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How Swiss Authorities Mishandled Their Oversight Of Credit Suisse

How Swiss Authorities Mishandled Their Oversight Of Credit Suisse
The governor of the Swiss central bank intended to nationalise Credit Suisse and infuse 50 billion Swiss francs ($57.6 billion) into the firm about six months before it was sold to competitor UBS in a weekend rescue, according to reports quoting people with firsthand knowledge of the situation.
Massive deposit withdrawals from Credit Suisse occurred in October 2022 as a result of a string of scandals and botched restructuring attempts under various management teams. According to two of the sources, Thomas Jordan, the chairman of the Swiss National Bank, and other officials thought that the lender was facing an existential crisis that would require more than a capital infusion.
According to one individual with knowledge of the situation, nationalising the bank would have given regulators the opportunity to appoint new managers who could instill trust.
However, the sources stated that Credit Suisse's management, the finance ministry, and Switzerland's financial watchdog, FINMA, were against the plan. Unable to reach a consensus, the three sources said Swiss officials concluded that letting the corporation go its own way was the wisest course of action.
A number of issues, notably how much deference to give management teams in bank regulations, have caused conflict among Swiss regulators in recent years. Many aspects of the story are disclosed here for the first time.
According to interviews with over two dozen individuals, including executives and advisors from the industry, current and former officials, and others, these distinctions made it more difficult for Swiss regulators to effectively supervise Credit Suisse, which went on to become the first systemically important bank to fail since the 2008 financial crisis.
Credit Suisse skidded from one scandal to the next under the negligent supervision. All told, this meant that when the bank effectively went bankrupt in March as a result of a deposit run, the Swiss authorities were caught off guard and were left with only one workable choice, as revealed by the interviews: to sell the bank to rival UBS, backed by guarantees of over 200 billion francs that the state had provided.
The failure of Credit Suisse undermined the notion that international banks are now safer and damaged Switzerland's standing as a significant hub of global banking and a refuge.
With UBS now overseeing an even larger bank—it has a balance sheet of over $1.6 trillion, nearly twice the size of the Swiss economy—after purchasing Credit Suisse, a better understanding of what transpired will help enhance global financial regulation and keep Swiss authorities accountable.
"Many people here feel that it would've been much better if policymakers had acted much earlier," said Stefan Gerlach, chief economist of Switzerland's EFG Bank and former deputy governor of Ireland's central bank. "One element common to many financial crashes is that politicians are often too quick to accept the views of the largest banks."
According to a spokesman for the finance ministry, while temporary state ownership of Credit Suisse had been considered, it was not "the best available solution." According to him, the administration is currently examining bank regulations.
The representative did not provide a timeline for their consideration of nationalisation or more details.
According to a FINMA representative, Credit Suisse was required to take proactive measures to prepare for a crisis as early as the summer of 2022, indicating that the regulator was aware of the possibility of a "destabilisation of the bank." One of the measures was to request that Credit Suisse get ready to sell business segments, and then the bank as a whole.
The spokeswoman continued, "FINMA had options other than selling to UBS, like a resolution or nationalisation of the bank."
On Tuesday, the regulator will make public a report detailing how it handled the bank's problem.
There were no comments from spokespeople for the SNB and UBS.
Regulators were able to avert a messy collapse and broader effects on global financial stability thanks to the hastily arranged sale to UBS.
When UBS was bailed out in 2008, Daniel Zuberbuehler, Switzerland's head regulator, stated: "It's difficult to decide when is the right moment to intervene."
"Had Credit Suisse collapsed, it would have been a nuclear bomb on the economy," Zuberbuehler said. "Nonetheless, it is no success story that we have lost one of our two big banks."
Early Concerns
According to one of the people with firsthand knowledge of the situation, SNB's Jordan began to worry about Credit Suisse in February 2020, when Tidjane Thiam resigned as CEO following revelations that the bank had spied on some of its senior executives.
However, the insider claimed that authorities did not show much public worry since they worded any warnings concerning the bank "very carefully" to prevent spreading panic.
In the meantime, things at the bank continued to become worse.
Four people with intimate knowledge of the situation said that Credit Suisse found it difficult to meet its funding needs in 2020 during the liquidity crunch brought on by the COVID-19 epidemic.
The crisis, which has not been publicised before, arose from counterparties' demands for additional security for funding, which Credit Suisse struggled to supply. Two of the sources claimed that the bank was finding it difficult to handle big clients using their credit lines.
Credit Suisse stated in its 2020 annual report that while net cash outflows had increased, weakening the bank's liquidity buffers, the bank nonetheless maintained "strong liquidity and funding." The public was not aware of the specifics of what transpired.
According to three of the sources, FINMA made Credit Suisse maintain larger liquidity buffers as a result of the occurrences. By making this manoeuvre, the bank would be able to buy regulators additional time in October 2022.
It was not possible to determine by how much the buffers were increased.
As Credit Suisse faced a slew of scandals that exposed the bank's inadequate risk management procedures, its cash reserves were also put under strain. The Swiss lender experienced losses from transactions with a lender named Greensill at the beginning of 2021 due to accusations of fraud. It lost billions of dollars when the hedge fund Archegos failed a few weeks later.
According to a person with firsthand knowledge of the situation, both events resulted in withdrawals from the bank, prompting Swiss regulators to ratchet up surveillance. One measure taken was requesting daily liquidity reports that demonstrate how much cash the bank could easily access.
Inadequate Power
As one of the least powerful financial regulators in the West, FINMA lacks several fundamental instruments, like the capacity to punish banks—a power that it attempted in vain to modify starting in 2021 through lobbying the government.
According to a former Swiss official, FINMA went to the Swiss finance minister that year and argued for more authority as well as the establishment of a financial liquidity backstop similar to what the US and some other jurisdictions have. In an emergency, banks can access a financing facility known as a liquidity backstop, which enables the central bank to take on the role of lender of last resort.
According to the former official, FINMA believed that the liquidity backstop was essential and the last component required for any resolution plan to succeed. Global banks like Credit Suisse were forced to draft resolution plans, or "living wills," during the 2008 financial crisis so that regulators could wind them down without causing more serious systemic problems.
According to the former official, the ministry did not back FINMA at the time. Ueli Maurer, a member of the Swiss People's Party that supported banks, served as finance minister at the time.
Three people with firsthand knowledge of the regulator's activities and the opinions of the banks claim that under Maurer, the finance ministry had shifted its focus towards the banks, who were complaining that FINMA was too invasive.
According to these persons, banks pushed the government to impose restrictions on FINMA's then-CEO, Mark Branson, a former banker who was perceived by the industry as being overly strict.
There were no comments from Maurer, who retired in late 2022.
Maurer expressed optimism that Credit Suisse will be able to turn the corner in an interview with Swiss television in December 2022. "You just have to leave them alone for a year or two," he stated.
Early in 2021, retired professor Marlene Amstad became FINMA's chair. As soon as she joined, insiders saw her requests for information regarding bank supervision from FINMA officials as an attempt to shadow Branson, according to a former official.
Then, in order to further bolster her oversight over Branson's team, she requested to add more employees to the FINMA supervisory board. The former official claimed that after resistance from FINMA authorities, this executive staff role was ultimately not created.
Shortly after, Branson departed to join German oversight organisation Bafin. His exit signalled a change in direction that resulted in the termination of important bank supervisors and the liquidation of financially distressed lenders.
A spokesman for FINMA stated that Amstad reorganised the supervisory board's activities to concentrate on fewer subjects and enhance their comprehension of those, rather than interfering with supervisory duties.
According to the spokesman, the board itself had made the decision not to explore the notion of hiring more employees, and the agency's employment levels had not changed much in years.
According to two of the people, authorities' warning signs went up in October of last year after a journalist's social media post claiming that a "major international investment bank is on the brink" sparked a rush on Credit Suisse.
In the weeks that followed, over 100 billion francs were taken out by customers.
According to one of the reports, FINMA formed a crisis committee. According to one source, the regulator also gave Credit Suisse instructions to set up backup plans, such as data rooms, in case the company was to be sold partially or entirely.
The regulator had requested that the bank get ready for a sale, the FINMA representative confirmed.
However, FINMA disagreed with Jordan's proposal to nationalise the bank. According to one of the individuals, FINMA believed that since its issues were considerably more systemic, changing the top tier of management would not be beneficial.
According to the source, it would be simpler for UBS, which has a stronger ability to reorganise managerial ranks than the government.
The bank was also subject to limitations imposed by FINMA. Three of the sources claimed that Credit Suisse's reported cash amounts were within most regulatory standards, which weakened the regulators' power to force the bank's hand, partly because of the buffers put in place during the pandemic.
Nevertheless, Credit Suisse reported in October 2022 that customers had withdrew money at a rate that caused the institution to go above some legal standards regarding liquidity. Reuters was unable to obtain further information regarding the breaches.
According to a bank executive, Credit Suisse executives tried to continue on their own without assistance. Executives cautioned authorities of the bad'signal' such a move would send, fearing that word of an emergency funding would escape and cause disaster, according to one of the sources, a former Swiss official.
According to three of the sources, the bank prepared a number of press releases to announce a potential central bank facility, showing how close it was, but in the end, the bank declined.
Later that year, Credit Suisse sold shares to investors, raising an additional $4.2 billion. Subsequently, the withdrawals became less severe, relieving the acute stress.
However, the quiet was fleeting.
Depositors concerned about the security of their money began taking billions out of Credit Suisse once more in March as a regional banking crisis originating in the United States extended to Europe.
Credit Suisse made an effort to strengthen its finances. It now sought assistance from regulators. An official at Credit Suisse who has firsthand knowledge of the situation stated that it determined that a lifeline of 50 billion francs from the SNB would be sufficient.
In a desperate attempt to obtain foreign exchange, the SNB turned to the U.S. Federal Reserve, utilising a little-known funding source to quietly take the maximum amount permitted—roughly $60 billion—without announcing its actions, according to two people with knowledge of the situation.
There were no comments from the Fed.
Ursula Schneider Schüttel, the head of a little-known group of legislators in charge of emergency taxpayer cash, received a call as the SNB scrambled to fill funding holes in a frantic attempt to keep Credit Suisse afloat.
Credit Suisse urgently needed money.
In a call on Thursday evening, March 16, Schneider Schüttel was informed by Karin Keller-Sutter, the recently appointed Swiss finance minister, that they would have to approve the amount of funds required to save Credit Suisse. According to a person with knowledge of the situation, she informed the Social Democratic politician that the nation's financial and economic stability hinged on it.
A few months earlier, in October, Schneider Schüttel had not been asked for assistance; now, however, they needed to be prepared by that weekend.
"It was an empty cheque," the insider stated. "We were told to get ready to approve the funds, but we didn't know how much."
That Sunday, UBS and the Swiss government reached an agreement for UBS to purchase Credit Suisse for 3 billion francs in stock.
"This would never happen again after we rescued UBS," Zuberbuehler declared. "It has happened again."

Christopher J. Mitchell

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