Is UBS too big for Switzerland? – Andreas Ita shares his views in BILANZ-Business-Talk
Orbit36 Managing Partner Andreas Ita had the pleasure to be invited to BILANZ-Business-Talk broadcasted by Swiss national television (SRF1) on 26 May 2024. Under the moderation of BILANZ editor-in-chief Dirk Schütz, the controversial question of whether UBS is too big for Switzerland was discussed. Other guests were Celine Widmer (National Parliamentarian), Yvan Lengwiler (Professor University of Basel, Head Swiss Expert Group on Banking Stability) and Matthias Müller (Vice-President Liberal Party Canton of Zurich).
Here a few of my main statements:
- Judging the risk solely based on the size of UBS’s assets vs. the Swiss GDP provides an incomplete picture. While UBS appears unusually large based on this frequently used indicator (around twice Swiss GDP), this is largely attributable to the small size of Switzerland. There exist six larger banks than UBS in Europe, but they are all based in big countries like France, Spain and the UK.
- UBS has a total loss-absorbing capacity of around 200bn USD. It is impressive that private investors are willing to provide UBS subordinated capital in the magnitude of 1.3 times Switzerland’s public debt. This capital would bear any losses before the claims of clients and debtholders would be touched. Importantly, this capital would also protect the public in case of a temporary liquidity assistance provided by the central bank, as became necessary with Credit Suisse in March 2022.
- The Too-big-to-Fail-regime could not be applied as planned, since the crisis at Credit Suisse evolved in a different way from what was assumed when the framework was designed. As opposed to most plan scenarios, the problems were not limited to an isolated area within the bank. Instead, there was an ongoing erosion of trust which affected all areas of the bank simultaneously. This made the regulatorily imposed ring-fencing of the businesses in different legal entities pointless. In addition, there were no material losses, so that a recapitalization through a bail-in was neither necessary nor justifiable.
- Generally higher capital requirements for systemically important banks are of limited usefulness. However, the capital framework for the parent banks needs to be revised, since its shortcomings contributed to the lack of trust into Credit Suisse. Additional capital may be necessary to protect Switzerland in case the parent entity of UBS would need to be resolved. Yet, bail-in debt could be more suitable for this purpose than common equity tier 1 (CET1) capital.
- It is crucial that variable compensation for senior management and key risk takers is determined based on risk-adjusted performance. While compensation clawbacks proofed to be difficult to enforce, we should acknowledge that a significant part of variable compensation is already now paid in instruments with vesting and forfeiture clauses. In the case of Credit Suisse, former employers lost most of their variable compensation provided in the form of AT1-bonds or shares.
- In the heated public debate about the Too-Big-To-Fail problem in Switzerland, we should better differentiate between public sector help in the form of equity injections or guarantees for insolvent banks – true state aid, which should be avoided – and liquidity assistance by the central bank for solvent banks – which may occasionally be necessary in a crisis. Liquidity assistance is unproblematic, as fully secured by collateral and the banks’ capital, including bail-in debt. Central bank liquidity facilities are standard in most major jurisdictions. The planned Public Liquidity Backstop (PLB) is of limited risk for the public, as systemically important banks need to hold a significant amount of bail-in debt as a buffer against potential resolution losses.
Since most of the legislative work is still ahead of us, the debate will likely keep Switzerland busy over the coming months.
Orbit36 is pleased to see that the discussion becomes increasingly fact-based and will continue to contribute on this important topic.
A link to the discussion broadcasted by Swiss National Television on 26 May 2024 can be found below:
