Swiss banking legislation – what needs to be changed post Credit Suisse?

A3JKD4 visitors in chamber of nationalrat or large chamber bundeshaus or house of parliament berne switzerland
  • Posted on March 21, 2024 by Dr. Andreas Ita

The collapse of Credit Suisse in March 2023 revealed some weaknesses in the Swiss Too-Big-To Fail (TBTF) framework. There is a broad consensus that the framework will need to be fundamentally reviewed. A long-awaited report of the Swiss Federal Council will be released on 10th April 2024. The report is expected to show the future direction of the banking law for the largest institutions. The release will provide the starting point for the extensive legislatory work to be done in the coming years.

Given the high importance of the TBTF-rules for the Swiss financial center, Orbit36 has condensed its views on the necessary reforms in a White-Paper. Earlier this month, we have shared our insights with selected parlamentarians from all political parties. The full version of the paper can be found at the bottom of this page (German only).

Our main conclusions are as follows

  • It is critical to align the Swiss TBTF-framework to liquidity and solvency crises
  • Albeit the liquidity framework allowed Credit Suisse to withstand a first bank run, a recalibration of the Liquidity Coverage Ratio (LCR) might be necessary
  • Solvent banks need to have better access to central bank liquidity facilities, against a wide range of eligible collateral  
  • The planned Public Liquidity Backstop (PLB) provides an indispensible tool to support the resolution of a struggled systemically relevant bank
  • Higher capital requirements would not have prevented the crisis at Credit Suisse and likely provide more harm than benefit
  • Especially an increase of the unweighted leverage ratio to 10-15 percent would have severe consequences for credit supply and the real economy in Switzerland
  • The capital regime for the so called parent banks (solo capital requirements for UBS AG and Credit Suisse AG) needs to be revised, since it aggravated the crisis at Credit Suisse
  • The observed procyclity of the parent bank capital ratios and the inconsistency with the numbers for the consolidated group could also become an issue for UBS in a possible crisis.
  • Solo-capital requirements for the parent banks should primarily ensure that there is enough capital available in Swiss legal entities to support a potential resolution

Please do not hesitate to reach out to us if you have any questions or if you want to discuss.

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