MNI INTERVIEW: Swiss Should Explain Why Emergency Plan Ignored

The combined operations of UBS and Credit Suisse are now too big for Switzerland, a former member of the board of the Swiss financial market supervisory authority told MNI, adding that the authorities should explain why they did not activate previously prepared plans for an emergency at CS.

Credit Suisse and UBS were already “borderline too big” for Switzerland before the announcement of UBS’s USD3.25 billion takeover, Yvan Lengwiler, who sat on the board of FINMA from 2012 to 2019, said in an interview, leaving the new bank “clearly too big for the country.”

“This is a major problem,” he said. “We have a massive too-big-to-fail problem now, and we have less diversification. I think there must be a medium-term strategy to shrink UBS to a more manageable size, because otherwise I'm not sure that Switzerland is the right home for this bank" (see MNI: Swiss Will Have To Step In Over Credit Suisse-Wyplosz).

EMERGENCY PLAN IGNORED

FINMA, the Swiss National Bank and the Department of Finance need to explain why they didn’t either agree terms with a foreign buyer or default to previously prepared contingency plans for an emergency at Credit Suisse, which had been to ring-fence the bank’s Swiss units - with government support if necessary, Lengwiler said.

“It's possible that this was considered to be unfeasible. But it has not been explained, as far as I can see, why this plan did what was not possible. And if it's true that the concern was for global financial stability, then the emergency planning of Credit Suisse was not appropriate to begin with.”

The decision to force through a link-up with UBS without consulting shareholders at either banks is also “discomforting,” he said, despite the obvious need for speed.

“The consequence still is that there is some loss of legal security now, because we don't know what the government can change offhand. This sets a very bad precedent.”

The decision to wipe out AT1 bondholders but not the equity holders over whom they would normally have held precedence indicated that supervisors were concerned by the solvency of Credit Suisse, said Lengwiler.

“I understand the anger of AT1 bondholders. I'm pretty sure that legally FINMA can do that - they wouldn't have done it otherwise. But I understand that people are a bit confused about this. And obviously this clearly has an effect on the CoCo market worldwide."

Lengwiler, now economics professor at the University of Basel, expressed relief at central banks’ coordinated decision on Sunday to enhance provision of dollar liquidity, and was optimistic that the new combined bank may not need to draw on all of the CHF 200 billion assistance guaranteed by the SNB.

“If everything calms down, if risk-averse bank managers of UBS take over and they de-risk the whole thing dramatically over the coming years, there is no need to worry. The CHF200 million liquidity support will not be needed because the bank run will stop.”

SNB RATE DECISION

With Swiss inflation running at around 3% against a target level of 0-2%, Thursday’s SNB rate-setting decision is unlikely to be deeply affected by recent events, Lengwiler said, although the odds on a half-point rate hike - widely seen as the most likely outcome until recently - have fallen back (see MNI INTERVIEW: ECB Peak Rate Likely 3.5-3.75% - GerlachGerlach).

“They could easily do only 25 basis points,” he said. “They could maybe not even raise interest rates at all. They won't do that, I think, but they could let the Swiss franc slide and then purchase back Swiss francs to prop up the exchange rates and have a very direct effect on inflation that way, because the effect of the exchange rate on inflation is much quicker than the effect through interest rates. Maybe that's even the better strategy.”