The Too-Big-To-Fail package announced by the Federal Council on Wednesday has one defining theme: Credit Suisse. The downfall of the bank is cited as justification for virtually every measure proposed — measures that will fall squarely on UBS.

The government is presenting tighter capital requirements as an inevitable consequence of the events of March 2023. But the existing Too-Big-To-Fail framework had already made provisions for precisely such scenarios, with ring-fencing rules designed to isolate and preserve systemically relevant parts of a bank in a crisis.

Always Fighting the Last War

There is a well-worn saying in policy circles: governments always prepare for the last crisis. What is more troubling here is that the Federal Council is explicitly drawing the wrong conclusions from that crisis — prioritizing capital over liquidity in what amounts to an unfortunate «Swiss finish» on the principle.

Credit Suisse did not fail because its software was depreciated over too long a period. It failed because liquidity evaporated so rapidly that no regulatory firewall could contain the damage. The refusal by US authorities to absorb Credit Suisse's problems on American soil was a separate but equally decisive factor.

A Regulator's Pet Project

The picture is further complicated by the conduct of the Swiss Financial Market Supervisory Authority (Finma). For years, the regulator granted Credit Suisse undisclosed relief on capital requirements through a so-called regulatory filter — and in an opaque process. The parliamentary inquiry commission noted dryly that it had been unable to «fully clarify» the circumstances under which the filter was granted.

Yet it was largely Finma that subsequently drove the push for dramatically higher capital requirements. Finance Minister Karin Keller-Sutter backed the authority's position and carried the full Federal Council with her.

A Swiss Peculiarity

What the government is now proposing reflects a long-standing ambition of the financial regulators: full capital backing — one hundred percent — at the Swiss parent level for all foreign subsidiaries. No other major banking center in the world is pursuing anything like this.

The practical consequences for UBS would be severe. Any future growth in foreign subsidiaries would need to be fully funded with hard core capital. Parts of the corporate banking and investment banking businesses would likely become unprofitable. Shareholders could face years of substantially reduced dividends.

Parliament Has the Final Word

The legislative process, fortunately, is far from a foregone conclusion. The Swiss People's Party (SVP) and the Free Democrats (FDP) will oppose the hundred-percent capital backing requirement by large majorities. They will be joined by parts of the Green Liberal Party and a broad share of Zurich's parliamentary delegation in both chambers.

The cantonal government of Zurich has also explicitly called for a pause in the «Vernehmlassung» — the formal public consultation — saying bluntly that the financial center is its economic lifeblood. Its representatives know what is at stake.

Between the consultation and the formal legislative message, the Federal Council has already quietly dialed back some of the more contentious measures: a rule requiring the immediate write-off of software was dropped, and tighter treatment of deferred tax assets was postponed. The aim was likely to reduce the political surface area for attack.

Hot Air, Lukewarm Outcome?

The hope — for UBS and for Switzerland's financial center more broadly — is that this partial retreat signals the direction of travel for the parliamentary debates ahead.

The decisive battle will be fought in parliament.