Swiss National Bank: Credit Suisse Crisis Showed Regulations’ Flaws

After the Credit Suisse disaster in March, the Swiss National Bank has asked for a review of the “too big to fail” (TBTF) rules.

Even though the situation has been stabilized by government actions and UBS’s purchase of the bank, the crisis has shown that more needs to be done to make banks stronger, increase trust in them, and give people a wide range of ways to deal with them when they are in trouble, the Swiss National Bank said in its Financial Stability Report 2023, which came out on Thursday (June 22).

“Although Credit Suisse met the regulatory capital and liquidity requirements, it became increasingly unlikely that the bank would be able to stabilize its situation through its own efforts,” Swiss National Bank said in the report.

Credit Suisse’s shares lost a quarter of their value in March, so the company had to ask the central bank for a $54 billion loan, which didn’t do much to restore investor trust.

After nine days of worry in the banking industry, the Swiss banking giant UBS bought its struggling rival in a $3 billion deal backed by the government. This helped restore trust in the financial system.

In a report released Thursday, the Swiss National Bank said that the crisis at the bank showed that meeting capital requirements is not enough to keep clients, market players, and rating agencies’ trust in a bank.

It also showed that additional tier 1 (AT1) instruments were important at the end of the crisis, but not at the beginning, even though they were made for that reason.

The study said that a third problem with the current rules was that they were not enough to deal with the size and speed of the unprecedented outflow of deposits at Credit Suisse.

“Looking forward, the experience with Credit Suisse shows the need for a review of the TBTF framework in order to facilitate early intervention,” the Swiss National Bank said in the report. “It is now up to the authorities to carry out an in-depth review and draw lessons, also in view of the higher systemic importance of the combined bank and the associated risks for Switzerland.”