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Switzerland is accelerating efforts to reform its banking regulations a year after the collapse of Credit Suisse \u2014 and handing more power to those who will enforce them.\u00a0<\/p>\n
The government is due to unveil long-awaited proposals for legislation in the coming days that are likely to touch on all of the main pillars of bank oversight, from capital and liquidity rules to controls on governance. UBS Group AG \u2014\u00a0the country\u2019s sole remaining globally-systemic bank that\u2019s now over twice the size of the domestic economy \u2014\u00a0is in for heightened scrutiny.<\/p>\n
A key plank is strengthening Finma, the banking watchdog which was unable to prevent years of bad management at Credit Suisse threatening the nation\u2019s historical reputation for financial stability. That task is aided this week by the arrival of Stefan Walter, a veteran European bank supervisor who\u2019s spent a decade going toe-to-toe with the likes of Deutsche Bank AG, to serve as Finma\u2019s new chief executive.<\/p>\n
\u201cI wouldn\u2019t call the Swiss authorities toothless, but there are certainly some things which should be changed,\u201d said Yvan Lengwiler, a professor at the University of Basel and the head of an expert panel created to make\u00a0proposals for reform<\/a>. \u201cFinma definitely needs more resources to come on to an equal footing with the banks.\u201d<\/p>\n Walter, 59, can be seen as the face of this revamp. The German national played a key role in building out the European Central Bank\u2019s oversight arm when it started watching over lenders in 2014 as part of the response to the bloc\u2019s sovereign debt crisis.<\/p>\n Walter is also a former secretary general of the Basel Committee on Banking Supervision and senior vice president at the Federal Reserve Bank of New York, two of the most significant bodies in the world of financial oversight.\u00a0<\/p>\n He helped build a system at the ECB which challenged banks on the risks they were taking. That approach continues to be seen, for instance in the\u00a0recent crackdown<\/a>\u00a0on the leveraged lending businesses at Deutsche Bank, BNP Paribas SA and others.<\/p>\n The Swiss have long preferred a more consensual approach to financial oversight than is common in other jurisdictions. The lack of the ability to hand down fines has sometimes been justified on the basis that it would destroy the cooperative atmosphere.\u00a0<\/p>\n The philosophy of lean management is also reflected in the relatively small size of the regulator \u2014\u00a0just under 600 staff work at Finma to oversee a financial sector that directly employs more than 230,000 people.<\/p>\n Yet the rapid evaporation of confidence in Credit Suisse after a string of missteps and losses, and its subsequent emergency rescue by UBS, has dented that previous consensus. Finma itself has complained that although it identified the rot at the heart of Credit Suisse, its appeals for change were effectively ignored.<\/p>\n The government, including the finance ministry, the Swiss National Bank and Finma are all broadly aligned on the need for expanded regulatory powers. Even the banks, including UBS, have signaled support for major parts of the reform agenda.<\/p>\n Alongside the ability to fine, a key part of the new approach is a so-called senior managers regime \u2014\u00a0making individuals directly responsible for their decisions. Such a system, which exists in different forms in jurisdictions including the UK and Hong Kong, enables regulators to identify who\u2019s at fault. Switzerland is likely to take its own approach, according to Thomas Hirschi, the head of banking supervision at Finma.\u00a0<\/p>\n \u201cSwiss regulation has always been, and will probably continue to be, principles-based rather than rules-based,\u201d Hirschi said in an interview. Yet for an effective senior manager regime, specific provisions are needed, he said. \u201cIf you only have principles, then we actually remain within the current system, where it becomes difficult to enforce the law.\u201d<\/p>\n The point is to shift the culture of risk taking among Swiss bankers. The need for such a change was underlined late last year when it emerged that Julius Baer Group Ltd, a globally active wealth manager, had run up a $700 million exposure to a single client \u2014\u00a0Austrian property tycoon Rene Benko.\u00a0<\/p>\n The bank\u2019s internal controls hadn\u2019t stopped the concentration of risk, and the resulting write-down as Benko\u2019s conglomerate Signa entered bankruptcy wiped out half the lender\u2019s annual profit. The chief executive stepped down; the chairman, Romeo Lacher,\u00a0apologized<\/a>.\u00a0<\/p>\n Proponents of a senior manager regime want \u201cto strengthen the sense of responsibility of bank managers in advance,\u201d said Nina Reiser, associate professor for financial markets law at University of St Gallen. \u201cIf there is a documentation that clearly states what I\u2019m responsible for, which is authorized by Finma or audit firms, then I will weigh my decisions more carefully.\u201d<\/p>\n There is a further screw that some are advocating to turn \u2014 bonuses. Current legislation only allows Finma to formulate \u201cguidance\u201d on how much bankers should be paid. That\u2019s not strong enough, according to former Finma chief executive Urban Angehrn.\u00a0<\/p>\n Finma needs to be able to influence \u201cthe\u00a0bonus pool<\/a>\u00a0decisions of the large banks,\u201d Angehrn told Bloomberg Television last month. Marlene Amstad, Finma\u2019s current chair, is also pushing for this to be laid down in law.<\/p>\n It\u2019s clear that UBS will be even more under the spotlight. The Zurich-based bank, the largest manager of private wealth outside the US, is already facing higher capital and liquidity requirements as a result of its increased size. Finma has boosted the size of its team working with the bank and is planning two\u00a0stress tests<\/a>\u00a0on its balance sheet this year.\u00a0<\/p>\n