The government is due to unveil long-awaited proposals for legislation in the coming days that are likely to touch on all of the main pillars of bank oversight, from capital and liquidity rules to controls on governance. UBS Group AG — the country’s sole remaining globally-systemic bank that’s now over twice the size of the domestic economy — is in for heightened scrutiny.

A key plank is strengthening Finma, the banking watchdog which was unable to prevent years of bad management at Credit Suisse threatening the nation’s historical reputation for financial stability. That task is aided this week by the arrival of Stefan Walter, a veteran European bank supervisor who’s spent a decade going toe-to-toe with the likes of Deutsche Bank AG, to serve as Finma’s new chief executive.

“I wouldn’t call the Swiss authorities toothless, but there are certainly some things which should be changed,” said Yvan Lengwiler, a professor at the University of Basel and the head of an expert panel created to make proposals for reform. “Finma definitely needs more resources to come on to an equal footing with the banks.”

Walter, 59, can be seen as the face of this revamp. The German national played a key role in building out the European Central Bank’s oversight arm when it started watching over lenders in 2014 as part of the response to the bloc’s sovereign debt crisis.

Walter is also a former secretary general of the Basel Committee on Banking Supervision and senior vice president at the Federal Reserve Bank of New York, two of the most significant bodies in the world of financial oversight. 

He helped build a system at the ECB which challenged banks on the risks they were taking. That approach continues to be seen, for instance in the recent crackdown on the leveraged lending businesses at Deutsche Bank, BNP Paribas SA and others.

The Swiss have long preferred a more consensual approach to financial oversight than is common in other jurisdictions. The lack of the ability to hand down fines has sometimes been justified on the basis that it would destroy the cooperative atmosphere. 

The philosophy of lean management is also reflected in the relatively small size of the regulator — just under 600 staff work at Finma to oversee a financial sector that directly employs more than 230,000 people.

Yet the rapid evaporation of confidence in Credit Suisse after a string of missteps and losses, and its subsequent emergency rescue by UBS, has dented that previous consensus. Finma itself has complained that although it identified the rot at the heart of Credit Suisse, its appeals for change were effectively ignored.

The government, including the finance ministry, the Swiss National Bank and Finma are all broadly aligned on the need for expanded regulatory powers. Even the banks, including UBS, have signaled support for major parts of the reform agenda.

Alongside the ability to fine, a key part of the new approach is a so-called senior managers regime — making individuals directly responsible for their decisions. Such a system, which exists in different forms in jurisdictions including the UK and Hong Kong, enables regulators to identify who’s at fault. Switzerland is likely to take its own approach, according to Thomas Hirschi, the head of banking supervision at Finma. 

“Swiss regulation has always been, and will probably continue to be, principles-based rather than rules-based,” Hirschi said in an interview. Yet for an effective senior manager regime, specific provisions are needed, he said. “If you only have principles, then we actually remain within the current system, where it becomes difficult to enforce the law.”

The point is to shift the culture of risk taking among Swiss bankers. The need for such a change was underlined late last year when it emerged that Julius Baer Group Ltd, a globally active wealth manager, had run up a $700 million exposure to a single client — Austrian property tycoon Rene Benko. 

The bank’s internal controls hadn’t stopped the concentration of risk, and the resulting write-down as Benko’s conglomerate Signa entered bankruptcy wiped out half the lender’s annual profit. The chief executive stepped down; the chairman, Romeo Lacher, apologized. 

Proponents of a senior manager regime want “to strengthen the sense of responsibility of bank managers in advance,” said Nina Reiser, associate professor for financial markets law at University of St Gallen. “If there is a documentation that clearly states what I’m responsible for, which is authorized by Finma or audit firms, then I will weigh my decisions more carefully.”

There is a further screw that some are advocating to turn — bonuses. Current legislation only allows Finma to formulate “guidance” on how much bankers should be paid. That’s not strong enough, according to former Finma chief executive Urban Angehrn. 

Finma needs to be able to influence “the bonus pool decisions of the large banks,” Angehrn told Bloomberg Television last month. Marlene Amstad, Finma’s current chair, is also pushing for this to be laid down in law.

It’s clear that UBS will be even more under the spotlight. The Zurich-based bank, the largest manager of private wealth outside the US, is already facing higher capital and liquidity requirements as a result of its increased size. Finma has boosted the size of its team working with the bank and is planning two stress tests on its balance sheet this year. 

Yet a debate is emerging about the adequacy of existing capital and liquidity requirements, given the bank’s systemic importance. The SNB added its voice last month, saying a review of the ‘progression’ of capital rules according to size is needed. It also argued that a revamp of liquidity rules, which were shown to be inadequate during Credit Suisse’s crisis, is due. 

Adding an extra layer of capital and liquidity rules on top of the current global standards, laid down after the 2008 financial crisis, raises the prospect of a return of the so-called “Swiss Finish.” That above-and-beyond approach from domestic regulators has irked bank executives in the past, and would likely prompt a stronger push-back if it becomes a key part of the government’s approach.

The steep rise in interest rates last year may have helped mask any underlying malaise in the Swiss financial system. Even though one of the country’s systemic institutions came close to failure, banks still stashed away a record amount in profits from lending. 

“I don’t see many reasons for changing the Swiss regulatory system fundamentally,” said Nicolas Veron, senior fellow at the Peterson Institute for International Economics in Washington and Bruegel in Brussels. “What happened was not a big failure like ‘the world will never be the same again.’ It’s more like ‘lessons learned,’ let’s do it better next time.’”