By Huw Jones
LONDON (Reuters) - Switzerland must strengthen its banking controls, a global financial watchdog said on Thursday, highlighting the risk a failure of UBS would pose to the country in the starkest warning yet of the perils from its takeover of Credit Suisse (SIX:CSGN).
Last year, UBS Group emerged as Switzerland’s one and only global bank, after a state-backed rescue of its smaller peer, orchestrated to avert the biggest banking collapse since the global financial crisis.
But the move, initially backed by more than 200 billion Swiss francs ($227 billion) in government guarantees, overrode post-crisis reforms that aimed to impose the costs of bank failures fully on investors rather than the state.
On Thursday, the Financial Stability Board (FSB), a grouping of central bankers, treasury officials and regulators from the group of 20 top global economies, delivered its critical review of events, cautioning Switzerland over its financial safeguards.
In the report, international officials urged Bern to strengthen controls on large banks, and bolster regulator FINMA by giving it more resources and powers to promptly intervene at a bank in trouble.
The report described such steps as "particularly important" because the newly formed UBS was the most outsized bank globally when compared with the size of the Swiss economy.
Officials wrote that its "failure could have severe impact on the Swiss economy and the global financial system".
In the report, the FSB said that the Swiss regulator relied on imposing extra capital demands and "remediation" orders but that it would be better if it could hold executives to account.
It also said that Swiss regulator FINMA continues to rely considerably on external auditors when checking on banks and should reconsider how much weight it gives to such audits.
"While such reliance may be necessary to some extent, the fact that banks pay for the audits directly may lead external auditors to hesitate in informing FINMA of major weaknesses identified," the review said.
The FSB also underlined the importance of establishing a public liquidity backstop, which would serve, as a last resort, to support a bank in trouble.
FINMA did not immediately respond to a request for comment.
MUTED DEBATE
Rules introduced globally after the financial crisis of 2007-09 to "resolve" or wind down banks in trouble, aimed to show that no lender was "too big to fail", meaning taxpayers would not have to bail them out again in another crisis.
But in the case of Credit Suisse, Switzerland quickly agreed to a multi-billion-franc backstop, shouldering much of the burden.
Although some bondholders were hit and UBS since surrendered the backstop, the move raised questions about the rules' effectiveness.
The FSB, which drew up the resolution framework, said that "additional steps can be taken to further strengthen" the rules in Switzerland, enhancing the recovery and resolution regime.
The Swiss authorities should have "clear standards or suitable indicators" to show when a bank is no longer viable to guide decisions on whether to wind it up, the authors of the review wrote.
A structured framework for early intervention should be put in place that would make clear when authorities can intervene. It separately urged for improvements to the country's deposit guarantee scheme.
Switzerland's failure to prevent Credit Suisse's collapse even though its problems had been apparent for months, has prompted a parliamentary investigation. The probe may lead to reform proposals, but it will take months to conclude.
The Swiss regulator's powers as a financial regulator are among the weakest in the Western world, lacking some basic tools such as the ability to fine banks.
As far back as 2019, the International Monetary Fund had urged Switzerland to strengthen FINMA's "autonomy, governance and accountability".
The agency, which has lobbied the government since 2021 for more powers, renewed its efforts in the wake of the Credit Suisse debacle.
However, banks, which remain influential, oppose substantial change and only a handful of Swiss lawmakers understand the issue, with many favouring self-regulation, officials and bankers have told Reuters.
($1 = 0.8802 Swiss francs)