Is it only banks that are system relevant?

In this age of digital transformation new risks have emerged for financial stability. The focus on banks has become too narrow. A public discussion is needed on the systemic risks of today and tomorrow.
Article byMartin Hess

Every year in its report on financial stability the Swiss National Bank (SNB) gives its evaluation of the current systemic risks. The report focuses on banks because «experience from previous financial crises shows that financial stability is predominantly dependent upon the stability of the banking sector.» In this year’s report one of the points made is that banks fulfil the conditions for “too big to fail” and meet the capital requirements.

A lot of signals are set to green, but a few are turning amber. The report is advance confirmation of the successful implementation of lessons learned by the banks from the financial crisis. This seems to confirm their fundamental interest in a stable system. So it’s all good, right?


Countless system risks

Not entirely: the conclusion that system stability is guaranteed purely by the fact that the banks have done their homework is premature. Many analyses by renowned international committees, such as the Financial Stability Board, are discussing new sources of risk to the financial system. These discussions are not taken up in the SNB financial stability report. We are left in the dark as to the impact crypto currencies, cyber attacks or the burgeoning rise in bank services provided by non-banks could have on stability in Switzerland.

The fact that technological developments and structural changes could affect stability in one form or another is now beyond question. In his recent tirade on Libra ECB Executive Board member Yves Mersch stresses that the digital currency is undermining public trust in the financial system. Cyber risks are the top priority for international financial committees, because they consider cyber incidents one of the greatest risks for the financial stability of individual countries and the system as a whole. Pension funds have of late affected market development in the mortgage market with growth rates in double figures and very low interest rates. A branch that the SNB has always analysed in great detail.


There is a lack of information

Observations like this are unsettling. We want to know more but find no answers in the SNB report on financial stability as to whether our worries are justified. It simply does not deal with these topics. So it is difficult to gain an insight into the need for action or the type of measures needed.

There are indications that the SNB is certainly aware of these issues. As one example, Thomas Jordan in his presentation to the University of Basle at the beginning of September reported that «broad access to digital central bank money could pose a threat to financial stability.». A footnote in the financial stability report indicates the existence of non-banks in the mortgage market. At the money market get-together this spring the significance of cyber risks in the field of infrastructure and payment systems were highlighted.


Initiating public discussion

These brief mentions of stability-relevant dilemmas cannot of course replace contextual discussion in a factual report. In order to instigate public discussion and enable structured consideration of possible measures, knowledge of analyses and an evaluation by the SNB are needed. With visible and detailed inclusion of current developments in the design of its stability mandate, the SNB would enhance the reputation of the financial centre Switzerland.

Financial stability is an essential precondition for the development of a national economy. The visibility of evaluations and endeavours contributes to building confidence in the financial system. Trust is the greatest asset of Swiss banks.

That’s why it is clearly important that the financial stability report 2020 stresses not the largest historic sources of risk, but rather those which are most materially relevant at the moment. And it also certainly wouldn’t hurt to sound the all clear in certain areas if the SNB’s evaluation suggests this is appropriate.

Digital Finance & Cybersecurity


Martin Hess
Chief Economist
+41 58 330 62 50