How does the SNB perform its role as lender of last resort?
As lender of last resort (LoLR), the SNB can provide emergency liquidity assistance (ELA) in crisis situations to banks which are no longer able to refinance their operations on the market. The SNB thus makes an important contribution to the stability of the financial system within the framework of its mandate.
A key objective of the LoLR function is that banks which are essentially solvent and viable should not face insolvency in the event of considerable outflows because they are unable to convert their illiquid assets to cash in time or are only able to do so at high cost. In its role as LoLR, the SNB therefore also accepts illiquid assets in particular as collateral, specifically loans.
A bank can only obtain liquidity from the SNB if it is solvent and has access to sufficient collateral. All comparable central banks require this.
The SNB takes its task as LoLR seriously and actively performs this role. It has invested substantial resources in appropriate crisis preparedness. It was also thanks to regular tests with banks that it was possible, in March 2023, to provide liquidity assistance to Credit Suisse in both Swiss francs and foreign currencies in a timely manner against the bank's prepared collateral.
Why does the liquidity assistance have to be secured?
The granting of unsecured loans - and thus the decision whether to support a bank incorporated under private law with public funds on a non-collateralised basis, with the attendant risk of loss for the public sector - must be controlled by government and parliament.
Under the National Bank Act (art. 9 para. 1 (e) NBA), the SNB must demand sufficient collateral in the case of liquidity assistance. The legislators' requirement that the SNB may only lend to banks on a secured basis corresponds to international standards and is based on the proven concept of the division of roles between the central bank and government/parliament.
Why did the SNB deploy ELA+?
In connection with the crisis at Credit Suisse, emergency law created the basis for the SNB to provide additional emergency liquidity assistance with preferential rights to repayment in bankruptcy proceedings over other creditors ('ELA+'). This type of loan was created as an emergency solution exclusively for the specific crisis at Credit Suisse. In this particular case, the value of the privileged creditor status at the time ELA+ was deployed was considered sufficient for the credit risk assumed.
ELA+ was provided within the clearly defined framework of the package of measures put together in the context of the acquisition of Credit Suisse by UBS. The combination of ELA and ELA+ served to create the necessary time window until a comprehensive solution to the crisis of confidence could be worked out. Also included in this solution was the federal default guarantee of up to a maximum of CHF 100 billion provided to the SNB to secure liquidity assistance loans to Credit Suisse (public liquidity backstop, PLB). Without ELA+, Credit Suisse would have become insolvent before this comprehensive solution came into effect.
How does the SNB determine the collateral for emergency liquidity assistance?
The SNB bases its decision regarding eligible collateral on the assets primarily available in the banking sector. Its aim is for banks, with appropriate preparation, to be able when necessary to obtain as much liquidity from the SNB as possible against collateral, particularly illiquid assets.
A prerequisite for this is that it must be legally possible for the bank's assets to be transferred to or pledged in favour of the SNB. Only then can they be used as collateral. The availability of eligible ELA collateral hinges on the banks' willingness to make the appropriate preparations. The universe of eligible collateral is reviewed by the SNB on an ongoing basis and developed in dialogue with the banks.
Depending on the systemically important bank in question, mortgage loans constitute some 85-95% of domestic credit volume in Switzerland. Mortgage claims are eligible as collateral provided the underlying real estate assets are located in Switzerland. The SNB accepts mortgages both on residential properties (single-family houses, condominiums and apartment buildings) and on commercial properties. They may be mortgages granted to private individuals or to companies. In its role as lender of last resort, the SNB thus accepts a much broader range of mortgages than other market participants.
Besides high-quality liquid assets (HQLA), the universe of accepted securities comprises less liquid bonds issued by borrowers with lower credit ratings, as well as securitisations and shares in various currencies. These securities are particularly useful if a bank no longer has access to the secured refinancing market or if there is a sharp reduction in the liquidity of certain asset classes.
The SNB cannot directly accept foreign loans due to their high local legal and realisation risks. However, the SNB does accept foreign loans if they are in the form of asset-backed securities (ABS) and the said legal problems have been resolved as part of the securitisation process. When assuming loans directly, other central banks also focus on loans within their own jurisdiction.
How is the collateral valued?
The SNB's liquidity assistance must be fully covered by sufficient collateral at all times. In order to ensure this, the SNB applies risk discounts (haircuts), which are risk-based and in line with market conditions, to the securities and mortgage claims. Such haircuts are determined using recognised risk assessment methods. They are comparable with those of other central banks and market participants.
A higher rate of interest is no substitute for risk-based haircuts because an obligation to pay interest does not constitute collateral.
Who has access to liquidity assistance?
ELA is available to all systemically important banks. The operational set up for access is in place, and the processes are tested.
Furthermore, the SNB is expanding its possibilities for providing liquidity to the whole banking sector. This initiative started in 2019. Following the launch of a pilot phase, the whole banking sector was duly informed in July 2023.
This expansion is aimed at making it possible for the SNB to provide liquidity against illiquid mortgage collateral to the whole banking sector in the event of liquidity shortages.
What steps must a bank take in order to be able to obtain liquidity assistance in a crisis?
In order to be able to provide illiquid collateral to the SNB in a crisis, it is vital that banks take the necessary preparatory measures.
These consist, in particular, of creating the contractual requirements, ensuring the legal and operational transferability of the collateral, as well as regularly testing the processes with the SNB and other service providers involved.
These preparations entails costs for the banks. Although the SNB can offer banks liquidity facilities in performing its role as lender of last resort, it does not have the power to instruct banks to take the necessary preparatory action. The SNB is convinced that good preparation for crisis situations is in the interest of the whole banking sector.
What risks arise when the provision of liquidity assistance is made public?
Information that a bank has obtained liquidity assistance from a central bank can lead to a loss of confidence on the market (issue of stigma attached to liquidity assistance). This poses a key challenge for all central banks as both the central bank and the bank are subject to certain statutory disclosure obligations.
Confidence can be weakened further particularly if bank-specific problems exist and no other measures are being taken to strengthen the bank.
The issue thus arises primarily due to the amount of liquidity being obtained and the reason for doing so - in the case of Credit Suisse a fundamental loss of confidence - and not due to the name of the instrument via which the liquidity is provided (e.g. 'emergency liquidity'). Renaming an emergency facility as an ordinary facility, for example, would therefore not be a solution.
The risks from a disclosure of liquidity assistance should be taken seriously, however. There are no simple solutions here. In any adjustment of disclosure obligations, consideration would have to be given to whether the advantages of such a regulation are to be given more weight than the need for market transparency.
How does the SNB as lender of last resort work with other authorities in a crisis?
The authorities which deal with financial stability issues are first and foremost the Federal Department of Finance (FDF), the Swiss Financial Market Supervisory Authority (FINMA) and the SNB. Each of these three authorities has its own specific powers and responsibilities assigned to it by law. In the case of the SNB, this is its role as lender of last resort (LoLR). This clear division of powers and responsibilities facilitates the three authorities' capacity to act.
At the same time, it is essential that the authorities exchange information on financial stability issues and coordinate their work and decisions aimed at crisis prevention and management. To this end, the FDF, FINMA and the SNB have signed a Memorandum of Understanding.
In the context of the crisis at Credit Suisse, the committees specified in the Memorandum of Understanding played a key role in evaluating the need for action and in coordinating measures between the authorities. In its role as LoLR, the SNB kept the authorities continuously apprised of the status of preparations and the volume of ELA available. The provision of the liquidity assistance loans was coordinated closely with the other authorities.