With the AGM now behind it, UBS faces the protracted work of fully integrating what was once Switzerland's second-largest bank. Beyond that, a possible straightjacket of stricter capital requirements. The question is really whether it – and the country – are still a good fit.
The chairman of UBS, Colm Kelleher, dropped hints of the group's current thinking at the annual general meeting with shareholders on Wednesday, the first since it bedded down the acquisition of Credit Suisse after a forced government-prompted rescue action a little more than a year ago.
In his opening speech, Kelleher maintained (finews.ch, German only) that Switzerland's largest bank does appear to have some concerns over certain discussions surrounding the additional capital proposals in the recently released Federal Council report on financial stability. According to him, requiring additional capital is not the right thing to do given there is no regulatory solution for the loss of trust and a faulty business model.
Still, you have to give the Swiss government some credit, as Kelleher himself did in many other respects. A year on from Credit Suisse’s collapse, the Federal Council does have an inkling of the tremendous challenges the banking industry, and the country, face in the decades ahead, But by the same token, as Kelleher seems to infer, they don’t seem to get to the very fundamental root of the problem.
Lip Service
In contrast to the rest of the world, they are still only paying lip service to more intense supervision. This is practically the exact opposite of what everyone else has been doing since the financial crisis. Yes, many jurisdictions have ratcheted up their common equity Tier 1, liquidity, and leverage ratios in sync with BIS requirements. But, unlike the Swiss, no one seems to be racing to be the very first.
Instead, most have turned regulation into a form of daily financial industry micromanagement with on-site inspections, periodic thematic audits, and daily, monthly, and annual breach and exception reporting. What they may get, and the domestic authorities may not, is that managing ratios and «Too Big to Fail» frameworks is mostly just a leadership thing. Unless you are in a specialized function such as finance or treasury, or one or two front-liners in one of the main businesses, it is practically meaningless to the rank and file, and practically all senior managers.
White-knuckle Rides
In contrast, modern-day supervisors interfere and irritate. They get into the workings of the engine room at each bank, where the real stuff gets done and the mistakes, and sometimes worse, are made. In Asia Pacific, as an example, a first wash of thematic financial crime audits in wealth management about a decade or so ago frequently turned due diligence and onboarding processes on their head at the same time that suitability-related ones upended sales and distribution frameworks.
Each of them required systematic fixes and major mitigation work that cost untold amounts of money and permanently changed how the banks in question functioned. Back then, the average on-site inspection took many relationship managers on fraught, white-knuckle rides, occasionally ending a career or two in the process even if they did not result in a publicly visible enforcement action or a fine.
Little Understanding
Moreover, supervision also makes itself felt by the knowledge that bankers, and leadership, are being watched, with the minutes and submissions of key governance forums subject to being, for lack of a better word, impounded at any time. That conflicts with conventional lore that the best companies do not manage anything by committee.
That might be true in some cases – but that is not banking reality. Many regulators and supervisors around the world require specific decision-making forums and clearly stated, pre-approved governance frameworks in their jurisdictions.
The Power of Fear
Understandably, this doesn’t mesh with the liberal economic foundations of Switzerland. But having higher capital requirements and regulatory ratios is also not the answer, something the government report itself indirectly answers, somewhat ironically, by noting the lack of forward-looking factors such as market cap, CDS swaps, profits, stress test results, governance, and the business model in its current regime.
In all that, the government still has a belief that supervision and regulation is an adjunct, a principles-based tool to be used to provide overarching guidance, only employed intensively when an institution is in its death throes. However, other places have painfully come to realize that the only good regulator is the one that conjures a deep-seated sense of fear in all banks and bankers – at the bottom and the top.
Not a Good Fit
UBS CEO Sergio Ermotti said at the same AGM that the bank plays an important role in Switzerland as a taxpayer and an employer. That, however, does not mean that the bank may someday find that the country is no longer the best fit for its needs. It might be premature now, but in the years ahead any internal UBS team working on group strategy worth its salt will have to take a good hard look at where it stands and weigh all future possibilities evenhandedly.
One of those options, after all real, theoretical, and, importantly, emotional, liabilities have been repaid, could well be moving its headquarters to a jurisdiction where it would be regulated in a group with other systematically relevant banks. There are also historical precedents in contemporary banking for taking a step, among them HSBC's shift from Hong Kong to London before the 1997 handover between the UK and China, not to mention the periodic strategic re-evaluation of that step every four or five years or so.
Moving Out
Besides, UBS, and Credit Suisse before it, have both borne the brunt and weight of tighter supervision and enforcement actions in major jurisdictions for years, and the combined entity might have something to gain from lesser capital and liquidity requirements while standardizing its overall control framework, particularly as it faces off against a likely bifurcated regulator in Finma.
Although it remains up in the air right now, it could well end being that specific teams and experts at the supervisor will handle a big bank population of exactly one, with the brunt of its workforce picking up the rest. It sounds unbalanced and clumsy, because it is, and it will probably end up being so.
Who Saves Who
If Credit Suisse, and UBS, hadn’t both required rescuing in a relatively short 15-year time span, you might have given the Swiss approach the benefit of the doubt. Given what we now know and the unique singularity that 2023 now represents for the domestic financial hub - erring on the side of the rest of the world doesn’t seem like such a bad idea.
After having lost two major banks in less than a generation, you would think that the key exponents of the Swiss government would have a better understanding of that without trying to again retread old ground. But we will have to wait until the dust settles and everything becomes crystal clear for all involved. Until that time, UBS faces an extremely lonely existence in its home country.
