Credit Suisse Group AG's collapse has highlighted deficiencies in banking supervision and resolution plans introduced in the wake of the 2008 global financial crisis.

Cross-town rival UBS Group AG took over Credit Suisse in March in a hastily arranged merger orchestrated by the Swiss government. The saga sparked criticism of Swiss regulator FINMA and the country's central bank for their oversight of Credit Suisse during its three-year struggle to overcome a string of crises and triggered a wider debate over whether current rules are fit for purpose.

National responsible authorities could have prevented Credit Suisse's downward spiral with earlier and more decisive action, market observers said. The tie-up with UBS also exposes Switzerland to potential future systemic risks and raises questions about bank resolution rules, which were not fully applied.

"There is little doubt in my mind that FINMA dropped the ball," said Darko Kapor, partner at consultancy firm Tricumen. The bank's "many problems were widely known and discussed over a long period of time, so there was no need for emergency action and cobbling together a deal over the weekend," Kapor said.

FINMA did not respond to requests for comment, referring instead to previous official statements.

Early intervention

FINMA should have put more pressure on Credit Suisse to correct existing risk management and operational issues sooner, as early as the collapse of US hedge fund Archegos Capital in March 2021, said Richard Portes, founder of UK-based thinktank Centre for Economic Policy Research. Credit Suisse lost $5.5 billion due to its sizable exposure to Archegos, which revealed serious failings in the group's risk management controls. The case came only weeks after the bank had to close four supply chain finance funds with $10 billion of assets linked to the collapse of specialty lender Greensill Capital.

The supervisor should have requested that Credit Suisse replace "a significant number" of managers and clarify its strategy at a much earlier stage, Portes said. While it may not be the supervisor's role to interfere with a bank's business model in normal circumstances, it becomes their responsibility if a bank is "heading for a disaster," said Portes, who is also an economics professor at London Business School.

FINMA and the Swiss National Bank could have used various opportunities to step in much earlier "with more proactive assistance, driving recovery, or effectively working something out that would have kept Credit Suisse as a viable alternative, in a perhaps smaller form," said Michael Huertas, partner and head of the financial institutions regulatory Europe team at PwC Legal.

This type of regulatory-led intervention "may have caused some concern amongst shareholders and other stakeholders, but it would have preserved a very important player in the financial services market, not only in Switzerland but also globally," Huertas said in an interview.

FINMA did not seem to have had a good plan for Credit Suisse's resolution or to have thought through the implications of the merger with UBS, according to a former central banker, speaking on the condition of anonymity. "What on Earth are they going to do next time if UBS runs into trouble?" they said.

Power limitations

A 2019 International Monetary Fund report found that while FINMA "enjoys a broad range of enforcement and early intervention powers to deal with problem banks," there is a "lack of clarity in the [Swiss] law with respect to the triggers and type of measures that supervised entities might be subject to."

The IMF recommended the establishment of an explicit, written early intervention framework to "enhance and institutionalize timely intervention." The fact that some supervisory decisions could be legally challenged given the lack of clarity in the law could lead to a timid or delayed application of some more intrusive early intervention measures, the IMF warned.

In its latest assessment report, released June 7, the IMF said Switzerland has not yet implemented the recommended measures necessary to enhance financial resilience, including the establishment of the intervention framework.

FINMA Chair Marlene Amstad and CEO Urban Angehrn have defended the authority's actions in the run-up to the merger. FINMA is not responsible for running banks or weighing in on their strategy and launched six enforcement proceedings against Credit Suisse over the past three years, they said via public statements and media interviews.

Enforcement of supervisory law is FINMA 's "most powerful weapon," yet it could take years until a conclusion via the court system is reached, especially when it comes to securing complicated evidence, which is often the case with big global banks, Amstad said.

The Credit Suisse case does, however, show that the authority's supervisory toolbox could be expanded, Amstad said in April.

Three additional instruments were suggested: public communication of supervisory actions, including enforcement proceedings; the power to impose administrative fines; and a senior manager regime that would enable FINMA to take action against individuals for general managerial failures at a bank. Currently, FINMA can only sanction individuals if there is proof they were directly responsible for wrongdoing found at a financial institution.

Swiss lawmakers on June 8 agreed to establish a parliamentary commission, only the fifth time it has done so in its modern history, to examine Credit Suisse's collapse and the rescue deal, Reuters reported.

Too big to handle

Credit Suisse's collapse exposed issues that extend beyond Switzerland, particularly around bank supervision, which global watchdogs think could be improved.

Agustín Carstens, head of the Bank for International Settlements, and ECB supervisory board chair Andrea Enria said in separate June 1 speeches that supervisory authorities should identify issues early and ensure their prompt remediation by banks. Carstens called for a significant increase in supervisory budgets in some jurisdictions, supported by higher contributions from the banking sector.

Recent events have also demonstrated that the post-2008 crisis resolution rules are inadequate when it comes to global systemically important banks (G-SIBs), Portes said. Given these big banks' interconnectedness with the rest of the financial system, a G-SIB's collapse is likely to trigger more bank failures, Portes said.

Current total-loss-absorbing-capacity buffers do not provide a large enough cushion to quell market fears about bank solvency and prevent bank runs. The lack of provisions for funding in resolution, as well as a mechanism to avoid cross-jurisdictional issues that could arise when resolving a group with major operations in several countries, make the current resolution regime inapplicable for big banks, Portes said.

The option to merge Credit Suisse with UBS rather than follow established resolution frameworks created a group with total assets of some CHF1.5 trillion, roughly double the GDP of Switzerland. This poses a serious risk to the country's financial stability if past crises are anything to go by, said Barbara Casu, banking and finance professor at Bayes Business School. Both Ireland and Iceland, where bank sector liabilities surpassed country GDP by multiple times, had to be bailed out during the eurozone debt crisis, Casu said.

When it came to a resolution of the bank, the authorities backed away as they feared the contagion risk and the hit to the Swiss economy would be too big. "There is a little bit of a disconnect between what regulation requires on bank resolution and what seems feasible in a moment of crisis," Casu said.