The Financial Stability Board of the G-20 has criticized a long-standing practice of Swiss authorities in banking supervision. The guardians of the global financial system have turned their sights to the emerging megabank UBS.

The Financial Stability Board (FSB) once again voiced criticism regarding the collapse of the major bank Credit Suisse (CS) and on banking supervision in Switzerland.

The latest «Peer Review» published by the guardians of the global financial system on Thursday acknowledges the Swiss authorities have made significant progress in implementing an effective «too big to fail» regime for globally systemically important banks.

But the FSB also concluded during the review that additional steps could be taken to strengthen this regime. This is particularly true in light of the forced merger of the two big Swiss banks – UBS and CS – just under a year ago.

Holding Managers Accountable

Specifically, the Financial Stability Board recommends increasing supervisory resources, strengthening early intervention powers, and enhancing resolution and winding-up arrangements. This should be music to the ears of the Swiss Financial Market Supervisory Authority (FINMA), which has been calling for expanded powers since the CS rescue operation, especially to impose fines.

The FSB also supports the call to hold managers accountable.

Potential Conflict of Interest?

But the G20’s body is also looking to patch up FINMA. It says the authority should rethink its reliance on external audit firms for banking supervision. Instead of the usual practice of delegating supervision to professional auditors and having the audited entities pay for it, FINMA should consider taking a different approach: with the authority directly appointing the actors and paying for the audits itself.

This would «address governance issues and conflicts of interest,» the body says.

FINMA Cannot Check Everything by Itself

The FSB is undoubtedly addressing a sore point in the supervision of the Swiss financial sector. But if FINMA were to check everything itself, it would have to be given significantly more resources.

The Financial Stability Board also criticized the Swiss institutions in its first report on the collapse of CS last October. The body was convinced at the time that a «too big to fail» restructuring of Credit Suisse would have also worked.

But the federal government, FINMA and the Swiss National Bank (SNB) rejected this solution at the last minute on March 19, 2023 and opted instead for the banking behemoth to be sold to UBS. And this was carried out in coordination with foreign authorities.

Making Provision for Emergency Liquidity

The FSB’s new «Peer Review» recommends expanding the Swiss regime to better address liquidity crises like the one at CS. This includes the public liquidity backstop (PLB), which was applied to the collapsed major bank under emergency law and is now to be retroactively incorporated into the banking act. Another demand is to remove the «stigma» of using central bank liquidity.

It seems UBS will likely breathe a sigh of relief that the financial stability overseers are no longer calling for additional capital for the «new» UBS. This in contrast to Swiss politics, which partly advocates for a massive expansion of capital at the country’s largest bank.