PUK wants to learn lessons from the Credit Suisse bailout
Published: Friday, Dec 20th 2024, 11:50
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Lessons should be learned from the Credit Suisse crisis and the emergency merger of the major bank with UBS forced by the authorities. This is the view of the parliamentary commission of inquiry. It presented its 500-page report on the emergency merger and its history to the public on Friday.
WHAT DID THE PUK INVESTIGATE?
The Parliamentary Investigation Committee (PIC) investigated the last ten years or so of Credit Suisse (CS), i.e. the period from 2015 until the completion of the forced merger with UBS in June 2023. As a body of parliamentary oversight, the PIC was tasked with scrutinizing the management of the federal authorities. The management of CS was not part of its remit. The PUK was set up in June 2023.
WHY THE ACCUSATION OF MISMANAGEMENT?
According to the PUK, it was the "years of mismanagement" by the CS management and various scandals (including aiding and abetting tax evasion, money laundering and the tipping-off affair) in the bank's management which, in combination with poor business results and high variable remuneration for top management, led to a loss of confidence in the markets. By the summer of 2022 at the latest, CS was in an increasingly precarious situation until it was on the verge of liquidation in mid-March 2023. In the opinion of the PUK, the near-collapse of CS and the resulting emergency merger with UBS was due to a "self-inflicted" crisis at the bank.
HOW DID CS MANAGEMENT BEHAVE DURING THE CRISIS?
Not so good. The PUK speaks of a "fundamental reluctance" towards the supervisory activities of the Financial Market Authority (FINMA). Despite numerous interventions and, in particular, various enforcement proceedings, CS had made "no sustainable progress" with regard to compliance with the relevant provisions. Even in late autumn 2022, when CS's problems could no longer be ignored, the bank's management "sometimes vehemently" resisted Finma's instructions.
HOW HAVE THE BONUSES DEVELOPED?
According to the PUK's calculations, the performance bonuses paid to CS management amounted to a total of CHF 39.8 billion between 2010 and 2022. At the same time, the bank reported a total loss of CHF 33.7 billion in these years.
WHAT CAPITAL RELIEF DID CS RECEIVE?
From 2017, FINMA granted CS extensive relief with regard to capital requirements in the form of a so-called "regulatory filter". According to the PUK, this relief was a prerequisite for CS agreeing to the introduction of new accounting regulations in relation to the parent company's participations. The "regulatory filter" made it possible to "neutralize" the change in regulations and it became part of the regulatory capital.
DID CS HAVE ENOUGH EQUITY?
In the PUK's opinion, the "regulatory filter" masked the real situation of the parent company. Without this "regulatory filter", the reported equity ratio had already fallen to the regulatory minimum at the end of 2019 and was already well below the regulatory minimum in the third quarter of 2022. Due to the relief, the bank was not forced to strengthen its capital situation when this would have been easier under certain circumstances.
HOW DOES THE PUK ASSESS THE TBTF LEGISLATION?
The PUK criticizes the "too big to fail" legislation (TBTF) for the Federal Council and Parliament being too accommodating to the concerns of banking institutions when implementing international standards such as Basel III, particularly in the period from 2015. For example, the Federal Council had extended transitional periods on various occasions or delayed the adoption of international standards. At the same time, in the opinion of the PUK, it also failed to take an "outside view", which led to an incomplete comparison with international standards.
SHOULD THE FINMA HAVE CRACKED DOWN HARDER?
The PUK notes that FINMA regularly communicated its expectations to CS in writing. It had to repeat certain demands for years. However, in the opinion of the commission, Finma made too little use of the "formal ruling" instrument. According to the PUK, Finma "intensively exercised" its supervisory activities. However, despite numerous enforcement proceedings and corresponding warnings from FINMA, CS had "lined up scandal after scandal". Accordingly, the PUK "regrets" the partial lack of effectiveness of its supervisory activities. It is also particularly critical of the capital relief granted by FINMA.
DO THE AUTHORITIES HAVE ENOUGH TOOLS?
According to the PUK, when the CS crisis became more acute in the fall of 2022 and then in the spring of 2023, the Swiss authorities lacked important instruments that other jurisdictions had already had in place for several years. In particular, the Federal Council was too hesitant to introduce a state liquidity backstop (PLB) for systemically important banks. The PLB had to be introduced by emergency law during the CS crisis.
HOW DOES THE PUK ASSESS THE ROLE OF THE SNB?
For the PUK, the SNB was too cautious in exercising its role as lender of last resort. Between October and December 2022, CS refrained three times from obtaining emergency liquidity assistance (ELA) from the SNB despite the high cash withdrawals. However, the SNB cannot legally oblige the banks to take precautions with regard to ELA, the PUK concedes. The SNB is therefore dependent on the cooperation of the bank.
HAS SNB PROVIDED SUFFICIENT INFORMATION?
According to the PUK, neither the SNB nor FINMA considered it appropriate to inform the political authorities after an exchange in May 2022 - i.e. just under a year before the emergency merger. Given the scope of the crisis at a major bank, this shows a lack of sensitivity. The PUK also criticized the non-formalized "non-meetings" of the then Finance Minister Ueli Maurer and SNB Chairman Thomas Jordan.
WHAT IS MEANT BY NON-MEETINGS?
Finance Minister Ueli Maurer, who resigned at the end of 2022, and former SNB Chairman Thomas Jordan initiated non-formalized non-meetings, which according to the PUK was a parallel format to the authorities' existing crisis organization. From October 16 to December 29, 2022, five meetings were held with the Chairman of the Board of Directors of CS and one with the Chairman of the Board of Directors of UBS. The fact that FINMA was not always represented was explained by the fact that this made it possible to hold discussions that were not influenced by the strained supervisory relationship between FINMA and CS. Such meetings were permissible and no binding decisions were made, writes the PUK. However, it questions whether they were appropriate in terms of passing on information to the crisis bodies.
WHAT ARE THE ACCUSATIONS AGAINST UELI MAURER?
Finance Minister Ueli Maurer, who resigned at the end of 2022, only informed the full Federal Council verbally and consistently refrained from providing written documents. This is incomprehensible to the PUK. Maurer justified his approach to the PUK with a lack of trust with regard to indiscretions. He shared very little information with the entire Federal Council. In the opinion of the PUK, he therefore did not fully comply with his statutory duty to provide information. The PUK also wonders why the six other members of the government did not make enquiries. Under Karin Keller-Sutter, information in the government improved from 2023.
WHAT HAPPENED AFTER MAURER'S RESIGNATION?
In the eyes of the PUK, the handover of office from Ueli Maurer to his successor Karin Keller-Sutter did not function optimally. When the files were handed over on December 19, 2022, it was clear that the CS dossier was a central dossier. Nevertheless, Maurer had not given Keller-Sutter any written information on CS. He apparently underestimated the importance of timely preparation for his successor in a high-risk dossier, the PUK wrote in its report. The PUK speaks of an omission: the departmental handover did not function adequately in the CS dossier.
WHAT WERE THE OPTIONS FOR OVERCOMING THE CS CRISIS?
The PUK welcomes the fact that the authorities had prepared several options in addition to the final takeover by competitor UBS. For example, a liquidation of Credit Suisse in accordance with TBTF rules had also been prepared. Another option was temporary nationalization ("temporary public ownership"). The solution chosen for the CS takeover was "appropriate" given the circumstances.
DOES THE PUK SEE POTENTIAL FOR IMPROVEMENT WITH THE AUTHORITIES?
In the eyes of the PUK, the cooperation between the authorities did not function optimally, nor did the involvement of the entire Federal Council in the management of the CS crisis. It calls for improvements in the exchange of information, risk management and early crisis detection. Future regulations must take into account the fact that UBS is the only globally systemically important bank in Switzerland.
WHO DID THE PUK LISTEN TO?
At 45 meetings, the PUK questioned 79 people in writing or orally, including all current and several former members of the Federal Council. Former CS CEOs Tidjane Thiam, Thomas Gottstein and Ulrich Körner attended the hearings, as did former Board Chairmen Urs Rohner, Antonio Horta-Osorio and Axel Lehmann. UBS CEO Sergio Ermotti and Chairman of the Board of Directors Colm Kelleher were among those invited by the PUK. Representatives of the Financial Market Supervisory Authority Finma, the Swiss Federal Finance Administration, the State Secretariat for International Financial Matters, the Swiss National Bank and the Audit Oversight Authority as well as the State Secretariat for Economic Affairs and the Federal Office of Justice were also heard. The PUK also requested documents from the authorities.
WHAT HAPPENS TO THE PUK REPORT?
The PUK makes twenty recommendations to the Federal Council, which has until the 2025 spring session to comment on the report. Parliament is due to discuss the report in March 2025. The PUK has also submitted ten parliamentary procedural requests, which the Federal Council must now respond to. The PUK is calling for lessons to be learned from the management of the CS crisis. This is the second time that the state has had to prevent the liquidation of a systemically important bank. With UBS, Switzerland now only has one globally systemically important bank. In terms of gross domestic product, this bank is many times larger than other financial institutions in the countries in which they are domiciled.
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