SNB's Hildebrand wants global bankruptcy code

"It cannot be that a government has to step in automatically if a bank gets itself into trouble," Hildebrand said in an interview with Handelsblatt, a German daily. "We need an international procedure to liquidate banks or parts of them...The crisis has shown that we could not do that. If we do not make progress here, the question of an upper limit to a bank's size arises quickly."

As of November 2008, the assets of UBS, Switzerland's largest bank, amounted to almost four times the country's GDP. The assets of Credit Suisse, the country's second largest bank were roughly two-and-a-half times Swiss GDP,

Hildebrand noted that Switzerland's participation in the debate was particularly important.

Hildebrand's comments follow from those of Sheila Bair, the chair of the Federal Deposit Insurance Corporation (FDIC), the executor of the United States' resolution regime, made last week.

Bair said that the current rulebook was limited because the FDIC could not seize control of investment banks and other financial institutions that were not deposit takers, which must be resolved through bankruptcy. "This can be a messy business in the case of systemically-important non-bank financial firms," Bair noted, adding that bankruptcy was supposed to protect the interests of creditors, not to prevent a meltdown when a systemically-important firm fails.

Eric Rosengren, the president of the Boston Federal Reserve, appeared to back Bair's comments on Tuesday. "The financial crisis has highlighted the pressing need for better resolution procedures," Rosengren said in Hong Kong. "Bankruptcy procedures are designed to provide a clear priority among creditors, but do not provide any special provisions for an insolvency that has broad systemic implications. In such situations, it is very possible that a preferable public policy would be to minimise systemic implications rather than follow the normal creditor priority set out in the bankruptcy code."

Click here to read Rosengren's speech