Reported by Mark Dittli

Paul Tucker warns against dismissing the end of CS as an isolated incident that cannot happen again. It was the first major global systemically important bank to go under since the global financial crisis of 2008, and its fall has important lessons to teach: for Switzerland in its dealings with UBS, but also worldwide for dealing with major banks. Nothing less than the sustainability of capitalism is at stake, he says in an in-depth interview with The Market NZZ.

As a former Deputy Governor of the Bank of England and a member of the steering committee of the G20 Financial Stability Board, Tucker was one of the leading architects in the endeavour to make the global financial system more resilient after the crisis.

After the Global Financial Crisis, the understanding among regulators was: Let’s make sure it won’t happen again. In the spring of 2023, Credit Suisse as a globally systemic financial institution failed. Were the past 15 years all a waste of time?

The policy response that emerged in 2010 onward was twin-tracked: One, reduce the probability of systemically relevant banks getting in distress at all. But we knew that this probability could never be reduced to zero. So the second, in my view more important track was that, once they go into distress, the authorities need to be able to cope much better than they did in 2008. Last year’s failure of Credit Suisse, as well as Silicon Valley Bank in the US, showed that the authorities still couldn’t cope well in such situations. Does this mean that it was all a waste of time? Not at all. To give you an example: Before the GFC, most countries in Europe, including the UK, did not have a special resolution regime for banks at all. They now have. And secondly, the US had a resolution regime, but not one that could cope with the very big institutions. They now do.

What lessons should be learned from the failures of CS and SVB?

The regional banking crisis in the US primarily threw up a lesson at the level of implementing policies for medium-sized banks. Regulators in the US need to realise that medium-sized banks matter to the stability of the system. The case of Credit Suisse is bigger, and more fundamental lessons need to be drawn from it. It reveals that there have been flaws in the implementation of the resolution regime, and there have been gaps in its conception. CS revealed some new-ish things about the ways massive banks can fail and about what central banks in particular might need to do. This was a seismic blow to international banking that, oddly, has not commanded much attention outside Switzerland.

You wrote in a report commissioned by the Swiss Finance Ministry that the CS episode should be causing sleepless nights among supervisors, central bankers and resolution agencies worldwide. Why?

Believe me, I did not write that sentence lightly. The reason it should give people in Washington, London or Frankfurt nightmares is twofold: Which other jurisdictions providing a domicile for globally significant financial institutions, so-called G-SIFIs, have not prepared well? And have they prepared as well as they themselves think and say they have? Have their regimes also got gaps or flaws similar to the ones that tripped up the Swiss? Remember, after the GFC, Switzerland was in the vanguard in addressing the «Too big to fail» issue. We have to realise that no capital in the world, not even Washington, can preserve financial stability in its own backyard without the cooperation and professionalism of the other big capitals.

What was so special about the case of Credit Suisse?

Most people, including most officials, think that vast banks can suffer a run if they have lost a lot of money, depleting their capital. CS is probably better thought of as failing not because it had suffered big losses, but because it had suffered a cascade of reputational problems. Wealth management clients simply no longer wanted to do business with CS. The best analogy for me is when customers turned their back on the accounting firm Arthur Andersen after the failure of Enron. Enron failed in a spectacular way, and they were audited by Arthur Andersen. So clients left them. The run on the wealth management unit of Credit Suisse affected pretty much everything with the name CS. We now have to understand that G-SIFIs can unravel for reputational reasons. The proximate problem is the liquidity run, but the cause is the reputational problem. It killed them even though they seemed comfortably solvent. This scenario could happen elsewhere. That should be lesson number one.

You say the Swiss authorities have failed. How exactly?

Let me stress first that my judgement is based entirely on publicly available documents. My report is not an inquiry where I have seen who said what to whom. If one were to do such an inquiry, it would have to go back to about 2010 to be done properly. That said: There is a very important but flawed provision in the Swiss legal regime, and I think the other jurisdictions should have spotted this and challenged it. It basically says that the Swiss National Bank is responsible for designating globally systemic institutions domiciled in Switzerland, but in terms of systemically important functions that must be maintained in an emergency, only the domestic business lines are designated. That creates a tension for Switzerland: It is hard to be a centre for globally significant institutions and global wealth management, but at the same time you emit a signal that in an emergency you only really care about the domestic business.

Isn’t that the case in other jurisdictions, too? In the end, the authorities are beholden to their domestic taxpayers.

I see the political dilemma. Why should we care about the international activities of a large bank? The broad answer is: You shouldn’t expect a domestic business with the name Credit Suisse to survive if the international business with the same name can’t survive. The framework in the UK is somewhat different: The UK also has a special regime for its big domestic retail banking businesses, which are ring fenced, but the law requires the Bank of England to have resolution plans for the whole of Barclays or HSBC, not just the domestic retail banking operations of these banks. In an absolute disaster, yes, the domestic business is the one you most want to preserve. But if you emit signals that international activities do not matter, and if you don’t want to prepare for the resolution or lender of last resort assistance to the whole group, that can infect the core domestic business. That happened to Switzerland.

Read full report: https://themarket.ch/english/paul-tucker-credit-suisse-should-cause-sleepless-nights-ld.11452