Give Me the Lowdown on Credit Suisse: How Swiss Financial Market Supervision's Easements Hurt the Bank
Living on the Edge: Too Much Freedom, Not Enough Support for Investors
Zurich
Lobbying impedes the allocation of increased equity financing
Switzerland's got some major financial institutions that are a crucial part of the national economy. Unfortunately, these powerhouse banks can be downright deadly for the country, its taxpayers, and institutions when their financial stability is out of whack with their level of risk. Ever since UBS's risky state bailout back in 2008, it's no secret that these mega-banks can leave us broke and broken if they don't keep things tight.
The Swiss parliament's Finance Committee has recently dropped a bomb of a report touching on the "easements" that the Swiss Financial Market Supervisory Authority (FINMA) granted to Credit Suisse. According to the report, FINMA gave Credit Suisse a whole lot of wiggle room on regulations, which hasn't exactly helped the bank's current dismal state.
The report takes FINMA to the cleaners, pointing fingers and calling for a boost in the regulator's independence. It also suggests FINMA needs more powers to mess with the dealings of systemically important banks, like Credit Suisse.
The Swiss government has given the report a warm welcome, but we'll have to wait and see if they follow through on making the necessary changes to prevent another financial disaster in Switzerland.
Credit Suisse: A Shady History of Indulgence
- Capital Adequacy Skip-a-roo FINMA let Credit Suisse get away with operating on lower capital buffers than usual, thanks to some temporary do-overs on capital adequacy requirements. This was supposed to help with liquidity and flexibility during market madness, but it could have also led the bank to operate with thinner buffers in the face of financial shocks.
- Risk-Weighted Asset Fiddle FINMA allowed Credit Suisse to adjust how they judge risk-weighted assets, meaning they paid less for capital reserves against less risky assets. This was intended to reduce the bank's burden on reserves, but it may have delayed the full recognition of underlying risks, worsening their balance sheet over time.
- Supervisory Forbearance on Risk Controls FINMA showed a lot of leniency when it came to enforcing certain risk management protocols and internal controls, giving Credit Suisse some leeway to reorganize without immediate repercussions from the regulator.
Blowing it Big Time: When Easements Blow Up in Your Face
- Short-Term Liquidity Lifeline vs. Long-Term Risk The temporary safety net provided by these easements helped Credit Suisse's liquidity and capital ratios in the short run, but their vulnerabilities were exposed when the bank faced subsequent market shocks, such as big losses in riskier trading operations and markdowns in reputation.
- Deferred Risk Denial The leniency on risk calculations may have postponed the recognition of the true risks lurking in the bank's assets. This:
- Made their balance sheet appear healthier than it actually was,
- Polluted investor and counterparty confidence, leading to a slow and steady erosion over time.
- Regulatory Red Flag and Market Mistrust The granting of these easements by FINMA painted the bank as a struggling entity, which unsettled investors and clients. They could interpret these regulatory accommodations as a sign of deeper, lingering issues within the bank.
- Operational and Strategic Slip-ups The leeway given by FINMA enabled Credit Suisse to make strategic maneuvers, such as asset sales, restructuring, and risk reduction initiatives. Although they've tried, the bank is still dealing with remnants of legacy risks and rivalry from competitors.
- The banking-and-insurance industry's scrutiny on Credit Suisse has intensified due to the Swiss Financial Market Supervisory Authority (FINMA) granting easements, which involved leniency on capital adequacy requirements and risk management practices, affecting their business operations and investor confidence.
- Finance experts argue that the easements provided by FINMA, primarily concerning regulatory flexibility and risk-weighted assets, may have led to a delay in the recognition of Credit Suisse's underlying risks, eventually harming their long-term financial stability and affecting investors.
- The involvement of the financial sector, including banks like Credit Suisse, in the business environment can be precarious when leniency on regulatory oversight results in insufficient support for investors, potentially leading to undesirable consequences in the industry and the broader economy.
