“Report by the Parliamentary Investigation Committee on the Conduct of the Authorities in the Context of the Emergency Takeover of Credit Suisse”

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Dirk Niepelt
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The report (in German). From the press release:

The Parliamentary Investigation Committee (PInC) attributes the Credit Suisse crisis to years of mismanagement at the bank. It is critical of FINMA’s relaxation of capital requirements and regrets the lack of effectiveness of its banking supervision. The PInC also criticises the hesitant development of the TBTF legislation and identifies shortcomings in the flow of information between authorities. It does not find any misconduct on the part of the authorities as a causative factor in the Credit Suisse crisis and acknowledges that the authorities prevented a global financial crisis in March 2023. In its report, however, the PInC calls for specific improvements: a more international approach to TBTF regulations, more effective rules for systemically important banks, and clearer directives on coordination with the authorities responsible for financial stability in Switzerland.

… the Federal Council and Parliament gave too much consideration to the concerns of systemically important banks (SIBs) in the implementation of international standards (Basel III, BCBS and FSB principles), particularly from 2015 on. For example, the Federal Council repeatedly granted SIBs extended transitional periods to comply with further legal developments; it also suggested delaying the adoption of international standards. The PInC believes the Federal Council acted too hesitantly, particularly with regard to the introduction of a public liquidity backstop (PLB).

The PInC also scrutinised FINMA’s conduct of business, finding that its supervisory activities – while intensive – lacked sufficient impact. Despite numerous enforcement proceedings and warnings issued by FINMA, Credit Suisse continued to be plagued by a series of scandals. The PInC finds it regrettable that FINMA did not opt for a withdrawal of recognition for guarantees of proper business conduct during this period.

Moreover, the PInC fails to understand why FINMA granted Credit Suisse extensive easing of its capital adequacy requirements in 2017 in the form of a regulatory filter. … While the filter was legal, the PInC questions its usefulness. … without the filter, Credit Suisse would have failed to meet capital adequacy requirements – just marginally in 2021 but significantly in 2022. The PInC sees an urgent need for action in the granting of alleviations to systemically important banks.

… The exit scenarios prepared from the outset included those set out in the TBTF rules (liquidation; ELA) and several additional options (TPO; ELA+; takeover). The PInC believes that the most important scenarios were analysed. However, it criticises the fact that not all the authorities involved had the same level of knowledge during this phase, which may have hindered the possibility of taking decisive action at an earlier stage. In particular, the information given to the Federal Council in autumn 2022 should have been more comprehensive. The PInC also considers that the informal meetings initiated by the then finance minister and the Chairman of the SNB’s Governing Board in the autumn of 2022 were of limited use, as they were not sufficiently coordinated within the regular crisis structures. If the PLB had already been in place, the authorities could have intervened in the autumn to restore confidence without the need for emergency legislation. Furthermore, any scope for action was limited by the regulatory filter introduced in 2017.

… Negotiations between Credit Suisse and UBS proved difficult, and the outcome was uncertain. The authorities therefore continued to pursue a number of fallback options in parallel: restructuring of Credit Suisse, temporary public ownership, or even a forced merger as a last resort. It remains unclear which solution would have been adopted if the emergency takeover had failed.

… The emergency legislation was applied in accordance with the law. In view of the acute situation, the PInC understands that an alternative solution with a foreign bank was no longer feasible at that point in time, even if it might have been more advantageous for Switzerland’s competitive position in the longer term. Additionally, the PInC notes that the chosen solution has revealed certain weaknesses in the existing TBTF regulations.

… The PInC acknowledges the achievements of the authorities in March 2023 in preventing a global financial crisis. However, it believes that lessons must be learnt from their handling of the Credit Suisse crisis, especially given that this was the second time the state had to intervene to save a systemically important bank and also due to the fact that Switzerland now has only one remaining global systemically important bank (G-SIB).

… the current TBTF legislation focuses too heavily on Switzerland, particularly in terms of emergency planning, and that the resolution plan for a G-SIB operating internationally from Switzerland must consider international interdependencies. Furthermore, the current TBTF regulations are not designed to deal with a crisis of confidence and overlook some important market indicators. The PInC recommends restricting future easing of capital and liquidity requirements. It also identifies need for action regarding the current rules on audit oversight.

Coordination between the individual authorities and the involvement of the Federal Council as a whole was found to be suboptimal, with particular attention needed in the exchange of information. Improvements are also needed in risk management and early crisis detection.

UBS, now Switzerland’s only G-SIB, is many times larger relative to the country’s gross domestic product (GDP) than other financial institutions are relative to their country’s GDP. The PInC considers it essential that this fact be given due consideration in the regulations.