The Swiss National Bank reflects for the first time on the emergency bailout of Credit Suisse.
Another candidate for «understatement of the year» is the Swiss National Bank (SNB) summing up in its Financial Stability Report published on Thursday that the last few months have been challenging for Swiss banks.
Themselves at Risk
Since last fall, the country's second-largest bank, Credit Suisse, was in acute crisis and finally sold to UBS in March at the behest of the federal government, the Swiss Financial Market Supervisory Authority (Finma), and the SNB. With total assets of more than 1.6 trillion Swiss francs ($1.78 trillion), UBS is now by far the country's largest bank.
The SNB was heavily involved in the forced rescue of Credit Suisse, granting three liquidity assistance loans totaling a maximum of 250 billion francs. The central bank assumed the risk of 100 billion francs for the Emergency Liquidity Assistance Plus loans (ELA+).
Future Prospects are Crucial
The report looks back on the «crisis at Credit Suisse» and attempts to draw lessons from it. The SNB says although the big bank always complied with Swiss «too big to fail» (TBTF) rules, it lost the trust of the markets, customers, and rating agencies, showing it wasn't enough to comply with capital adequacy rules.
The bank's prospects were also crucial for assessing its resilience, and questions of profits and the institution's ability to raise capital. Before its demise, Credit Suisse was posting historic losses and had to pay exorbitant interest rates to raise new debt capital. The SNB said that overreliance on regulatory capital ratios can underestimate the need for urgent corrective action.
What is Core Capital?
The SNB admits there are weaknesses in the definition of what banks can include in their core capital. Credit Suisse counted deferred tax assets in this category, but as these positions eroded throughout its profit-losing streak, it ultimately weighed on its core capital as well. As a result, about half of the four billion in fresh equity raised last November evaporated, the report notes.
Write-downs on IT further dragged down the core capital ratio, which was felt in particular by Credit Suisse Holding in the third quarter of 2022.
The SNB didn't present effective solutions to the problem on Thursday, although a group of experts appointed by the Federal Council will look into the question of how the crisis at Credit Suisse could have come about, despite TBTF rules. This panel is headed by Jean Studer, a former chairman of the Bank Council of the SNB.
Only Talk of UBS
SNB directors will have to consider publishing a Financial Stability Report at all in the future and, if so, how they will structure the chapter on major banks since future reports will explicitly mention UBS. What insights competitors can gain from this, and whether this is conducive to the stability of the bank are questions monetary watchdogs will have to ask themselves.
