UBS staff were surprised by criticism of the Swiss bank made by Chief Executive Officer Sergio Ermotti and Chairman Colm Kelleher at an all-hands meeting last month.
“They were being pretty brazen,” recalled one attendee based outside Switzerland. “The feeling was that UBS had stepped in to save Credit Suisse last year and now we were being punished.”
Other officials said Ermotti had argued that Credit Suisse’s collapse was an “embarrassment for Switzerland” and that UBS should not have to pay the price.
The strong comments by two of Europe’s most powerful bankers are the latest blow in an increasingly fierce war of words between Switzerland’s financial community and the all-powerful “trinity” of the finance ministry, the central bank and regulator, the Swiss Financial Market Supervisory Authority (FINMA).
Just 16 months after working closely together on the most significant bank acquisition since the 2008 financial crisis, the two are now at public odds over issues ranging from executive pay to capital requirements.
The deal has been controversial, with bondholders who lost $17 billion in the acquisition launching a flurry of lawsuits around the world and local politicians alleging that UBS got the “deal of the century” at the expense of the Swiss people.
Much of the recent disagreement has been over plans to shore up the Swiss financial system after the devastating loss of Switzerland’s second-largest bank, sparking public bickering among the new leaders who are vying to dictate the future of the Swiss banking industry.
“There’s a lot of shadow fighting going on with people trying to establish their own authority,” said a banker involved in the negotiations with Credit Suisse.
Most of the people involved in the four days of tense negotiations that sealed Credit Suisse’s fate last March have since left.
Days after UBS agreed to buy its rival, Mr Kelleher and the board replaced Chief Executive Ralph Hamers with Mr Ermotti, who had led the bank for the past nine years.
FINMA this year hired Stephan Walter as CEO after Urban Angeln, who led the regulator during its final years at Credit Suisse, resigned, citing health concerns caused by “permanent stress levels.”
The Swiss National Bank also recently appointed Martin Schlegel as its new president, who will take up the post in September to replace long-time president Thomas Jordan.
While Ermotti and Schlegel are deeply rooted in their respective organisations and have experience navigating Swiss politics, with the latter having worked at the central bank for more than 20 years, the German Walter is a newcomer, having spent the past 10 years at the European Central Bank.
Karin Keller-Sutter, who had been finance minister for just two months when Credit Suisse collapsed, and Kelleher will soon be the only survivors of bailout talks.
The truce between Switzerland’s four largest banks collapsed dramatically in April when Keller-Sutter announced 22 measures to improve the country’s “too big to fail” regulations.
While most of the proposals, such as greater personal liability for senior bankers and greater powers for the Finnish Financial Supervisory Authority (FINMA), were widely accepted, the proposal to raise capital requirements caught UBS off guard.
Messrs. Ermotti and Kelleher have said publicly that Credit Suisse’s problems were not due to a lack of capital, and the group’s executives said they were surprised by the ministry’s proposal.
Keller Sutter added fuel to the fire by criticizing Ermotti’s pay at the press conference where the rule changes were announced.
The 64-year-old had just become Europe’s highest-paid bank chief after UBS increased his total compensation to 14.4 million Swiss francs ($15.9 million), with potential to rise to 20 million Swiss francs in future.
“Certain amounts are incomprehensible,” Keller-Sutter said, adding that given a Swiss cabinet ministerial salary of 473,000 Swiss francs per year, it would take 30 years to earn the same amount.
“Maybe I’m a little old-fashioned, but as a child I was taught that the salary of a federal councillor was the measure of all things,” she said. “But for a long time that wasn’t the measure of all things, was it?”
Keller-Sutter has since repeated similar criticism in interviews with Swiss media.
As Switzerland’s largest international bank, UBS would be hardest hit by proposed higher capital requirements for its foreign subsidiaries, which the Swiss parliament is due to vote on next year.
The Treasury Department has provided few details about how it will calculate the capital requirement, but analysts estimate it could cost UBS an additional $15 billion to $25 billion. While Keller Sutter calls those projections “plausible,” UBS executives have complained they haven’t been given any information to conduct their own analysis, and they’re deeply disappointed.
Since then, questions about whether higher capital requirements should be applied to UBS or whether it is too big for the Swiss economy have dominated public debate over the future of financial regulation in the country.
“I have serious concerns about some of the discussions around additional capital requirements,” Kelleher said at the bank’s annual general meeting in April.
A month later, in his first public appearance as chief executive of the Finnish Financial Market Authority, Walter said he fully supported UBS raising more capital to support its overseas subsidiaries.
“The Credit Suisse crisis clearly demonstrated the fragility of the parent bank,” he said.
The next day, Ermotti hit back, accusing Swiss authorities of allowing Credit Suisse to collapse and failing in their responsibilities to oversee the bank.
“Fourteen months after the Credit Suisse bailout, there is still an intense and often superficial debate about whether UBS is too big for Switzerland,” Ermotti said in a speech at the University of Zurich. “To be honest, it’s quite surprising how quickly UBS has gone from being seen as a savior to being a potential problem for Switzerland in the future.”
A few weeks later, Ermotti warned that if policymakers overreacted to the Credit Suisse collapse, Switzerland risked being overtaken as the world’s top asset management location by Hong Kong, Singapore and the United States.
“There are too many ignorant, populist and fear-mongering voices in the media, politics and academia, including at this university, that focus solely on the dangers of having big banks based in our country,” he said in a speech in Lucerne.
Tensions at the top of Swiss finance have sparked speculation in Zurich that the rift is a convenient way for the authorities to demonstrate to a public who believes they gave UBS too generous a deal that the two sides are no longer in cahoots.
“UBS got an incredible gift, the deal of the century,” said one banking adviser. “Now the government is under pressure from the Swiss public to make it look like it wasn’t such a great deal. But in the end, there will be regulation that can be paid for, which will inevitably mean higher capital requirements for UBS.”
One area of agreement between the two camps is that the enlarged UBS does not have an undue advantage in its domestic market.
The bank controls around 20% of the country’s deposits and 31% of its loans, and its total assets are roughly twice Switzerland’s gross domestic product, leading opposition politicians and rival banks to say it has undue influence over market pricing, ultimately to the detriment of its customers.
But Switzerland has more than 235 regional banks and up to a third of the market is controlled by government-owned cantonal banks, and Ermotti argues that “talk about a lack of competition is a joke”.
FINMA decided last month not to impose any restrictions on UBS’s domestic operations following a report from Switzerland’s antitrust watchdog.
But another regulator that watches prices said it would scrutinise the fees charged by UBS after a Competition Commission report highlighted how the bank still dominates parts of the domestic market.
UBS, the Bank of Finland, the Swiss National Bank and the Ministry of Finance declined to comment.
People involved in the private talks between the two sides said the discussions were “active” and “intensive” but that more agreement was reached than in talks with U.S. banks, which have spent the past year lobbying strongly against the implementation of Basel III capital rules.
Others add that opposing views are a natural part of healthy political debate in Switzerland.
Added a banker who worked on the Credit Suisse takeover: “There are a lot of different positions being taken but in the end common sense will prevail. A middle ground will ultimately be found.”
