Switzerland: Critics Warn Of Loopholes In New Banking Rules

By Urs Geiser

Parliament has approved a set of stricter banking regulations to prevent a repeat of a government bailout of a major bank facing a financial crisis.

While the centrist parties hailed Switzerland’s pioneering role, the political right argued the measures compromised the competitive edge of the financial sector and the left called for further restrictions, notably on investment banking.

Ahead of a final vote on the bill on Friday and following tough bargaining between the two chambers over the past autumn session, parliament agreed to impose a total capital equity ratio of at least 19 per cent, improved risk diversification and steps to ensure the payment of transactions in case of a bank’s insolvency.

The measures, largely in line with proposals put forward by the cabinet, are more stringent than those set by international regulators for banks deemed too big to fail – that is, vital for a country’s economy.

The centre-left Social Democratic Party welcomed parliament’s decision only as “a first step” in the right direction. “The risk of big banks for the Swiss economy is still too big,“ it said.

Amid calls for tougher equity rules or an outright ban on investment banking parliamentarian Susanne Leutenegger Oberholzer said: “We must not allow the big banks to hold Switzerland hostage.”

Investment banking

She was unable to raise the issue of a ban on investment banking within the terms of Thursday’s debate, but warned that she would do so later. Her particular concern follows the announcement earlier this month by the UBS bank that it lost $2.3 billion (SFr2.04 billion) in alleged rogue trading.

The right wing Swiss People’s Party which rejected the bill as “over-regulated” and “damaging for competition”, said alternative options had to be considered.

“We call on the government to come up with plans to split investment banking from the other units to stop major banks running incalculable risks,” said Martin Baltisser, secretary-general of the People’s Party.

“The risk has been reduced, but problem has not been solved. In the event of a bank’s insolvency the state still has to bail it out. We want structural measures: to break up major banks into separate business units or the creation of a holding structure,” he explained.

The Green Party also said it wanted the government to prepare proposals to break up universal banks into separate units.

Stability

The centre-right Christian Democrats hailed the bill as “exemplary”. They said they are satisfied that demands by the right and the left failed to win a majority.

“A ban on investment banking would be a purely populist measure which would not create more security,” a statement said.

In a similar vein, parliamentarian Philipp Müller of the centre-right Radical Party said a ban on investment banking would not necessarily be able to prevent major damage.

“Even with a maximum number of legal restrictions it is always possible for bankers with criminal intentions to find loopholes,” he warned.

The Swiss Bankers Association opposes- proposals to break up existing universal banks, claiming that clients benefit because they offer a wide range of services.

“This model contributes to stable, well-diversified banks,” spokeswoman Sindy Schmiegel said.

The association welcomes the new banking regulations, including a regular review, pushed through despite opposition by the government.

It said the amendments ensure “a good balance between […..] system stability and the international competitiveness of big Swiss banks.”

Tougher rules

During the debates in the House of Representatives and the Senate, several proposals by the Social Democrats and the Greens for more far-reaching measures, were thrown out.

A majority rejected a bid to ban major banks from engaging in investment banking activities, further restrictions on trading activities or tougher liquidity rules based on total assets rather than risk-weighted assets.

For its part the People’s Party saw its call rebuffed for the UBS and Credit Suisse banks to be forced to split their investment arms off from the core wealth management and retail businesses.

Confidence

It took several rounds of tough haggling between the two chambers before the last details were settled on Thursday.

Finance Minister Eveline Widmer-Schlumpf said the stringent laws would help restore confidence in Switzerland as a financial centre.

“We want to leave the banks their entrepreneurial freedom, albeit with certain restrictions to avoid creating problems for the state and taxpayers. It possibly might result in lower yields. But it creates more stability, more security and higher reliability. This will restore confidence in the financial sector – and this is crucial,” she told the house.

At the height of the financial crisis in 2008, the government bailed out UBS with a multi-billion franc package following major losses in the mortgage market.

At the time the combined value of assets of the country’s two main banks, UBS and Credit Suisse, was more than four times higher than Switzerland’s gross domestic product.