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SNB: The lessons we learned from the Credit Suisse collapse

  • By The Swiss Times
  • 22 June 2023
The Swiss National Bank revealed the lessons it has learned in the collapse of Credit Suisse and how the financial institution plans to prevent another banking crisis.
SNB: The lessons we learned from the Credit Suisse collapse
Protestors gather in front of Credit Suisse’s Zurich headquarters after the announcement of its state-backed shotgun merger with UBS in March, 2023 (Keystone SDA).

(Keystone SDA) The rapid demise of Credit Suisse in March of this year came as quite a surprise to the Swiss National Bank (SNB), officials say. The bank says it has learned lessons on how to avoid such a crisis in the future.

“The cause of the Credit Suisse crisis was not a macroeconomic shock, as assumed in the SNB’s stress scenarios,” writes the SNB in ​​its report on 2023 financial stability published on Thursday. Rather, the crisis is the result of repeated incidents in the bank themselves, which were primarily triggered by the violation of legal and supervisory obligations and deficiencies in risk management and led to reputational damage.

The takeover of CS by UBS on March 19 and the measures taken by the authorities led to an immediate stabilization of the situation, according to the SNB. In order to prevent another crisis for the Swiss financial center, it is “important to learn lessons from the Credit Suisse crisis and to take appropriate measures.”

End of an era: UBS officially absorbs CS

Such measures would strengthen the resilience of the banks in order to prevent a loss of confidence as much as possible. And they should contain a wide range of effective options to stabilize, restructure or resolve a systemically important bank in the event of a crisis, SNB officials say.

SNB: The lessons we learned from the Credit Suisse collapse
At the last, annual CS shareholder’s meeting a man wore a jacket reading “Liquidate Criminal Suisse + Banksters Assets” (Keystone SDA).
Three observations from the CS failure

From the SNB’s perspective, three observations are “particularly relevant.”

First, compliance with capital requirements, while necessary, is not sufficient to ensure trust in a bank. CS had met the capital requirements at all times. However, customers, market participants and rating agencies had increasingly doubted the bank’s prospects for profitability, its resilience, and thus, its ability to successfully implement the previously announced transformation.

Second, the so-called AT1 capital instruments only absorbed the losses when the end of the bank was imminent and state intervention became necessary. At this late stage of the crisis, while the AT1 instruments played an important role in the package of measures, the specific features of these bonds, intended for early loss absorption, were not effective.

And third, the extent and speed at which customers withdrew their funds from CS was unprecedented and more serious than the liquidity regulations assumed. In any case, the bank’s liquidity buffers and the collateral provided for the central bank facilities would not have been sufficient to cover the massive liquidity outflows and the higher collateral requirements.

In the opinion of the SNB, the banks should therefore be obliged in future to set aside a minimum amount of assets that could be pledged to the central banks.

SNB: The lessons we learned from the Credit Suisse collapse
The Swiss National Bank’s headquarters in Bern (Keystone SDA).
Looking to the future

Taken together, these observations also raise questions, according to the SNB, as to whether a systemically important bank can be obliged under the applicable “too big to fail” rule in good time to take sufficient corrective measures to be able to recover from a stress situation on its own.

In any case, recent experience has shown that the regulatory parameters in stressful situations are relatively narrow and corrective measures can be delayed. According to the SNB, it is now up to the authorities to carry out a thorough examination and learn lessons, also with regard to the higher systemic importance of the merged bank and the associated risks for Switzerland.

A thorough analysis is carried out as part of the statutory regular review of the TBTF regulation. According to the SNB, the implementation of the revised liquidity regulations will also play an important role. The results are to be presented to Parliament within 12 months as part of the Federal Council’s next report on systemically important banks. The SNB will be involved in this work, she emphasizes.

This article was reprinted with permission from Keystone SDA.

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