‘Credit Suisse situation shows that our financial system is shaky’

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‘Credit Suisse situation shows that our financial system is shaky’

The uncertainty surrounding Credit Suisse had to be resolved this weekend, and so it has been done, concludes Professor Arnoud Boot. If that had not happened, the Swiss government would have had to take over the bank. ‘And there is no government that can run such a large bank,’ says Boot. ‘And certainly not suddenly on the weekend.’

The uncertainty surrounding Credit Suisse had to be resolved this weekend, and so it has been done, concludes Professor Arnoud Boot. If that had not happened, the Swiss government would have had to take over the bank. ‘And there is no government that can run such a large bank,’ says Boot. ‘And certainly not suddenly on the weekend.’ (EPA)

Instead, it was UBS that acquired Credit Suisse, meaning Switzerland now has an even bigger bank. Boot goes so far as to say that Switzerland is owned by UBS. “They have so much power now, and that is quite a disappointing situation. It shows that the financial system is shaky.’

“UBS now has so much power, and that is quite a disappointing situation”

Professor Arnold Boot

According to Boot, one of the conclusions of the previous financial crisis was that banks should have more equity. If that is the case, then one can feel safer. ‘Banks, however, were not very keen on this,’ Boot argues. ‘But they had to. After all, it couldn’t be less than zero.’ He states that banks then tried to avoid acquiring equity. “They insisted they were complex institutions, so they came up with complex solutions.”

Convertible quota

Banks came up with the so-called Co/Co system: convertible contingent bonds. Under normal circumstances, these bonds are regarded as debt capital, the interest paid on them may be deducted from taxes. ‘That also made it attractive for banks,’ Boot continues. “But if things go wrong, they are canceled or converted into shares.”

In Switzerland, there is now a situation from the first category: bonds are being eliminated. And that is striking, according to Boot. “Switzerland has let banks get away with selling CoCos that can be canceled if a viability event takes place,” he says. ‘In other words: if the supervisor decides to do so. Such an event has been invoked, and now the bonds have been canceled.’

Lobby in order

Boot thinks that the regulator did not keep its knife between the teeth because the banks had their lobby in order again and preferred interest deductions. “They preferred to suggest that the extra profit would go to shareholders, while at the same time having that interest deduction,” says Boot. Something that the then Minister of Finance and Eurogroup President Jeroen Dijsselbloem accidentally approved. ‘He was not in favor at all, but signed as a sign of fatigue,’ says Boot.

According to Boot, this created an undesirable situation, where complexities kept piling on top of each other, ‘while the simpler and better alternative is called equity capital’.


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