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Films by Sam Peckinpah and his followers were known for their use of slow-motion violence. A report by the Swiss National Bank draws a parallel to this effect prior to the catastrophic collapse of Credit Suisse. The report highlights the fact that there was ample time to observe the impact of market forces on the vulnerable Swiss wealth manager. The main lesson from the SNB report is the inadequacy of current capital buffers.
It is important to note that the Swiss National Bank is not responsible for regulating Swiss banks; that duty falls under the jurisdiction of Finma. However, the SNB report suggests that Finma could have taken more proactive measures at an earlier stage. The low price-to-book ratio and poor return on assets of Credit Suisse clearly indicated imminent threats to the bank.
This situation poses a dilemma for investors. Despite having common equity tier one ratios well above regulatory minimums (Credit Suisse had a reasonably high 14% by the end of March), these figures become meaningless when confidence is lost. The credibility of capital and liquidity measures relies heavily on conservative asset valuations.
After years of mismanagement, Credit Suisse faced a serious credibility problem in the market. The SNB referred to the bank’s “difficult-to-assess” assets, which posed further risks and weakened its capital base. Unfortunately, neither Credit Suisse nor Finma made the necessary difficult decisions early on. In 2021, Credit Suisse was ranked among the top 25 globally systemically important banks, one of only two in Switzerland.
The SNB alarmingly points out that the current definition for CET1 has some vulnerabilities. It is evident that Swiss regulations allow a reweighting of risk assets when a bank makes provisions for foreign assets, rather than deducting capital. Another suggestion by the SNB is that banks should maintain a minimum amount of assets to pledge to the central bank.
The slow downfall of Credit Suisse will be thoroughly examined by Finma and the government. Nonetheless, the initial thoughts from the SNB indicate that Swiss banks, including UBS, will face increased scrutiny and higher capital requirements. This will undoubtedly impact their future profitability and investor sentiment towards banks.
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