Skip to main content

TOO MANY LAWYERS AND NOT ENOUGH ECONOMISTS IN BERN.

 Banks failing: Lessons learnt from Credit Sussie collapse. Part 2.

WRITTEN BY
Dr Giuliano Bianchi. 

Two bailouts in just 15 years

UBS in 2008 and now Credit Sussie.

"“Never again” was the mantra and the goal was to bring Swiss laws in line with other frameworks (namely the U.S. and the EU) and to follow international financial recommendations (i.e., the Basel accords). The Swiss regulator sought to shore up the stability of the system and bring it in line with international capital market standards, in hopes of bolstering the attractiveness of the Swiss financial marketplace."

The bank takeover and its consequences

How did FINMA orchestrate UBS’ absorption of Credit Suisse? FINMA decided to write off Tier 1 capital, tout simplement. This financial instrument was created by the international regulatory community after the 2008 financial meltdown to guarantee banks would have access to capital in case of distress.

The idea is quite simple: Tier 1 works as a bond, but if and when the bank needs capital, they get converted into shares. This conversion carries extra risk that is compensated by a risk premium. The market expected Tier 1 bonds (dubbed “CoCos” for ‘contingent convertible bonds’) to be—in one way or another—converted into stock or compensated in some other way. Nein! FINMA decided to write the bonds off instead, with two lasting repercussions.

First, the decision might sound the death knell for CoCos (or Tier 1) as an asset class. Who’s going to trust them now? Conventional wisdom says that investing in shares of stock is riskier than holding bonds. But FINMA just unilaterally decided to wipe out $100 billion in bondholder wealth. So a tenet of investing wisdom has been turned on its head.

Second, the Swiss authority has put national interests ahead of international credibility. Finance has another truism: “Banks are international in life, but national in death”. FINMA has sent a scary message to investors, which may cut the legs out of a market that has proven to be efficient in preventing bank failures. The decision, to its credit, seems to have halted (or at least slowed) the spread of bank failures that ignited in the United States with the collapse of Silicon Valley Bank. In a recent speech, President Biden’s response was unequivocal: “Investors in the banks will not be protected. They knowingly took a risk, and when the risk didn’t pay off, investors lose their money. That’s how capitalism works.”

"So FINMA has an army of fantastic lawyers to explain their way out of trouble. But what are economists saying about the deal? Is it good for the Swiss economy? Economists could provide a better understanding of the financial engineering, how markets operate and the dynamic behind it, which would help to predict and anticipate events in the future. Maybe there are too many lawyers and not enough economists in Bern. While law and economics is a well-established discipline in the U.S. and other countries, Switzerland seems to be clinging to an antiquated legal interpretation of events."

SOURCE:

https://hospitalityinsights.ehl.edu/banks-failing-lessons-learnt-credit-suisse-collapse-part-2



Comments

Post a Comment

Popular posts from this blog

The Cracks Are No Longer Hairline

For decades, Washington treated support for Israel as something beyond debate. It was political scripture. Republicans defended it. Democrats defended it. Presidents came and went, wars came and went, thousands died, settlements expanded, Gaza burned, and the checks kept arriving. Questioning the arrangement was once political suicide. Now the walls are cracking. This week, more than half of House Democrats either voted to end U.S. aid to Israel or refused to oppose doing so. The amendment failed, but something far more important succeeded. The illusion collapsed. For years, American politicians insisted that criticism of Israeli government policy belonged only to "the fringe." Apparently the fringe has become half the Democratic caucus. History has an unusual sense of humor. The same establishment that spent years dismissing students, academics, humanitarian workers, doctors, journalists, and millions of protesters as naïve, radical, or antisemitic now finds itself strugglin...
Post a Comment
Read more

When the Soup Kitchens Begin to Die

There is a special kind of cruelty in watching not only a society collapse, but also the last institutions keeping it alive. For nearly three years, Gaza's humanitarian lifeline has increasingly been reduced to a queue for a single meal. Parents no longer ask their children what they would like to eat. They ask whether there will be anything to eat at all. Childhood has become measured not in birthdays, classrooms, or family gatherings, but in ration lines, empty cooking pots, and the uncertain arrival of humanitarian assistance. Now even those fragile lifelines are disappearing. The gradual closure and scaling back of World Central Kitchen (WCK) operations reflects a convergence of financial pressures, operational insecurity, and restrictions affecting humanitarian access. According to World Central Kitchen and the Israeli human rights organization B'Tselem, kitchens that once produced approximately one million meals each day have been progressively reduced, leaving only a han...
Post a Comment
Read more

Deutsche Bank's AML Failures: A Case Study in Regulatory Enforcement

German regulator BaFin has withdrawn its special monitor from Deutsche Bank, initially installed due to unresolved money-laundering control deficiencies . This monitor had been in place since 2018 , with its mandate extended to October 2024 earlier this year, threatening fines if improvements weren't made . Deutsche Bank, Germany's largest bank, acknowledged its compliance issues and stated it was cooperating with regulators . However, another monitor remains active , overseeing the bank's consumer service issues at its Postbank unit. Neither BaFin nor Deutsche Bank commented on the withdrawal report Part I Federal Financial Supervisory Authority of Germany. What were the specific deficiencies in Deutsche Bank's money-laundering controls? Deutsche Bank has faced significant deficiencies in its anti-money laundering (AML) controls , primarily highlighted by: - Inadequate Customer Due Diligence:   The bank failed to perform sufficient due diligence on customer...
Post a Comment
Read more

Morgan Stanley's ex-terrorism specialist ( Valentina Soria) joins UBS in London

  by Alex McMurray   "(Valentina)  Soria, an Italian based in London, joins UBS as its global head of cyber threat intelligence and adversarial threat modelling. She was at Morgan Stanley for six and a half years, starting as the EMEA cyber threat intelligence lead and rising to head of global threat intelligence. Prior to that she was head of intelligence at the Bank of England. She leaves at a tumultuous time for the US bank as other senior  London officials are reportedly included  in its 3000 person job cuts." SOURCE:  https://www.efinancialcareers.com/news/2023/05/morgan-stanley-ubs-intelligence
Post a Comment
Read more

Blood on Every Flag: The Global Architecture of Gaza’s Genocide.

  “This Is Not Just Israel’s War — It’s the West’s Genocide Too” “I think it is without doubt that Israel has committed war crimes.” — Matthew Miller , Former U.S. State Department Spokesperson ( source ) This rare moment of candor from a former U.S. official pierces through the fog of political posturing. But let’s be clear: It is not only Israel that has committed war crimes. It is the United States . It is the United Kingdom. It is Germany . It is France . These nations — and their allies — are not merely complicit. They are co-perpetrators of a genocide. 🇺🇸 United States: Chief Financier of Bloodshed $14+ billion in emergency military aid approved for Israel since October 2023 ( source ) 4 vetoes at the UN Security Council blocking ceasefire resolutions ( source ) Full diplomatic cover , even after Israel bombed aid convoys and hospitals “We stand with Israel. Full stop.” — President Joe Biden , October 2023 ( source ) 🇬🇧 United Kingdom: Arming At...
Post a Comment
Read more