“The next crisis can’t be prevented through regulation alone”

Rolf Sethe, the URPP Financial Market Regulation analyzed the existing and planned regulatory concepts for national and international financial markets. What are the key results with regard to the Swiss financial market? 

Rolf Sethe: We were able to contribute our expertise to the political debate regarding the creation of four key reform acts: the Financial Market Infrastructure Act, the Financial Institutions Act, the Financial Services Act, and the Distributed Ledger Technology Act, or DLT Act for short. We submitted interdisciplinary statements in consultation procedures and legal opinions to the Federal Office of Justice, and we penned numerous critical scientific papers on the economic and legal aspects. 

Once the reform acts were passed, we explained them through extensive commentaries and specialist articles and organized an annual expert conference on the new rules with representatives from the Swiss Financial Market Supervisory Authority. 

And how about at UZH?

At UZH, we’ve established two interdisciplinary continuing education programs on financial market law and wealth management, which have proven very popular. We also organized 11 high-profile annual conferences on various economic and legal focus areas with experts from other legal systems, enabling us to reach audiences from all over the world. By the same token, our members were invited to many conferences in other countries. 

What came out of this international dialogue?

Our URPP generated many insights that also attracted attention outside of Switzerland. For example, in 2018 we became a member of the European Banking Institute, and in 2021 UNIDROIT asked us to act as expert advisor in the development of an international reform proposal on bank insolvency. 

We have gradually expanded our annual meeting of experts with representatives of the Swiss Financial Market Supervisory Authority to Germany and Austria, which has given rise to an annual trilateral meeting where we can also discuss new developments and trends that are yet to be regulated

What did you personally find most surprising in the last 12 years of research?

The extremely rapid changes in financial market law due to the introduction of blockchain and the rapid rise of sustainable finance. When the URPP was launched back in 2013, we were mainly talking about UBS’s multi-billion losses and the fact that the major Swiss bank was too big to fail. And then, surprisingly quickly, came blockchain and sustainable finance, monopolizing the debate and pushing the other topics to the sidelines. Over the last 12 years, we’ve seen how our field has rapidly moved in a direction we couldn’t have predicted. 

And another point worth noting is that in 2013 we started with the fallout of the financial market crisis and the UBS rescue and now we’re ending with the collapse of CS and yet another crisis. One can’t help but see a certain irony in that.  

The expertise of URPP researchers is respected because they are seen as neutral. What is the advantage of that?

When dealing with laws and regulations it makes sense to have a neutral player involved who looks for the best solution and incorporates all perspectives, not just their own. Neutrality and independence are key to outward credibility. As researchers, we don’t control which solution has legs politically, but we can highlight potential solutions. 

The political debate about the tighter regulation of financial markets sparked by the financial crisis has now become even more pressing and economically relevant due to the takeover of Credit Suisse by UBS. What would the perfect regulation of systemically important banks in Switzerland currently look like?

There’s no such thing as perfect regulation, as every crisis is different. Crises always have different causes and parameters, and they involve different political stakeholders. We can’t prevent the next crisis in advance through regulation. But we can ensure that there are risk buffers in place. The legislation must be designed to minimize the number of crises and stave them off for as long as possible. If a crisis does occur, it needs to be cushioned so that the stability of the system is guaranteed. 

We mustn’t prevent bank collapses. Competition only works if market players who don’t perform can fail in the market. If you prevent that and see bankruptcies per se as damaging, as people still did 50 years ago, banks lose the ability to innovate.  This in turn adversely affects the market and us as customers. Financial market legislation is not there to prevent bankruptcies, but to alleviate the impact of bankruptcies and stop contagion.

How has the URPP Financial Market Regulation benefited society? 
 
The program closely supported the regulatory measures of recent years, and Swiss policymakers have listened to the science regarding many individual matters in the reform process. One of the key reasons for this is our independence. We also successfully managed to establish financial market regulation as a subject of academic study and continuing education, and we raised the profile of our research within Switzerland and internationally.

What was your own personal research highlight during the URPP? 

The fact that we networked with other research locations and built a reputation as a neutral player in financial market law. And that since 2013, we’ve trained five habilitation candidates who now all hold a professorial chair. And another assistant professor is moving to a central bank in July. 

What’s next?  

For me, it’s a major success that we managed to consolidate the URPP and continue it as the Center for Financial Market Regulation, which has international standing and is recognized as a leading-edge research institute. 

Our research will continue to focus on topics such as behavioral finance, decentralized finance, sustainable finance, blockchain, cryptocurrency, digital money, FinTech and AI. We will of course continue to comment on financial market legislation and monitor traditional financial market law.