What good are the proposals for taming the new megabank?
With the takeover of CS by UBS, a new major bank is created in Switzerland. How it should be regulated is hotly debated. We have subjected the proposals to a reality check.
At the extraordinary session on CS rescue, there were many questions for Federal Councilor Karin Keller-Sutter: Roland Rino Büchel from SVP, Fabian Molina from SP and Thomas Matter, also SVP (from left).
Photo: Alessandro della Valle (Keystone)
Since the collapse of Credit Suisse, the future of the Swiss financial center has been the subject of heated debate. At the extraordinary session earlier this week, politicians submitted numerous proposals for regulating the future megabank. We show what to think of it.
More equity for systemically important banks
It sounds simple: banks back their business with more equity. In this way, they can better absorb any losses, which means that they get into difficulties less quickly and do not have to be rescued by the state and taxpayers.
The topic of “capitalization of systemically important banks” is not new: Even after the financial crisis and the rescue of UBS by the state in 2008, politicians were demanding that banks have to hold more equity in the future. In the course of the “too big to fail” legislation, agreement was reached on somewhat stricter capital requirements.
Since 2013, banks have had to maintain a minimum equity ratio of 8 percent as part of the so-called Basel III capital regulations. This is risk-weighted: the higher the risk a bank takes, the more equity it needs.
For critics, this is far too little. After the rescue of Credit Suisse, Central President Gerhard Pfister demanded that banks have to have an equity ratio of 20 percent in the future. One doesn’t go that far Motion submitted by SP 2021. She wants systemically important banks that operate globally – UBS in Switzerland and up to now CS – to have an equity ratio of at least 15 percent. Regardless of the risks a bank takes.
It is unclear where the additional capital will come from. The economist Klaus Wellershoff assumes in the “Handelzeitung” with an assumed equity ratio of 20 percent for systemically important banks that the canton of Zurich as the owner would have to pay in 25 billion at the Zürcher Kantonalbank. At Postfinance, the federal government would have to inject a good 15 billion, and at Raiffeisen there is a lack of around 40 billion, which the members of the cooperative would have to shell out.
Tougher capital regulations are no solution to the risks of the new megabank.
Doesn’t more equity mean more expensive loans and a possible bottleneck in lending? Sergio Ermotti, the new head of UBS, used this argument in the past to resist tougher equity rules. Banks would have to pay more for their refinancing. As a result, loans become more expensive for customers.
However, Urs Birchler vehemently denies that mortgage interest rates necessarily rise with higher equity. “How much a bank has to pay for its financing does not depend on how much equity and how much borrowed funds it has,” says the economist, who used to be a member of the Board of Directors of the National Bank. That depends on the risks that you have on your balance sheet, and these do not change with more equity. If a bank is considered systemically important, it can also refinance itself more cheaply, since this circumstance acts like an implicit state guarantee.
It is questionable whether the collapse of Credit Suisse could have been averted with more equity. Their customers have lost confidence in the bank and have withdrawn massive amounts of money. Stricter capital regulations alone will not reduce the risks of the new megabank.
Could a separate banking system solve the problems?
This proposal is basically about separating the investment bank from asset management and business with private customers at a bank. The idea behind this is that risks in a separate banking system are limited to certain parts of the financial system. However, this does not solve the problem. “That’s regulation with a label,” says Jürg Müller, economist at the think tank Avenir Suisse, who deals with the future of the financial system in the book “The End of Banks”.
Risks lurk not only in investment banks. The Silicon Valley Bank in California had to file for bankruptcy in March because it could not handle the risks posed by rising interest rates. And at Credit Suisse, it wasn’t just this business unit that proved prone to scandals. Greensill happened in asset management, the affair involving Georgian ex-Prime Minister Bidzina Ivanishvili in asset management.
What if there were no more Swiss “too big to fail” banks?
One of the most radical proposals for banking regulation comes from the SVP. So that Switzerland no longer has to save systemically important banks, the party wants to ensure that there are no longer any banks that are “too big to fail”. Party leader Marco Chiesa submitted a proposal for a revision of the law at the extraordinary session.
It is unclear exactly how the goal is to be achieved. Only that “too big to fail” banks should be obliged to sell or shut down certain parts of the business. And in the event that the SVP fails in parliament, former Federal Councilor Christoph Blocher has announced a corresponding popular initiative. (Read more about his plans here.)
The SVP’s proposal would de facto mean the end of the big Swiss banks. But even small financial institutions could create major risks, Müller points out. For example, when there is a real estate crisis. “Here, too, there are regulatory problems.”
And what if CS Switzerland becomes independent after all?
The carve-out of the Swiss business of CS is currently also being hotly debated. In addition to continuing to operate independently, UBS could take the business unit public. This idea has also circulated before: In 2017, former CS boss Tidjane Thiam wanted an IPO with part of CS Switzerland.
There are similar demands in politics. Shortly after the takeover by UBS, Thierry Burkart, the President of the FDP, called for the spin-off of CS Switzerland. In the meantime, the party only calls for secession after the rescue has been completed, in a second phase.
An independent CS Switzerland would have advantages from a competition law perspective.
Photo: Dominique Meienberg
The Greens are more specific. In the extraordinary session, you submitted a motion calling for the separation of CS Switzerland and its further development into a Swiss climate bank.
An independent CS Switzerland would have the advantage that UBS could quickly dispel competition law concerns about the new megabank. Ultimately, the ball is in UBS’s hands in this regard. The Financial Market Authority has already approved the takeover of CS without imposing conditions on UBS for the purchase. She only obtains an opinion from the Competition Commission. “From a competitive perspective, it would be good if UBS did separate Credit Suisse’s Swiss business after all,” says Müller.
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