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The Swiss National Bank has called for a review of banking regulation as it warned that existing global capital and liquidity rules do not protect systemically important lenders from failure, in its first public rethink since its bailout of Credit Suisse.
“Credit Suisse’s experience shows the need for a review of the ‘too big to fail’ framework to facilitate early intervention,” the SNB said in its annual report. Financial Stability Reportpublished Thursday.
The report contained some startling first observations about the bailout of Switzerland’s second-largest bank, which was taken over by rival UBS in March, a government-funded bailout. planned transactions and provided a 260 billion Swiss franc ($291 billion) liquidity support program.
In the report, the SNB warned that reliance on existing regulatory capital and liquidity rules might even be contributing to the bank’s problems.
“Credit Suisse’s experience shows that in times of stress, supervisory indicators are relatively narrow and corrective action may be delayed,” the SNB said.
The SNB, which oversees Switzerland’s financial stability along with markets watchdog Finma, said it had identified three main problems.
First, it said Credit Suisse’s higher-than-required capital ratios offered little assurance. It also said it was concerned about what exactly could be classified as regulatory capital under existing rules, citing deferred tax assets. The SNB said current accounting rules for these tax assets had created a CHF2 billion hole on banks’ balance sheets as their conditions deteriorated.
Second, the SNB said the additional tier one bond issued by Credit Suisse – a debt instrument that has been one of the banking industry’s most popular funding vehicles in the post-2008 regulatory environment – was not fit for purpose.
The SNB said the bank should have been able to eliminate the value of AT1 bonds earlier to improve its balance sheet, which was supposed to be the regulatory purpose of these instruments, but because the capital-linked trigger point ratio was insufficient to measure the bank’s financial position .
By the time the bonds were emptied – a controversial decision that has sparked a bitter legal battle in Switzerland – it was too late, the SNB said.
Third, the SNB has indicated that regulatory liquidity buffers are far from sufficient for Credit Suisse to deal with its situation.
“Banks’ liquidity buffers and collateral for central bank facilities are insufficient to compensate for large liquidity outflows and higher provisioning requirements,” the report said.
The report recommends that going forward, Swiss banks should be required to set a higher minimum level of balance sheet assets at any given time that are eligible to be pledged to the SNB as collateral for emergency liquidity lines.
The central bank is conducting a deeper investigation into the Credit Suisse crisis, which will be presented to Swiss parliamentarians next year.