After the storm: ten years on, how weatherproof is the Swiss banking system today?
Fritz Zurbrügg, Vice Chairman of the Governing Board
University of Lucerne, Lucerne, 06.09.2018
The financial crisis exposed the particular risks presented by large, highly interconnected banks. Banks provide services which are indispensable to the national economy. In the event of the failure of a systemically important bank, these services cannot be substituted at short notice by other institutions. Such banks cannot exit the market without causing significant disruption. As a result, they enjoy an implicit state guarantee - they are 'too big to fail'.
The implicit state guarantee creates false incentives. Shareholders and management are induced to take on greater risk, while creditors have no incentive to stop this happening. The bail-out obligation thus becomes even more acute and can generate unforeseen costs for the state which could, in the worst-case scenario, overburden it financially.
The 'too big to fail' issue is especially pronounced in Switzerland due to the economic significance of the two big banks and also the size of the domestically focused systemically important banks.
The financial crisis revealed, not least for Switzerland, that legislators, regulators and supervisory authorities had not been vigorous enough in tackling this issue. They had underestimated the risks being taken on by ever larger and more globally interconnected banks.
In the aftermath of the crisis, there was soon a broad consensus that the regulatory framework was in need of a thorough overhaul. A number of measures have since been adopted at international level to strengthen banks' resilience and alleviate the 'too big to fail' issue. Switzerland's regulatory approach is in line with international efforts. It rests on two complementary pillars: first, the strengthening of the banks' resilience, and second, ensuring the orderly resolution of a systemically important bank in the event of a crisis.
The Swiss approach thus directly tackles the fundamental causes of 'too big to fail'. At the same time, it is designed to be cost-effective in terms of the calibration of capital requirements and the choice of specific measures; in particular, it does not actively intervene in banks' business models or organisational structure. In this way it contributes to the good framework conditions that characterise Switzerland in general and that constitute an important precondition for a successful banking sector.
The implementation of the planned measures is already well under way. As a consequence, the Swiss big banks are significantly more weatherproof today than they were before the financial crisis. Nevertheless, the finish line has not yet been reached. Full implementation is a necessary condition for resolving the 'too big to fail' issue in Switzerland.