How Oversight Of Credit Suisse By Swiss Authorities Went Awry, A Struggle Between Regulatory Challenges And Financial Independence Of Financial Institutions

Approximately six months prior to Credit Suisse’s acquisition by UBS in a weekend bailout, the head of the Swiss central bank considered injecting 50 billion Swiss francs ($57.6 billion) into the troubled bank and nationalizing it, as disclosed by sources even as fresh details about the fiasco emerge.

Facing significant deposit outflows in October 2022 amid scandals and failed restructuring attempts, Credit Suisse was being perceived to be in an existential crisis. 

Swiss National Bank Chairman Thomas Jordan and others proposed nationalization to instate new managers and restore confidence, but this idea faced opposition from FINMA, the finance ministry, and Credit Suisse’s management.

The disagreement among Swiss authorities, revealed for the first time, highlights broader tensions within over how to regulate the country’s banks and the level of deference given to management teams. 

However, recent interviews with over two dozen individuals, including current and former officials, industry executives, and advisers, shed light on the internal differences that hampered effective oversight of Credit Suisse. 

The bank’s subsequent collapse in March, triggered by a run on deposits, caught Swiss authorities unprepared, leading to its sale to UBS with state-funded guarantees exceeding 200 billion francs.

Credit Suisse’s downfall tarnished Switzerland’s financial reputation and challenged the belief in the enhanced safety of global banks. 

Hence, a comprehensive understanding of the events could aid in strengthening global financial regulation and holding Swiss regulators accountable, as the repercussions are significant, with UBS now overseeing an even larger bank after acquiring Credit Suisse, valued at over $1.6 trillion.

Stefan Gerlach, chief economist of Switzerland’s EFG Bank, emphasized the sentiment that earlier intervention by policymakers would have been preferable. 

A finance ministry spokesperson acknowledged that they were considering temporary public ownership but deemed it, not the optimal solution, indicating a current review of bank regulation without specifying when the nationalization idea was contemplated.

However, FINMA defended its actions, stating it demanded concrete steps from Credit Suisse in 2022 to address the risk of destabilization, including preparing for the sale of business units and, later, the entire bank. 

Despite alternative options like resolution or nationalization, FINMA favoured letting Credit Suisse navigate its own course, and now the regulator plans to release a report outlining its crisis management.

The sale to UBS, arranged hastily to avert a messy collapse, allowed regulators to sidestep broader implications for global financial stability. 

Daniel Zuberbuehler, Switzerland’s chief regulator during UBS’s 2008 bailout, acknowledged the difficulty in determining the right moment for intervention and expressed concerns about losing one of the country’s major banks.

The Signs

Early concerns about Credit Suisse surfaced as early as February 2020, when Tidjane Thiam’s departure as CEO revealed the bank’s espionage on top executives; regulators quietly expressed worry, but public scrutiny was limited. 

In 2020, amid the COVID-19 pandemic, Credit Suisse struggled to meet funding needs, leading to increased net cash outflows, and FINMA responded by requiring higher liquidity buffers to buy time.

Credit Suisse’s challenges persisted with scandals, including losses from dealings with Greensill and the collapse of hedge fund Archegos; these incidents triggered increased supervision by Swiss regulators, demanding daily liquidity reports. 

FINMA’s limited powers, lacking the ability to fine banks, became apparent, as the regulator sought additional tools, including a liquidity backstop, which was not supported by the finance ministry.

The Sidestepping

The finance ministry, under Ueli Maurer, aligned with banks’ complaints about FINMA’s intrusiveness. 

Banks lobbied against then-CEO Mark Branson, perceived as too tough, leading to a shakeup with Branson’s departure and the winding up of troubled lenders.

Red flags for regulators intensified in October when a social media post triggered a run on Credit Suisse, resulting in over 100 billion francs in customer withdrawals. 

FINMA set up a crisis group and instructed the bank to prepare for a sale; despite SNB Chairman Jordan’s suggestion of nationalization, FINMA opposed it, favouring UBS to shake up management effectively.

Credit Suisse’s struggles continued, prompting a plea for a 50 billion franc lifeline from the SNB in March. 

The SNB, seeking foreign currencies from the U.S. Federal Reserve, withdrew about $60 billion; as funding holes emerged, the finance minister authorized funds to save Credit Suisse. 

UBS ultimately acquired Credit Suisse for 3 billion francs, emphasizing the recurrence of a crisis despite past assurances.

The Viewpoint

From a financial and banking perspective, Credit Suisse’s unravelling warns about the delicate balance between regulatory intervention and the autonomy of financial institutions. 

The proposal to inject substantial funds and nationalize the bank, while a drastic measure, reflected the recognition of an existential crisis that traditional interventions might not remedy.

However, the resistance from both within Credit Suisse’s leadership and regulatory circles raises questions about regulatory oversight and the independence of financial entities. 

The hesitation to embrace nationalization may stem from concerns about disrupting market dynamics and the potential ripple effects on investor confidence. 

In this light, the events present the perennial challenge of finding the right equilibrium between regulatory control and the inherent risk-taking nature of banking.

While critics argue that the Swiss regulatory body, FINMA, lacked the necessary tools, it’s essential to acknowledge the unique landscape of the financial sector and prompts a reevaluation of regulatory frameworks, emphasizing the need for agility and robust risk management within banks themselves.

The complex series of events showcases the existing challenges in Swiss regulatory oversight and the need for comprehensive reforms to prevent similar crises in the future.

The Last Bit, Credit Suisse’s collapse, from early warning signs to the frenzied attempt at rescue, unveils the complicated dynamics between financial institutions and their regulators. 

The reluctance to act decisively allowed the bank’s troubles to fester, ultimately leading to a significant blow to Switzerland’s financial reputation. 

As regulators now grapple with the aftermath, there’s a pressing need for comprehensive reforms, empowering regulatory bodies with the tools necessary to avert future crises. 

The lessons learned from Credit Suisse’s downfall should serve as a catalyst for a more resilient and adaptive financial regulatory framework in Switzerland and other countries.