CS crisis puts “too-big-to-fail” regulation to the test
Published: Friday, Mar 15th 2024, 11:20
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The sale of Credit Suisse on the dramatic weekend of March 2023 sealed the end of the big bank. However, this also meant that the compulsory restructuring provided for in the "too big to fail" (TBTF) regulation did not apply. Whether this solution is really practicable remains highly controversial.
In spring 2023, the Swiss authorities had already been focusing on the heavily troubled bank for months. The Swiss Financial Market Supervisory Authority FINMA, the Swiss National Bank (SNB) and the Federal Department of Finance (FDF) had been making preparations since the fall not only for a possible sale, but also for a forced restructuring.
However, when the crisis escalated in March 2023, the authorities did not implement the restructuring solution envisaged for systemically important banks. They justified this primarily with the risk of triggering an international financial crisis in a banking environment that was already unstable at the time.
Never performed before
The "too-big-to-fail" (TBTF) regulation introduced in the wake of the 2008 financial crisis was actually intended to prevent a major bank from having to be bailed out again with taxpayers' money. In the case of CS, Finma would have ordered a restructuring of the bank, which would at least have ensured the continuation of the systemically important Swiss business. At the same time, CS would have been recapitalized with the help of its bail-in bonds.
Abroad in particular, the decision not to implement a TBTF restructuring of a major systemically important bank, which had never been carried out anywhere in the world before, was received with surprise and even some disappointment, as the "Banking Stability" expert group noted in its report. Last but not least, it remained controversial whether such a restructuring solution would have worked in practice.
Credibility weakened
However, the international banking body FSB (Financial Stability Board) was convinced last fall that restructuring according to TBTF rules would have been a feasible solution to the CS crisis. It had only not been applied because an alternative had been available in the form of the takeover.
For Aymo Brunetti, a professor of economics from Bern who is considered the "father" of Swiss TBTF regulation, the authorities should have wound up CS. The promise of TBTF regulation was broken by choosing an alternative solution, he criticized in an interview with the newspaper "Finanz und Wirtschaft". "This has severely weakened the credibility of the regime".
However, numerous economists have been extremely skeptical of the restructuring solution in recent months. "Because the TBTF regulation excludes the tense situation on the financial markets that can be expected in such cases, triggering the emergency plan is a very theoretical and bureaucratic concept," said banking expert Teodoro Cocca from the University of Linz.
Nationalization as a way out
If the takeover solution had failed, many observers believe that a temporary nationalization of CS would have been the only option left. An option that would hardly have met with much enthusiasm in liberal Switzerland, however. Nevertheless, this solution was apparently also discussed at an early stage and ultimately prepared with an emergency ordinance - according to several media reports, the current UBS CEO Sergio Ermotti would have been appointed as CEO of the "state-owned CS".
Supporters of a nationalization option can also be found in this country. In the aftermath of the crisis, St. Gallen economics professor Manuel Ammann argued in an expert opinion that, in view of the weaknesses of the restructuring solution, the TBTF regulation should be explicitly supplemented by the option of nationalization.
For economics professor Sergio Rossi from the University of Fribourg, nationalization would have been the best solution in the CS crisis: The approach would have helped to contain the financial instability in Switzerland and worldwide, he is convinced. "In addition, nationalization would have given the federal government influence over CS's banking strategy by focusing the business on less risky activities such as supporting SMEs."
Report soon
The discussion about the "too-big-to-fail" regulation will pick up speed again in the near future. In April, the FDF is due to present its overall evaluation of the regulations, which was announced last year.
The significance of the debate is obvious: should UBS, the country's only remaining major global bank, one day run into difficulties, the option of a Swiss takeover will no longer be available.
©Keystone/SDA
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