deal.

The government could even face the situation of having to completely assume all risks in a timeframe as brief as 48 hours. Besides the full extent of the liabilities assumed, the question will be as to who can or should make such a decision in such a short order based on what information relating to legal risks, derivatives valuations, and similar.

No Swiss Candidate

The knight in shining armor certainly won't be a Swiss bank next time. The remaining domestic players are not even close to being large enough to take over a bank the size of a UBS. That changes a great deal.

According to a ranking of the world's largest banks, it would have to be a US, Chinese, or UK institution. In any future rescue scenario, Swiss authorities will have to negotiate with a geopolitical superpower. In that kind of political David and Goliath situation, it means that important decisions for Switzerland as a country will – factually – be made abroad.

US Supervisors

The likely rescuer of a foundering UBS is a US investment bank given the increasing importance of the Swiss institution's American business. That means that talks would be held with the US Securities and Exchange Commission (SEC), the Federal Reserve (FED), and the Department of the Treasury.

Swiss authorities, not just UBS, need to have a realistic emergency plan for that. International discussions about the restructuring measures for such an eventuality have to be discussed at length – again.

Swiss Involvement

The future supervisory regime has to make sure that factual control over decisions related to its domestic business stays in the hands of Swiss authorities. This has to happen at the same time that time-intensive talks are taking place with superpowers.

The recent experience between Switzerland and US authorities is not a good omen. The issue of Holocaust-era deposits, UBS's cross-border settlement in 2009, and the collapse of Wegelin, a private bank, are clear examples of that.

No Too-Big-to-Fail

Given that Swiss authorities didn't use the too-big-to-fail framework with Credit Suisse, employing it during the next crisis will raise the same question.

The question of credibility in employing a Swiss rules framework will be very important during a crisis. Restoring that kind of legal security is a decisive question for one of the world's leading financial hubs. Any signal that of employing an own set of rules would be a disastrous sign in any talks.

Relatively Small

Credit Suisse was really one of the smallest system-relevant banks in the world. Still, the stress and the panic surrounding its collapse was extreme. What would the situation be if the same happened to the much larger UBS? The Credit Suisse crisis might seem like child's play in comparison.

The psychology of markets and clients in a banking crisis is an element that both Credit Suisse and technocratic regulators completely underestimated. Hundreds of pages of bank regulation, and the intellectual brain power behind it, were trashed in the space of a few hours because they were useless in reality.

The Psychological Question

Future rules have to pay much more heed to psychological factors - or they will also end up as a useless paper tiger during the next crisis.

There should never be a collapse of a major Swiss bank again. But a great deal can happen between today and never. The effectiveness of any new Swiss banking regulation shouldn't be measured by whether it would have prevented Credit Suisse from collapsing. It needs to look forward at how a future major bank can be rescued, one that is more expensive, more complex, and riskier – and where the decisions are more likely to be made in Washington than they are in Bern.

Teodoro D. Cocca has been Professor of Asset and Wealth Management at Johannes Kepler University Linz since 2006. Before that, he worked for several years at Citibank in both investment and private banking, conducting research at the Stern School of Business in New York, while teaching at the Swiss Banking Institute in Zurich. In addition, Cocca, a Swiss citizen with Italian roots, is an associate professor of private banking at the Swiss Finance Institute (SFI) in Zurich, acting as a consultant for financial companies and public authorities in Switzerland and abroad.