Letting out a secret on the state of Swiss bank governance
One of the Swiss Federal Government’s report’s main points is a surprising admission: Switzerland needs to catch up with the considerable upgrade of supervisory capabilities that emerged internationally after the disastrous global financial crash. That recognition led to a major upgrade in the governance of the global financial system.
The admission that these safeguards are not in place in Switzerland is commendable, albeit frightening, given that the country is recognized for its fiscal prudence (correct) and conservative nature (false when it comes to the governance of its banks). While most of the world has accepted that self-regulation by the banking sector is unwise and creates excessive risks, the report confirms that Switzerland had continued to trust self-regulation in banking and that its authorities did not realize the vulnerabilities of their governance regime, nor the importance of Swiss banking stability for the global financial system.
Neither the G20 nor the G7 insisted sufficiently strongly on Switzerland’s implementation, at a minimum, of the same requirements for a level playing field with the EU. The Credit Suisse failure exposed the latent risks that existed both in Switzerland and in the global system.
The report thus explains why the Credit Suisse crisis happened: because self-regulation was still largely at play. Given the density of its banking network, it is not far-fetched to think that Switzerland ought to be good at supervising its domestic banks. Practice makes perfect, particularly considering the country’s fiscal prudence. The Credit Suisse debacle confirms that another property of Swiss culture – conservatism – was, in fact, not at play in Swiss banking.
Most stakeholders will thus find little joy in reading the Swiss Federal Government report, which argues that Swiss banking supervision is full of holes and vulnerabilities that need to be plugged.
The report, with its proposals and recommendations, will bring Switzerland into line with the global banking order. Most, if not all, of the proposed changes were already in effect or were put into effect in the EU after the global financial crisis. The good news is that the Credit Suisse crisis finally spurred Swiss authorities to review a domestic banking governance system reliant on trust, and, through the federal government’s report, commits to a serious update. That is the positive side of the story. But the report also highlights that the Swiss authorities simply did not have the toolkit or the authority to intervene earlier in the governance of Credit Suisse, or that of any other bank.
Why did Switzerland ignore the lessons of the global financial crisis? The answer likely has roots in the decentralized and trusting Swiss culture and its accompanying aversion to delegating too much power to the federal center.
Another explanation might be that Switzerland always considered itself apart from a world it always saw as foreign and dangerous. Shielding itself in a position of political neutrality allows the country to benefit commercially and financially from that world, without compromising its self-righteous, protestant ethics.
It is also likely that the Swiss government, at the time, was more focused on transitioning away from its bank secrecy regulations and on containing the breach into that regulation brought by its 2013 Foreign Account Tax Compliance Act (FATCA) agreement with the US. The agreement means that Swiss financial institutions share account details directly with the US tax authority, provided they have the consent of the involved US clients.
Meanwhile, the Swiss government’s bailout of UBS in 2008 after the collapse of Lehman Brothers triggered a global financial meltdown and must have loomed large. Finally, the long and fateful excursion by UBS and Credit Suisse into the world of US investment banking may have contributed to this timidity, too, as it is hard to fathom how Swiss authorities could supervise US activities which they were distant from – and unfamiliar with.
Now, however, the Swiss Federal Government recommends exactly what we suggested they do in a media article published in late 2023: “In fact, FINMA could be seen as a leader in the supervisory world by proposing transparent standards, not dissimilar to those required by the EU’s Single Supervisory Mechanism (SSM) for bank boards of directors about the composition, credentials, and no-conflicts of board members, by not appointing anyone that has worked for UBS or CS on its own board. This would help to avoid either a “pro-UBS” bias or even a perception of such bias. It is a step that could be taken immediately. And shouldn’t Swiss authorities now be looking at rebranding their own dedicated agencies, immediately giving them greater enforcement powers and discretion to supervise deposit-taking institutions? “
The questions now are whether the government’s recommendations will be implemented, and when.