On Tuesday, Switzerland’s financial regulator, the Swiss Financial Market Supervisory Authority (FINMA), called for greater legal powers and vowed to adapt its approach in the wake of the Credit Suisse collapse.
Credit Suisse was rescued back in March by its domestic rival UBS in a deal brokered by Swiss authorities after a series of well-publicized risk management failures and scandals that served to trigger a client and investor exodus and pushed the bank to near-insolvency.
FINMA said in a Tuesday report that it had achieved the aim of safeguarding Credit Suisse’s solvency and ensuring financial stability, with the help of the Swiss National Bank and Swiss government.
Governance issues
FINMA made it clear in its detailed report on the Credit Suisse crisis that the major bank’s downfall was primarily due to governance issues.
The constantly changing executive committees, FINMA says, were unable to comprehensively and permanently rectify the identified shortcomings since the financial crisis in 2008.
And the remuneration system at the bank also played a significant role in these shortcomings, the report states. Variable remuneration, especially banker bonuses, remained particularly high even in years with large losses, and the major shareholders barely exercised their influence on remuneration, according to the authority. And this was despite loud criticism at the annual general meetings.
Credit Suisse generated a net loss of SFr2.1 billion ($2.45 billion) over the previous ten financial years, but the total variable remuneration, according to its remuneration reports, amounted to over SFr33 billion in the same period. Between 2015 and 2017 when sizeable losses were being accrued, bonuses of over Sfr3 billion ($3.5 billion) were also being granted year on year.
Even in 2021, variable remuneration at Credit Suisse still amounted to over SFr2 billion ($2.34 billion), despite significant losses by the bank caused by events such as the bankruptcy of US financial firm Archegos.
“During these years, Credit Suisse paid out high sums of variable remuneration that essentially amounted to a fixed salary over time, creating incentives that mainly promoted short-term monetary profits at the expense of developing a healthy risk culture,” FINMA says.
Basically, the top bosses got their special compensation, regardless of business performance, while the company’s shareholders shouldered the losses.
In 2021, Credit Suisse’s earnings situation began to structurally deteriorate, it came under pressure from FINMA, and reduced the planned bonus pool for that financial year from SFr2.5 to SFr2 billion ($2.95 – $2.34 billion).
For 2022, the bank then reduced the bonuses from the planned SFr1.75 billion to SFr1 billion ($2.04 – $1.17 billion), with the bank considering this the absolute minimum amount to protect the business franchise, the report says.
Risk issues
Credit Suisse’s problems manifested themselves in a range of business areas and were due to various types of risk manifesting themselves, FINMA says. In almost all of these problems, serious deficiencies in risk management played a role.
FINMA also repeatedly criticizes the bank’s risk culture, saying that despite the adjustments, sometimes extensive and spread over a number of years, the bank’s governing bodies were unable to find long-term overall solutions to the shortcomings in the bank’s capital adequacy, liquidity buffers and its ability to stop liquidity outflows once confidence in the bank plummeted.
Credit Suisse’s bonus programs only exacerbated these issues, as the programs failed to increase the productivity of those who were favored with the payouts, nor did they help foster integrity and good behavior at the business. According to FINMA this is evidenced by the history of regulatory enforcement actions against the bank.
Between 2012 and the bank’s emergency rescue, the regulator says it conducted 43 preliminary investigations of Credit Suisse for potential enforcement proceedings. Nine reprimands were issued, 16 criminal charges filed, and 11 enforcement proceedings were taken against the bank and three against individuals.
In the period from 2018 to 2022 it also conducted 108 on-site supervisory reviews at Credit Suisse and recorded 382 points requiring action, FINMA said.
FINMA – lessons learned – remuneration, capital regulation and recovery
The supervisory authority now wants to see the requirements for remuneration systems spelled out at the legislative level, and it wants the power to impose specific measures on remuneration in relation to banks.
In the area of capital requirements, FINMA said the legal obligation to grant exemptions at the level of its branch operations led to the parent company being weakened. FINMA is now calling for stricter standards for regulation at the specific, smaller institution level in the context of a review of “too big to fail” requirements.
FINMA said it ordered far-reaching additional capital charges to counter the increased risks from Credit Suisse’s business activities, but in the future, FINMA will analyze the risks involved in strategy implementation or an inadequate control environment and the resulting potential for losses by financial institutions even more systematically, and it will impose and disclose additional capital charges if necessary.
“During these years, Credit Suisse paid out high sums of variable remuneration that essentially amounted to a fixed salary over time, creating incentives that mainly promoted short-term monetary profits at the expense of developing a healthy risk culture.”
FINMA
And in terms of recovery and resolution measures, the regulator said some of the measures in the recovery plan it had reviewed and approved could not be implemented as planned during the crisis the bank was facing. In the future, FINMA will therefore place a stronger focus on ensuring that the measures can be implemented effectively and consider tightening up its approval practice.
It will also adapt the resolution plan to include anticipating faster bank runs and more dynamic crisis scenarios, noting how digital communication channels in this particular case had essentially caused a “digital bank run” that brought the bank to the brink of insolvency. Interestingly this was a point also made by regulators in connection witht the failure of SVB in the US.
FINMA’s weak regulatory powers
FINMA said its legal basis for supervision had reached its limits, even as it increased its supervisory and enforcement activities. FINMA considers a Senior Managers Regime that comes with the powers to impose fines, the option of publishing enforcement proceedings on a regular basis and the ability to effectively intervene in remuneration systems a key requirement. But such a regime will require a more solid legal mandate according to the regulator.
FINMA points out that its actions in March in brokering the takeover by UBS ensured creditors were protected and financial markets continued to function properly. (UBS purchased its former rival for $3.3 billion, and although the deal averted a true disaster, the merger contained its own headaches.)
FINMA said that its strategic changes to de-risk Credit Suisse, such as downsizing its investment bank, focusing on its asset management business and reducing its earnings volatility, were “not implemented consistently,” while “recurrent scandals undermined the bank’s reputation.”
Referring back to the 382 points requiring action, the regulator says that “in 113 of these points the risk was classed as high or critical.” It goes on to say that “these figures and measures illustrate that FINMA exhausted its options and legal powers.”
FINMA’s powers as a financial regulator are considered among the weakest in the Western world, lacking some basic tools such as the ability to fine banks, something the agency unsuccessfully lobbied the government to change from 2021.
That year FINMA went to the Swiss finance ministry, making the case for additional powers as well as the creation of a financial liquidity backstop like the one that exists in the United States and some other jurisdictions, according to a former Swiss official. A liquidity backstop is a financing facility that banks can tap in an emergency, allowing the central bank to act as the lender of last resort.
In FINMA’s view the liquidity backstop was a crucial as well as a final building block needed for any resolution plan to work, the former official said. In the aftermath of the 2008 financial crisis, global banks such as Credit Suisse were required to create resolution plans, called living wills, which would allow regulators to unwind them without creating broader systemic issues.
At the time, FINMA did not get the support that it required from the ministry, the former official said. The finance minister at the time was Ueli Maurer, a member of the Swiss People’s Party, which was supportive of the Swiss banks and banking industry.
Under Maurer, the finance ministry had gravitated towards the banks’ own views, which suggested that FINMA was too intrusive, according to three people with direct knowledge of the work of the regulator and the banks’ views, Reuters reported.
Banks lobbied the government to restrain FINMA’s then-chief executive, Mark Branson, a former banker viewed by the industry as too tough, these people said. Maurer, who retired in late 2022, did not respond to a request for comment from the news agency.