Bank Separation: Switzerland Gets a Second Chance

Magdalena Martullo-Blocher, the daughter of SPP founder and herself a member of Parliament, reminded the news portal Watson (April 29) that the bank separation system proposed by the SPP and the left in 2009, after the state bailout of UBS would have prevented the Credit Suisse (CS) debacle. “The riskier part of a bank could have gone bankrupt separately”, she said. But the “too big to fail” regulation did not deal with the problem of a bank run, or with the ensuring of liquidity, which was left up to the National Bank. “CS now needs such large amounts that not even the SNB is equipped to handle it and the federal government has to step in. The federal guarantee alone corresponds to 1.5 times the annual federal budget!”

Implementing the reform proposed at the time would have prevented losses which retail customers, pension funds and insurers have now incurred as a result of the CS liquidation. For instance, Migros, Switzerland’s second-largest retail-company (after Coop), has joined a growing number of CS clients, who are filing a court action against the decision to write off the bank’s AT1 (Co-Co) bonds. The pension fund of Migros lost CHF110 million, of which 100 million on Co-Co bonds and 10 million from the depreciation of CS shares. Under a bank separation regime like Glass-Steagall, a pension fund would be prohibited from investing in such high-risk instruments.

The plaintiffs’ chances of rescuing their money are slim, as they signed contracts which explicitly say that their value would be totally written off in special cases, such as an imminent bankruptcy or a necessary state intervention. However, this is ultimately a political decision, dependent on whether the legal motivation for the write-off – i.e., the state of emergency declared by the government — was legitimate or not.