Switzerland’s financial watchdog FINMA is pushing for more authority to regulate and sanction banks, following the failure of Credit Suisse earlier this year. A group of Swiss lawmakers has proposed a set of reforms to grant FINMA additional powers, such as the ability to fine banks, require them to disclose key risk takers and publish stress tests.
FINMA wants to fine banks and name managers
FINMA currently lacks the power to impose fines on banks that violate its rules, unlike its counterparts in other countries. The regulator can only issue reprimands, order remedial measures or revoke licenses. FINMA has been calling for more powers to take banks to task, especially after the collapse of Credit Suisse, the country’s second-biggest bank and a one-time symbol of Swiss financial strength.
Credit Suisse failed in March 2023, after suffering massive losses from its exposure to the U.S. hedge fund Archegos Capital Management and the British supply chain finance firm Greensill Capital. The bank was taken over by its rival UBS in an emergency deal brokered by the Swiss government, which had to inject billions of francs to prevent a systemic crisis.
The lawmakers also want FINMA to oblige banks to name their key risk takers, such as traders and executives who are responsible for significant positions or exposures. This would increase the accountability and transparency of the banks, and allow the regulator to monitor their activities more closely.
Additionally, the lawmakers propose that banks should publish their stress tests, which are simulations of how they would cope with adverse scenarios, such as market shocks or economic downturns. Stress tests are standard practice in Europe, but not yet in Switzerland, despite its outsized financial sector. Publishing stress tests would enhance the credibility and confidence of the banks, and help the regulator and the public to assess their resilience.
Swiss parliament to debate reforms in 2024
The proposal from the Swiss parliamentary committee represents a modest attempt at reform, largely bringing its supervisor into line with international peers. The committee is composed of members from various political parties, and aims to find a consensus on the necessary changes to the Swiss banking regulation.
The proposal is expected to be debated in the Swiss parliament in 2024, and could become law as soon as in the second half of that year, according to a Swiss parliamentarian and commission member. However, the proposal could face opposition from some politicians and bankers, who prefer to keep the regulator weak and the industry self-regulated.
Switzerland has a long tradition of banking secrecy and free-market philosophy, which has made it a global hub for wealth management and private banking. However, this has also exposed it to risks and scandals, such as the U.S. tax evasion probe, the 1MDB corruption case and the Credit Suisse debacle.
IMF and experts urge stronger supervision
The proposal comes after the International Monetary Fund (IMF) warned Switzerland about the need to strengthen its regulator, urging that its “autonomy, governance and accountability” be strengthened. The IMF made this recommendation as far back as 2019, but it was largely ignored by the Swiss authorities.
The IMF also highlighted the challenges and vulnerabilities of the Swiss banking sector, which is highly concentrated, interconnected and exposed to foreign markets. The IMF estimated that the assets of the two largest banks, UBS and Credit Suisse, amounted to more than four times the Swiss gross domestic product (GDP) in 2019, making them too big to fail.
Experts and analysts have also called for more reforms and oversight of the Swiss banks, especially after the Credit Suisse collapse, which blindsided the country’s officials and regulators. They have argued that the Swiss regulator should have more independence, resources and enforcement tools to supervise the banks effectively and prevent future crises.
