The way Switzerland handled the downfall of Credit Suisse by merging it with UBS did not sit well with U.S. regulators. The chair of the Federal Deposit Insurance Corporation (FDIC), Martin Gruenberg, openly criticized this approach. Unlike the Swiss method, he noted, U.S. authorities are geared up to completely shut down such a major bank if faced with a similar crisis.
Gruenberg, in discussions with the Financial Times, shed light on a recently issued paper by the FDIC. This document outlines the protocol for handling the collapse of a globally significant bank like Credit Suisse. He emphasized that the FDIC’s stance is a stark reminder to shareholders, creditors, and bank executives that the days of government bailouts stabilizing the system—as seen in 2008 after Lehman Brothers’ failure—are over.
A Shift in Resolution Strategies
Gruenberg expressed discontent with the Swiss authorities’ decision to not put Credit Suisse through a formal resolution process. He called it a “missed opportunity” and suggested that such action would have been more beneficial for financial stability and market confidence. Instead, the FDIC is set to implement a resolution framework that could handle the orderly failure of any major financial institution, including giants like JPMorgan.
The FDIC’s approach involves drastic measures such as removing top management, erasing shareholder value, and imposing losses on holding company creditors, while ensuring essential operating subsidiaries remain functional to prevent widespread economic disruption.
This strategy stems from powers granted under the Dodd-Frank Act, enacted post the 2008 financial crisis. This act provided new legal frameworks to manage the failures of significant financial entities differently from the standard procedures used for smaller bank collapses like those of Silicon Valley Bank, Signature Bank, and First Republic last year.
In contrast, the Swiss authorities allowed Credit Suisse to merge with UBS, preserving some shareholder equity and imposing losses on certain bondholders. This controversial decision essentially inverted the traditional capital structure, sparking debate and criticism internationally.
Global Perspectives and Future Implications
Following the merger, Switzerland has proposed new measures to fortify its banking sector. These recommendations include enhancing the powers of the Swiss financial regulator, Finma, and tightening capital requirements on major banks. These proposals, largely advocated by UBS, are set to be debated in the Swiss parliament.
However, the narrative surrounding the Credit Suisse collapse extends beyond regulatory adjustments. UBS CEO Sergio Ermotti pointed out at the Ambrosetti Spring Forum in Italy that the merger should serve as a “case study” for future consolidations in the banking sector. He argued that such moves are essential for creating stronger, globally competitive banks.
Despite this, Ermotti acknowledged that the current political and economic climate in Europe does not fully support the swift execution of such significant mergers. He highlighted the necessity for a banking union and capital markets union in Europe to enhance the global competitiveness of European banks.
The FDIC’s clear message through this debacle is that investors should be wary as the safety net of bank debt is not as secure as it once was.
