Credit Suisse: resolution could have worked

The financial world spent the summer poring over the Swiss analysis of the takeover of CS by UBS. Both the appraisal by Prof. M. Ammann and the Report of the Expert Group on Banking Stability regard the first two pillars of “too big to fail” regulation, namely capital adequacy and liquidity requirements, as effective. However, they take a more critical view of the third pillar, resolution measures. Whereas Prof. Ammann judges these to be “inadequate”, the expert group merely points out that they lack flexibility.

International bodies published their assessments of the case in October. In its preliminary report, the Financial Stability Board (FSB) concludes – perhaps surprisingly – that a resolution could in fact have worked, based on the planning work carried out and the availability of loss-absorbing resources. It cites a number of factors influencing the decision against a resolution: possible knock-on effects from imposing losses on shareholders and bailing in bondholders; uncertainty about the market and customer acceptance of a stand-alone recapitalised entity; and other risks, specifically concerning the bail-in mechanisms. The report also notes that FINMA expressed the view that resolution measures should always be subsidiary to other measures that are deemed to provide the same stabilising effect.

The FSB will use these preliminary findings as a springboard for detailed investigation of the issues raised with a view to increasing the robustness of resolution for systemically important banks. Specifically, it will address effective designs for public liquidity backstops, the operationalisation and enhanced cross-border recognition of bail-in capital, and the coordination and communication of resolution measures.

The report by the Basel Committee on Banking Supervision (BCBS), meanwhile, examines in depth how Credit Suisse was able to continue meeting the regulatory requirements on liquidity for such a long time despite its obvious troubles. It questions, for example, whether the net stable funding ratio (NSFR) performed its role as an indicator of banks’ structural liquidity mismatch, particularly for banks that faced a “slower burn” liquidity stress. The report notes that the NSFR was calibrated at levels that did not correspond with the outflow rates faced by CS. The BCBS also states that a large part of CS’s buffer of high-quality liquid assets (HQLA) was reserved for purposes other than covering the outflows in the 30-day stress scenario foreseen in the regulations. This, it points out, raises questions about the design and implementation of liquidity requirements. The BCBS comes to the sobering conclusion that liquidity regulations alone cannot prevent all liquidity runs on banks in an age characterised by easy access to information as well as banking services via various digital tools.

The Swiss Bankers Association (SBA) acknowledges the BCBS and FSB reports and finds their insights highly relevant to the analysis and investigations that must now take place. The SBA will continue to support expedient amendments to the supervisory framework based on the lessons learned from the CS case. The goal of further strengthening resilience must remain paramount. The SBA will continue to play a constructive role in these efforts and engage in the regulatory and political discourse as a representative of the entire banking sector.