As published on: finews.com, Thursday 15 June, 2023.
Since Credit Suisse's rescue, the conventional wisdom in Switzerland is that investment banking is a dangerous minefield. Many in the financial hub see private banking as the new be-all and end-all. That is looking at the situation too simplistically.
Switzerland's financial regulator practically caved in at the start of this week. It gave the new megabank resulting from UBS's forced rescue of Credit Suisse a full seven years time to build up enough capital to comply with the higher requirements under the country's too-big-too-fail regulations.
They did this at the same time as Swiss members of parliament have been asking for a doubling of equity requirements while also weighing up possible total balance sheet size limits relative to Swiss GDP.
Finma explained away the moratorium by saying UBS was going to sustain substantial additional costs by taking over Credit Suisse and that the transitional period was necessary to reduce risks in an «orderly manner.»
In that time UBS promises to cut the level of risk-weighted assets in investment banking to 25 percent from 30 percent currently. Less investment banking, the thinking goes, means less risk.
That is the conventional wisdom in Switzerland right now. Buried are any ambitions to compete with the bulge bracket on Wall Street. The trend started with UBS's rescue by the government in 2008 and was sealed by the numerous scandals involving Credit Suisse, including Archegos and Mozambique.
That might be true with the benefit of hindsight. But the fact right now is what brought Credit Suisse to the point of insolvency were not speculative losses or its investment bank but the massive flows of funds and withdrawals related to the super-wealthy. Although they are sought after by private banks the world over, they can also bring any institution to its knees within days by shifting funds between banks, unlike retail clients.
It was exactly those kinds of clients that withdrew more than $100 billion in assets in March.
Two experts can testify about the risks of a bank run triggered by billionaires. One of them is Axel Weber, the former head of the Bundesbank and ex-UBS chairman. He is also the guiding father of the Swiss bank's dismantling of its investment banking business while simultaneously putting the onus on wealth management.
At a recent event in Zurich that just cutting back on investment banking risks does not make the new institution entirely risk-free. Switzerland had to be clear that there were also risks in putting too much emphasis on wealth management. If he says that, it should make everybody stop and think. The new UBS will have $5 trillion in client assets and it become the second-largest wealth manager in the world after Morgan Stanley.
The other is Swiss National Bank chairman Thomas Jordan, who last week expressed particular concern about what happened at Credit Suisse.
From the banking crisis in the US and at Credit Suisse, we are seeing that withdrawals are a great deal more extreme than they were earlier, both in regards to scale and speed, he told the Sonntags Zeitung That has to be considered within the too big to fail framework, he believes.
Jordan believes there need to be measures that stop the withdrawals, at least temporarily. According to him, many assets need to have notice periods or be booked as time deposits.
Those kinds of things are also being discussed in the asset management business. Many regulators have been sensing new risks in the funds business for a few years now, a business which has been growing strongly in Switzerland. In domestic financial markets, about half of the volume is now in the non-bank financial institution sector.
Two Successive Panics
Supervisors were deeply concerned during the pandemic when there were massive withdrawals in large fixed-income funds, something that prompted central banks worldwide to add copious amounts of liquidity to markets.
In September 2022 the UK central bank had to repurchase gilts when prices for them crashed.
As a result, the Financial Stability Board (FSB) is redrafting requirements related to liquidity risks with the International Organization of Securities Commissions (IOSCO) and they may set limits on withdrawals.
After they are drafted, likely by 2024, Swiss fund regulators will have to see whether they will follow suit, a question that parliament will have to look closely at.
The dreams of all bankers who once wanted to become masters of the universe were completely laid to rest with the collapse of Credit Suisse. But it is not only UBS that wants to gain as much critical mass as possible in wealth management. Others, including Julius Baer, are looking to grow significantly. Even if it is a business that requires less capital and produces steadier revenues, one thing remains certain. The risks will grow with the business.