Op-Ed written for Banking Risk & Regulation (FT Specialist)

Banking Risk & Regulation- a Financial Times Specialist service – invited Orbit36 to write an Op-Ed on the current banking regulation discussion in Switzerland.

In the article, Orbit36 Managing Partner Dr. Andreas Ita discusses the parent bank capital regime in the context of the crisis at Credit Suisse.

Whether Credit Suisse was sufficiently capitalized or not depends on the perspective taken. At the consolidated group level, Credit Suisse was always well capitalized. However, there was a lack of capital at the parent bank level. Since capital requirements exist in parallel and are neither additive nor divisible, the capital deficit in the parent bank and the concessions granted by FINMA had no impact on the group. This is frequently overlooked in the current discussion.

Andreas also elaborates why bank capital requirements are associated with a cost. Banks react to stricter capital requirements, either by repricing products or exiting from certain businesses. This evidently contradicts the propositions under the seminal Modigliani-Miller (MM) theorem, which suggest that the impact of higher capital requirements should be fully offset by a lower cost of capital. However, our practical observations are consistent with empirical studies which find that for banks the MM effect is less than half of what is predicted by theory.

Lastly, bank capital requirements below the consolidated group level are not subject to the Basel III standards. As a consequence, the capital rules for the parent banks vary largely across jurisdictions. In the current environment, this bears the risk that standards are kept lax in some financial centers for competitive reasons.

The full article was published in Banking Risk & Regulation (FT Specialist) on 18 February 2025: https://www.bankingriskandregulation.com/why-parent-bank-capital-rules-deserve-more-attention-post-credit-suisse/ Please register for a free, no-commitment trial to access this and other articles.