CREDIT SUISSE TO RING FENCE DOMESTIC BANKING BY EARLY 2017

As the winds of the next crisis are starting to stiffen, the Swiss are rushing to absolve themselves of the responsibility for their overgrown too big to fail (TBTF) banks. Credit Suisse and UBS are being prodded by the regulators to split off the Swiss-only domestic banking from their gargantuan global assets (and liabilities).

The Swiss are still reeling from bowing to the US pressure and ending bank secrecy, which had been the cornerstone of Swiss private banking for over 80 years. This happened, in part, because the two largest Swiss banks, UBS and Credit Suisse, have grown larger than the Swiss GDP, which made these banks not just too big to fail but also too big for the Swiss government to protect or bail out.

Last fall, an obscure Credit Suisse press release described a process whereby the bank would form and float a new separate banking entity that would exclusively service Swiss businesses and individuals. A well informed Swiss source told us today that Credit Suisse was further along in the process but that UBS was working on a similar plan. Our source also mentioned that FINMA (the Swiss regulator) wanted the Swiss-only bank to have 95% of its assets coming from the Swiss ultimate beneficial owners, which would exclude all non-Swiss nationals and all of the Swiss entities owned by the foreign interests.  

What does it all mean? The Swiss have realized that the next crisis is on its way and that they would have no ability to manage the situation should UBS or Credit Suisse were to fail. Their plan is to create an old-fashioned commercial and retail banking system that would serve only Swiss citizens and Swiss-owned companies. This way, when the next crisis triggers another round of TBTF bank failures, the Swiss government would have an option to let their TBTF banks' creditors, shareholders, non-Swiss counter parties and non-Swiss depositors, fend for themselves.  No one ever accused the Swiss of not looking out for Number One!

The Swiss are making contingency plans and prudent investors should do the same.