SNB tackles too-big-to-fail

A report published by the Swiss National Bank last Wednesday, entitled ‘Bank regulation: What went wrong? What will improve?', highlights new plans to introduce enhanced liquidity measures and hints towards a solution to the too-big-to-fail problem.

The collapse of the financial system spurred a massive deleveraging of the banking system as banks recorded massive losses requiring government intervention to instill stability in banking sector. According to the report, despite the irreparable damage caused, Switzerland's biggest banks remain the largest threat to the banking system as moral hazard, and the belief that banks will receive government assistance if they run into problems, now offers the banks stronger incentives to take excessive risks.

The report from the Swiss National Bank details three measures to help reduce the risk of a similar collapse of the banking system through the implementation of a number of new liquidity measures.

These include new capital adequacy requirements to double the risk-weighted capital held by banks, and a minimum amount of equity capital, irrespective of the risk models they use internally as, the report posited, the crisis has shown internal risk models massively underestimated the risks taken.

The financial crisis also demonstrated that even solvent banks had liquidity problems, therefore new liquidity regulations were expected to be adopted in future. These would, the report says, ensure big banks will hold a sufficient amount of high-quality liquid funds to be able to cover unexpected liquidity losses for at least 30 days.

More importantly, the report discusses new measures that will require the creation of incentives to encourage banks to reduce their size or change their organisational structure. The report states: "No bank should be so systemically important that governments feel forced to rescue it from impending failure, fearing the economic costs such a failure would cause."

Switzerland's two largest banks, UBS and Credit Suisse, have a combined balance sheet seven times the size of the nation's GDP and account for more than 50% of all deposits held in the country.

A full version of the report can be found in German here