Swiss too-big-to-fail rules are too timid to work

Bailing out. It’s barely a year since Swiss government arranged an emergency rescue of Credit Suisse by rival UBS. Swiss Finance Minister Karin Keller-Sutter wants to avoid anor debacle. Proposed reforms, unveiled on Wednesday, should make big lenders less prone to a crisis. Yet re’s little progress on question of wher enlarged banking behemoth could fail without government support.

209-page government document is a comprehensive review of what happened to Credit Suisse in March last year and why post-2008 rules to end taxpayer bailouts did not work. It floats some sensible fixes, like beefing up powers of financial watchdog FINMA, which currently cannot issue fines.

For UBS boss Sergio Ermotti and his shareholders, most eye-catching element is a proposal to make $100 billion group hold more capital. An information sheet accompanying report, which states that an increase would be “significant”, knocked 3% off Zurich-based bank’s shares on Wednesday. Keller-Sutter proposed a new “forward-looking” supplement to common equity Tier 1 ratio, based on supervisory discretion and regular stress tests.

Swiss regulators may also close some loopholes in capital rules that flattered Credit Suisse’s ostensibly healthy ratios. One idea is that banks deduct from ir capital full value of assets which would be worthless in a liquidation, like proprietary software and deferred tax claims. Anor requires UBS to fully fund stakes in foreign subsidiaries with an equivalent amount of equity at parent. A mismatch in this area me it harder for Credit Suisse to wind down or sell its accident-prone investment bank.

se changes make it less likely that UBS will get into trouble. But y do not resolve question of what happens if it does. Swiss authorities last year wrote off Credit Suisse securities worth $17 billion to smooth UBS rescue. However, y stopped short of using ir post-2008 toolkit for winding down failing lenders.

report offers some convincing reasons. next step in a full-on resolution would have been bailing in Credit Suisse’s $60 billion of loss-absorbing bonds. But that might have caused debt investors to offlo similar securities, destabilising or banks. Second, it’s far from clear move would have calmed Credit Suisse customers.

This is not a hypotical question for Keller-Sutter and her successors: Swiss authorities have twice come to rescue of country’s biggest lenders in past 15 years. If things go wrong with UBS in future, re will be no domestic white knight, while bill for taxpayers from any bailout will be even larger.

Yet investors appear to see few dangers. Ermotti’s bank has about $107 billion of unsecured debt that’s designed to absorb losses in a crisis. One of bigger bonds tres with a relatively modest 5.7% yield – roughly same as when it was issued in early 2023. In Switzerland, too-big-to-fail problem seems to be alive and well.

Context News

Swiss government on April 10 said UBS and three or systemically important banks will face tougher capital requirements to shield country's wider economy from any future failures. In a report, prompted by collapse of Credit Suisse in March 2023, government pitched 22 measures for direct implementation. It stopped short of saying how far stricter capital requirements should go. increase in requirements for UBS will be "substantial, especially if UBS were to retain its current size and structure, or even grow," it noted in an explanatory document. UBS shares were down 2.6% at 27.11 Swiss francs as of 1448 GMT on April 10.