Swiss regulators voiced concerns in 2019 about ability to save Credit Suisse and UBS

Swiss authorities had concluded in 2019 that the country’s two biggest banks, UBS and Credit Suisse, could no longer be saved in the event of a liquidity crisis using emergency measures put in place after the 2008 financial crash.

“The special liquidity requirements for SIBs [systemically important banks] embedded in the Liquidity Ordinance [do] not safeguard the higher resilience of SIBs required by the Banking Act,” a government working group, comprising members of the Ministry of Finance, the Swiss National Bank (SNB) and the market regulator Finma, decided nearly four years ago.

There was also no possibility of the orderly wind-down of one of the two big banks, the group added, without far greater government support than had previously been
anticipated.

A summary of the group’s work was disclosed in Finma’s annual report, released on Tuesday, and highlights the extent to which Credit Suisse’s near-collapse raises serious questions for regulators around the world.

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Switzerland was regarded as having applied a particularly stringent version of international regulatory standards on the handling of banking crises put in place after the financial crash 15 years ago.

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The revelation will add fuel to an escalating political crisis in Bern, with parliamentarians poised to convene for a special emergency session next month to scrutinise the government-organised rescue of Credit Suisse by UBS just over a week ago.

Public anger over the deal is mounting, with a majority of Swiss in favour of legislation to split up the new bank and claw back bankers’ bonuses.

On Monday night, both the upper and lower houses of the Federal Assembly of Switzerland announced they would be triggering legislation for the creation of a special parliamentary commission of inquiry, with wide-ranging powers of subpoena, to investigate the sudden merger of the two banks, which will combine to become the fourth-largest lender in the world.

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Several prominent politicians have asked why Swiss authorities did not take earlier measures to safeguard Credit Suisse – an issue that is likely to be a key focus of the commission.

Just days before the bank’s rescue, Finma and the SNB had publicly reassured investors that the bank was stable and had plentiful liquidity at its disposal.

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Following the government working group’s 2019 conclusions on inadequate liquidity provisions, it took three years for the Federal Council – the Swiss executive – to amend its existing ordinances on emergency liquidity. The new measures, which were intended to address the working group’s concerns, came into effect last June.

They were still inadequate, however, as became rapidly clear in the months that followed.

Finma began to harbour serious concerns about Credit Suisse’s liquidity, even with the expanded liquidity laws in place, last October.

In an interview with the Neue Zürcher Zeitung newspaper on Saturday, Swiss finance minister Karin Keller-Sutter said clarification over the liquidity problems at the bank had been the first issue she had raised with civil servants when she took office in late December.

She recalled asking: “When will the point be reached at which the authorities have to intervene? At which point will Finma come to the conclusion that CS is no longer viable?” – Copyright The Financial Times Limited 2023