The Federal Council report on banking stability has become a complex choreography of innumerable recommendations and measures. That could end up being very costly for the country as a whole, finews.com believes.
«The Dog and the Frisbee» is a now legendary speech given by former UK central banker Andrew Haldane (image below) in 2012. At the time, western regulators were preoccupied with working through the consequences of the 2008 financial crisis, which had then forced the Swiss government to bail out UBS.
Minimizing Risks
They came up with the «Too big to fail» framework and Basel III capital requirements in the hope that banks on the verge of collapse could be either restructured or bankrupted in a way that didn't pose a danger to the wider financial system while costing taxpayers anything.
They relied on complicated calculations of core capital and leverage ratios. Keeping to the required minimums would prevent the risk of large-scale losses. But they were only tested in controlled situations and rarely were any infractions punished.
Absurd Joke
Haldane, a financial stability expert, was suspicious of all that. He called for banking regulation that was as intuitive as possible in his parable about the dog that easily managed to catch frisbees despite a very complex array of physical and atmospheric factors needed to do so. Rules should be simple rules and the consequences clear on missteps.
The collapse of Credit Suisse in March 2023 turned the «Too big to fail» into an absurd joke. The bank had fulfilled all the necessary capitalization thresholds even though the likelihood of its continued survival could be counted in days. It had lost the trust of the market and it was near insolvency. Once again, the government had to jump in as guarantor before its erstwhile rival could be forced to rescue it.
(Image: Bank of England)
22 Individual Measures
Still, the Federal Council deemed in its report on banking stability released Wednesday that the measures in the country's «Too big to fail» regime «have generally proved their worth». Many of those introduced at the national and international level have increased financial stability although the government also had to concede there were gaps in the existing framework. Moreover, there was a need for action to further develop and strengthen regulation.
Now, an expert group commissioned by the Federal Council has defined three clear focus areas and 22 specific measures, which has ended up as a 209-page long report (339 pages in German). As it now stands, it remains a proposal although the government reserves the right to force parts of it through by direct ordinance if necessary. But before doing that, it intends to wait and see what the findings of the Parliamentary Investigation Commission related to last year's rescue effort, which is expected at the end of this year.
Not Up for Discussion
It is easy to see that there is no frisbee flying around here. In fact, it all looks more like an Airbus A380 lumbering around in a holding pattern. The experts also seem to disagree with key political demands for the major bank(s) to hold more capital, with the report itself maintaining: «It is difficult to reach a final judgment on the exact impact of increased capital requirements.»
What is clear is what the Swiss government wants to prevent happening at any cost. Getting taxpayers involved in any kind of way. Accordingly, there were no discussions about possible nationalization steps, as Swiss federal finance minister Karin Keller-Sutter told the media in Berne on Wednesday.
She also believed it was counterproductive to signal that banks could rely on the government as a last resort if they needed rescuing again.
Bank Failure Script
«The top objective of our considerations is preventing another crisis and minimizing the risks for citizens», Keller-Sutter summarized. The maxim that government and authorities had to stay out of future bank rescue efforts would define major banking regulation over the next decade, she indicated.
Still, that is something that is not mandatory per se. In other jurisdictions, rescuing banks has become an institutionalized process, including in the US, the largest banking center in the world. Banks near collapse are subject to an exacting script. That was clearly illustrated by the collapse of California's Silicon Valley Bank in March 2023, the largest American financial sector collapse since 2008.
Similar to Credit Suisse
The bank suffered a bank run in much the same way that Credit Suisse did. The state of California did not hesitate and shut the bank down and then transferred all the assets to a bridge bank operated by the Federal Deposit Insurance Corporation (FDIC). Whatever remained was sold to First Citizens, a competitor.
The same thing happened a short time later with Signature and First Republic, two regional banks, with the latter being swallowed up by JP Morgan after the FDIC intervened.
US Criticism
Ironically, the chairman of the FDIC, Martin Gruenberg, heavily criticized the role of Swiss authorities during last year's rescue during a speech Wednesday.
«The fact that Swiss authorities did not put Credit Suisse into resolution...was frankly unhelpful and ultimately a missed opportunity,» the «Financial Times» (paywall) reported. The FDIC chairman then went on to show how it would go about shutting down a globally systemic relevant bank like Credit Suisse.
Shut, Resolve, Sell
Of course, Credit Suisse, and the new combined UBS-CS, are a good deal larger than the now-bankrupt North American banks. Switzerland's GDP is also a fraction of the US. But the Americans have a clear, simple, consistent script that gives the market clarity. Shut, resolve, sell. Everyone in the market knows what happens to a US institution that falls by the wayside.
It is also something that very closely mirrors Haldane's avowed simplicity.
Less is More
«So what is the secret of the watchdogs’ failure?», the central banker asked 12 years ago. «The answer is simple. Or rather, it is complexity. For what this paper explores is why the type of complex regulation developed over recent decades might not just be costly and cumbersome but sub-optimal for crisis control».
When it came to financial regulation, as Haldane indicated then, less may well be more.
