Instead, the Federal Finance Minister’s statement “that there was no other solution” was not a great message to send to markets. Instead of picking the best amongst several options, the message communicated that authorities had no other contingencies or plans and, were in a rush and forced by events. This not only spoke of a lack of surveillance and supervisory preparedness vis-à-vis CS, but implies a lack of readiness on other issues, including a systemic crisis that could impact the Sovereign. The past perception that slowness to respond was driven by prudence is now perceived as prolonged inaction and, ultimately, unpreparedness.
The fate of UBS, and as we argue Switzerland, was left to a news conference in which the Chairman of UBS was unable to present a cogent and coherent plan or timetable for de-risking the new UBS group, further contributing to the overall uncertainty.
The Road Ahead
“Too Big to Fail” in Switzerland has now become “Too Big to Rescue.” Switzerland has put big banking into a single basket, denominated UBS. This is an enormous concentration, UBS’s assets now representing 2 times the GDP of the country. This exposes the country to existential risk like never before. A swift plan of action to defuse the risks currently concentrated in the UBS group is now required. So is a revision of the Swiss banking supervisory regime, with one “too big to fail and to rescue” bank. And, as argued earlier, Switzerland’s financial and banking models need to be recast.
Prior to the finalization of the international treaties that ended Switzerland’s banking secrecy, the Swiss authorities were given over 10 years of notice that they needed a new economic model. The mono-line national banking strategy, held up by two global banks acting as its pillars, has ended. So has the exploration of US investment banking – a game that proved too Anglo Saxon and too remote from the core competencies of UBS and CS. Exploration is now ongoing, but of a different kind. Finma has opened an investigation into the Credit Suisse top brass, while the Attorney General has opened an investigation into UBS’s state-backed takeover of CS.
Recovery is typically a long process. Strength, safety, stability, and security need to be restored, and as soon as possible. Confidence in the country’s institutions will return with credible and strong reforms, emanating from a thorough re-examination of its banking sector and a reassessment of its supervisory regime.
CS, once a pillar of modern Switzerland, has, after a long journey to America and the world, ended up damaging the Swiss brand, known the world over for stability, professionalism, and prudence. Swiss banking must start emanating the values demonstrated so ably by Swiss watch manufacturers and chemists, and more recently, by its micro- and biotech sectors.
The world will be watching and asking whether Switzerland will remain what it always was: a country engaged in the world, but neutral, upholding the Swiss Franc (CHF) and its banking system as a beacon of solidity, with independence from the US Dollar, the Euro, and the Renminbi. Or, whether it will cave into US and Euro pressures to join their fiscal indiscipline and its consequences.
The worst would be for Switzerland to do so inadvertently, the result of an inability to resolve the current troubles affecting its banking sector.