One year after the Credit Suisse bailout, banks remain vulnerable By Reuters

By Stefania Spezzati and Oliver Hirt

LONDON/ZURICH (Reuters) – A year after the banking crisis that engulfed Credit Suisse, authorities are still assessing how to address vulnerabilities at lenders, including in Switzerland, where the takeover of the bank by rival UBS has created a colossus.

The Swiss government-sponsored bailout of Credit Suisse and U.S. banks in March 2023 put out immediate fires sparked by a run on little-known U.S. regional lender Silicon Valley Bank.

But regulators and lawmakers are just starting to grapple with how banks might better weather runs on deposits and whether they need easier access to emergency cash.

A leading global financial watchdog recently warned Switzerland to tighten its banking controls, highlighting the risk that a failure of UBS – now one of the world’s largest banks – would pose to the financial system.

“The banking system is no longer safe,” said Anat Admati, a professor at the Stanford Graduate School of Business and co-author of the book “Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It.”

“Global banks can cause a lot of damage,” he added.

Rules introduced after the 2008 financial crisis did little to avert last year’s collapse, as customers withdrew cash from banks at an unprecedented rate.

One of the main weaknesses that emerged last year was that banks’ liquidity requirements proved insufficient. Credit Suisse saw billions in deposits exit in a matter of days, burning through what appeared to be comfortable cash reserves.

Introduced after the 2008 financial crisis, the so-called liquidity coverage ratio (LCR) has become a key indicator of banks’ ability to meet liquidity demands.

LCRs require banks to hold sufficient assets that can be exchanged for cash to survive significant liquidity stress within 30 days.

According to a person familiar with the discussions, European regulators are debating whether to shorten the acute stress period to measure the reserves banks need in shorter timeframes, say a week or two.

The move would echo calls from the U.S. acting comptroller of the currency, Michael Hsu, who also argued for a new report to cover stress over five days.

If such measures were put in place, “banks would have to hold higher levels of liquid assets and park more assets with central banks,” said Andrés Portilla, director general of regulatory affairs at the Institute of International Finance, a bank with based in Washington. lobby group. “Ultimately financing could become more expensive.”

Industry-wide changes are likely to happen in Europe only next year, as banks are still working towards the final implementation of post-financial crisis rules, the so-called Basel III, which will require banks to set aside more capital, one person told Reuters. .

Amid concerns that a repeat of a rapid run could threaten another bank, the European Central Bank is stepping up scrutiny of individual banks’ cash reserves, another person familiar with the discussions told Reuters.

The ECB declined to comment for this article. Liquidity supervision is a priority after the Credit Suisse rescue.

banking giant

In Switzerland, the regulatory debate has focused on how to make emergency loans more widely available.

When they borrow from central banks, lenders must provide certain assets in exchange, also known as collateral, which must be easy to price and sell in financial markets. This protects taxpayers in the event that the creditor cannot repay.

As Credit Suisse suffered unprecedented outflows, the lender ran out of securities to pledge at the Swiss National Bank (SNB), forcing the central bank to offer cash to the troubled creditor without collateral.

An expert group has called on the SNB to accept a larger pool of assets, including corporate loans and securities-backed loans.

The National Bank specifies that the universe of eligible collateral is constantly monitored and developed in dialogue with the banks.

A UBS spokesperson declined to comment.

UBS’s massive balance sheet of more than $1.6 trillion, nearly double the size of the Swiss economy, is also pushing the country to review its too big to fail rules, a package of regulations governing systemically important banks.

“All national and global systemically important banks have become public-private partnerships. No government can risk their instability,” said Peter Hahn, professor emeritus of banking and finance at the London Institute of Banking & Finance.

The Swiss government is expected to publish a report next month. It may announce tougher capital requirements for UBS, some analysts have warned.

UBS Chief Executive Officer Sergio Ermotti said this week that he could not rule out that this could happen.

“We only solved the problem in the short term. What we did lays the foundation for a much bigger problem later,” said Cédric Tille, professor of economics at the University Institute of International and Development Studies in Geneva, sitting to the Swiss National Bank. supervisory board until last year.

“UBS has become too big to save.”

Amid concerns about a repeat of 2023, the ECB has asked some lenders to monitor social networks for early bank runs. Global financial regulators are expected to reveal an “insight” later this year into how social media can accelerate deposit outflows.

“A run on deposits doesn’t happen in a month, it happens in a few hours,” said Xavier Vives, professor of economics and finance at the IESE Business School in Barcelona. “The regulation needs to be changed.”