It is not the aim of this blog to comment on what is happening around the big Swiss banks and the SNB and I leave the political evaluation to others anyway. Unfortunately, we now clearly have to talk about a bailout, as substantial risks have now arisen for Swiss taxpayers. It is unclear whether these risks will materialize. I would like to take up a few points here from the perspective of the successfully unwound SNB stabilization fund, which I hope have not already been discussed by others.

Much clearer starting position in 2008 than today

We distinguish between two fundamentally different starting points. In 2008, the situation was clear-cut. Losses on real estate loan exposures led to write-downs and impairments in the double-digit billions for UBS in the quarters before “Lehman Brothers”. After Lehman Brothers’s collapse, it was unclear whether further losses would be incurred that would melt the equity cover. With the offloading of $40 billion of mainly securitized loan assets to the Stabilization fund and the recapitalization of UBS by the federal government via a mandatory convertible bond, the core of the problems were clinically removed from UBS’s balance sheet. There was transparency for the public, and the federal government and the SNB had clearly quantifiable risks. However, the political reactions at that time were also already very negative. These then subsided when we were able to generate a high profit of 4 billion with the stabilization fund.

Currently, the situation is still difficult for me to grasp. A few weeks ago, Credit Suisse’s liquidity situation seemed good and its capitalization comfortable. Losses in recent weeks did not threaten CS, but the bank was draining confidence capital after “Greensill”, Archegos, due to uninspiring senior management and BoD. As the situation in the US around regional banks deteriorated, many identified it as the “next shoe to drop.” This has probably triggered an increased bank run.

Without resolute action over the weekend, the situation would have deteriorated massively on Monday, as many banks abroad would have stopped doing business. The pressure from abroad on Switzerland was enormous. Everyone was nervous and wanted a solution. The situation was different in October 2008. At that time, significant problems were observed in the UK and the USA. This time, however, one Swiss bank, in particular, was unfortunately the focus of international nervousness.

Current crisis of confidence could not be solved via capital or liquidity

Since trust in a bank’s management and culture were the problem, higher liquidity lines or recapitalization of the bank probably would not have helped. It needed a cut. With the forced sale to UBS, the simplest option was chosen. The other option would have been temporary nationalization, or letting the TBTF process run its course. In this case, similar to the SNB Stabilization Fund, a management loyal to the Confederation and the SNB should have been appointed, acting in the interest of the taxpayers and thus minimizing the risks for the SNB or the Swiss Confederation. The aim would have been to sell parts of CS to various players in Switzerland and to seek the best possible solution from the point of view of the Swiss financial system and the concept of competition.

The StabFund was designed so that the bearer of the risk should also have the decisions on management decisions. That was exactly what we did at the time with the Stabilization Fund. We have made every asset management decision in the 6.5 years under the motivation to minimize the risks for the Swiss taxpayers and for the SNB as lender. At that time, we were always working day and night to make sure that the settlement would be a success for Switzerland. The question is whether UBS will now also act in the interests of Swiss taxpayers.

Elements of control and upside for Swiss taxpayers seem to be missing

Besides the 4x-5x higher risks for the Swiss taxpayer currently, two elements – if I understood everything correctly – are different than in 2008. Currently, they have been content to transfer the problem and its resolution to UBS, instead of having control themselves over the actions that affect the risks of the SNB as a lender or the guarantees of the Confederation. The consideration is probably that due to the attractive takeover price of UBS, probably no losses materialize on the risk. But it is generally a fundamentally different philosophy than in 2008 and a subsidy for future UBS profits.

In 2008, I also liked the SNB’s many safeguards in structuring the deal. If losses had been incurred on the acquired portfolio at that time, the SNB received call options on UBS shares. This was intended as a safeguard. Due to the low acquisition prices of the positions from the UBS balance sheet, the Stabfund always had a chance to realize a significant profit at that time. I am not currently aware of any such mechanisms. I hope they also exist currently, and that they are still communicated. My view is that in such exercises, taxpayers must also be compensated for taking the risks. This would also be politically astute. Otherwise it is said again: the capitalists always have the upside, but the risks and costs are socialized.

Approximately 50% of the Swiss banking system is now under government guarantee

With each crisis, we observe the trend towards ever larger banks. On the one hand, this is the result of regulation. After the financial crisis, we saw regulatory excesses. Some regulatory efforts have been useful; others have had counterproductive effects. Anyone who has worked in one of the big banks has been confronted with the increasing omnipotence of compliance. It didn’t help much. I contend it has been rather counterproductive, undermining enterpreuneric spirit and common sense in these banking cultures. As before the financial crisis, we have now observed “accidents” time and again in recent years. In this sense, the role of regulation and the growth of compliance must be critically examined. A banking system characterized by smaller entrepreurial banks with personal liability of the partners would lead to a better financial system than we currently have.

On the other hand, it turns out that this is an illusion. Concentration in banking systems has continued to increase. In the USA, we have seen a flight of client money from the regional banks to the big banks. With UBSCS, a JP Morgan of Europe has now been created. Switzerland’s success is now also linked to the success of this bank. In this sense, it now has an implicit state guarantee. This will also have political consequences for the compensation models within UBS, as part of the profits generated are purely attributable to the state guarantee. Together with the cantonal banks, the market share of banks with a state guarantee in Switzerland is now almost 50%. Is this just a temporary solution? Will parts of CS be sold to other market participants so that we move back to a more balanced financial system, or is this the new modus operandi?