The Swiss regulator’s new head appears prepared to consign its principles-based regime to the dustbin of history. Will he be able to?
It took time but a year on from Credit Suisse’s collapse and its government-prompted rescue by UBS, we finally seem to be getting some fresh thinking from the powers that be.
The Swiss Financial Market Supervisory Authority’s (Finma) new director, Stefan Walter, who finews.asia profiled extensively in January, seemed to be turning the page on the country’s principles-based regime in a wide-ranging speech (German only) at the Bundesbank Symposium on Wednesday.
Under the Hood
He had hinted at it in a first speech in May although the one Wednesday had more detail and it smacks of a pre-emptive shot across the bow in the direction of skeptical domestic naysayers.
Walter maintained in the speech that the root cause of large-scale banking issues almost always lay in a weak risk culture, poor governance, and faulty business models.
Double-Pronged Incentives
«That is why supervisors have to be able to act early in those areas, or before those weaknesses manifest as losses, weaker capitalization and liquidity,» he maintained.
He suggested an array of so-called red flags, or warning indicators, based on a structured methodology to keep things in check. This might include competence reviews of a bank’s board of directors and a system of balance and checks for overly dominant CEOs. When it comes to compensation, he suggests double-pronged incentives that include growth, conduct, and risk controls as objectives that can’t be breached or bypassed by rainmakers.
Forced to Respond
By now it is well-known that Credit Suisse, once Switzerland’s second-largest bank, to all intents and purposes ignored Finma at critical junctures.
He wants to put that practice to rest by requiring banks to respond and provide information whether they want to or not – while also preventing them from ignoring audit findings or not doing anything to mitigate them.
No Growth Without Control
Overall, he intends to prevent banking cultures where growth comes first, with frameworks and controls being a distant second. Importantly, Walter wants to limit overt concentrations of risk-taking and stricter enforcement processes. According to him, the more that red flags are raised, the more supervisors will have to act.
But he also doesn’t shy away from punitive action, asking for strict limits on growth for badly led and controlled institutions, better stress tests, and fines for those who don’t comply.
Far Cry
To wit, this is a far cry from Finma’s current practice, as stated on the regulator’s website whereby a «principles-based» form of supervision requires only that it «regulates where necessary» and only when this is «expressly provided for by legislation».
Getting from here to there is going to take a great deal of work, not to mention legislative change, something that is likely to become a fraught and difficult political discussion in the years ahead.
Stiff Criticism
Still, this kind of fresh thinking is a sea change for Swiss regulation and, with a little imagination, you can almost picture the piles of new circulars, regulations, guidelines, and ordinances wafting across the financial hub in the years ahead.
Given that, he is also trying to stay abreast of future critics who believe that early intervention by regulators poses an excessive infringement of entrepreneurial freedom, particularly as supervisors are not responsible for governance, culture, and business models.
Few Options
«I would say the following here. It is not the role of supervision to lead a bank or determine its business model. The institution is responsible for that. But regulation has to recognize when a poor risk culture, inadequate governance or faulty business model pose increasing dangers to the institution,» he said.
In his earlier speech in May, he suggested that the Federal Reserve, the European Central Bank, the Bank of England, and even smaller jurisdictions such as Singapore, all had the tools and the ability to intervene early with supervisory measures when banks were still operating normally. «The Finma does not have many of those options,» he maintained then.
Under the Hood
Still, everyone in Switzerland is ardently focused on the combined UBS-CS’s future capital requirements, with many seeing it as some kind of holy grail of future Swiss banking bliss and stability.
Although it is also something he also touched on, many will potentially overlook the significance of this change in direction in regulation and supervision, inasmuch that the detail needed to get it done will largely occur, almost surreptitiously, by way of large-scale fixes that mostly happen under the hood, far from the public eye.
Join the Class
In his last sentence, he indicates an intent to develop Swiss regulation and supervision to be best in class. That is a laudable vision to have but it is still some way off in the future. At this point, what Finma needs to do is join the class in the first place.
