Presentation held at Swiss Risk Association CRO Forum

On 22 November 2023, the Swiss Risk Association hosted its first CRO Forum. Over 90 Board members, Chief Risk Officers, Treasury and Risk professionals attended the event to discuss the impact of recent bank failures on liquidity risk management and the “Too-big-to-Fail” regulation in Switzerland.

In his presentation, Orbit36 Managing Partner Andreas Ita highlighted the need to distinguish between solvency and liquidity crises. After a bank incurred large losses, capital measures are pivotal to re-establish the bank’s solvency and win back the trust of its clients and counterparties. However, in a liquidity crisis, a bank needs in first instance regain access to liquidity. For this reason, central banks in most jurisdictions maintain emergency liquidity facilities. In Switzerland, solvent banks can obtain Emergency Liquidity Assistance (ELA) from the Swiss National Bank (SNB), provided they have sufficient collateral available to secure the temporary liquidity loans.

While the Swiss authorities were able to successfully resolve the crisis at Credit Suisse, the events highlighted some challenges in the Swiss liquidity framework. ELA is not easily accessible to banks. Since banks naturally exploit all other funding opportunities first before they request central bank assistance, the high-quality securities required for ELA are typically already depleted in a crisis. It is therefore encouraging that the SNB newly accepts domestic mortgage loans as collateral for ELA from all banks.

Andreas also explained why it can be difficult for global banks to have the collateral available in the entities which require the central bank liquidity support. Since large banking groups are subject to separate capital and liquidity requirements in their subsidiaries, they need to held a significant amount of their HQLA-securities in the respective local entities. Regulations typically prevent the upstreaming of cash or collateral to higher-level entities. Likely for this reason, Credit Suisse had not sufficient collateral in their parent bank available to fully secure the required ELA loans. The Swiss mortgages loans were difficult to access, since they are ring-fenced in a separate legal entity under the Swiss TBTF rules.

The Public Liquidity Backstop (PLB) is a well-established instrument in various jurisdictions. The work for the final implementation in the Swiss banking legislation is already much progressed. There are though two shortcomings to be mentioned. Firstly, the PLP should be accessible for all banks in Switzerland, not only the systemically important banks. Otherwise, this creates a competitive distortion. Secondly, it is unfortunate that the PLB mandatorily requires a restructuring – and presumably a bail-in – before the PLB can be granted. This can be problematic if a bank faces a liquidity crisis, but has an intact capital base. Following the experience with the recent crisis, fixed-rules which need to be applied merely for legalistic reasons should be avoided, if possible.