UBS has been instructed by the Swiss financial regulator, Finma, to improve its emergency and recovery strategies following its acquisition of Credit Suisse. This directive is part of a broader effort to address the increased risks associated with UBS's expanded operations and ensure that the bank is adequately prepared for potential crises.

Background

The regulator's concerns stem from lessons learned during the Credit Suisse crisis, which highlighted the importance of robust mechanisms to manage potential insolvencies. UBS is currently in the process of integrating with Credit Suisse, which experienced a significant collapse after years of scandals and financial losses.

Living Wills

Living wills are important documents that large banks must submit to regulators, outlining how they can be safely wound down in times of financial distress. This process aims to limit market contagion and prevent the need for government bailouts.

• Finma has called for UBS's resolution planning to be further developed, with a focus on demonstrating how the bank could divest or wind down individual business units or the entire institution without compromising financial stability or requiring taxpayer support.
• This requirement reflects an increasing recognition of the complexities involved in managing large financial institutions and the potential systemic risks they pose.

Liquidity Management

Finma has also emphasized the importance of liquidity management, particularly regarding the speed at which customers can withdraw their deposits. This focus is informed by the experience of Credit Suisse, which faced significant deposit outflows due to social media rumors about its impending failure.

• These withdrawals contributed to the bank's rapid decline, highlighting the need for robust strategies to manage customer confidence and liquidity during crises.

Reforms and Regulatory Landscape

The Swiss authorities are considering a range of reforms to strengthen the financial system's resilience in the aftermath of the Credit Suisse failure. These reforms may include expanding Finma's regulatory powers and imposing stricter capital requirements on UBS, which is Switzerland's last significant global bank.

• The fallout from Credit Suisse's collapse has prompted a reevaluation of the regulatory landscape, with a focus on preventing similar crises in the future.

UBS's Response

UBS has responded to Finma's statement by asserting that it has a sustainable business model with a total loss-absorbing capacity of around $200 billion. The bank acknowledges the need for further development of its resolution planning and states that it has already taken steps to enhance its existing strategies.

• This proactive stance demonstrates UBS's commitment to addressing regulatory concerns and ensuring preparedness for potential challenges ahead.

Conclusion

The Credit Suisse crisis serves as a reminder of the vulnerabilities in the banking sector, particularly for institutions considered "too big to fail." Regulators worldwide are scrutinizing the practices of large banks, leading to an increased emphasis on robust emergency plans and effective resolution strategies. The ongoing integration of UBS and Credit Suisse will be closely monitored as stakeholders seek to understand how the combined entity navigates the evolving financial landscape.