Swiss central bank urges review of 'too big to fail' bank safeguards

Switzerland's central bank said the government and regulators should carry out an in-depth review of rules aimed at preventing disastrous bank collapses, saying key guardrails failed to prevent Credit Suisse from needing to be rescued by Swiss competitor UBS.

The Swiss National Bank scrutinised several of the safeguards imposed in the wake of the 2008-2009 global financial crisis that were aimed at preventing a repeat.

The central bank concluded that several too big to fail rules designed to avoid the collapse of a major global bank were inadequate and may even have delayed action to ward off disaster.

Looking forward, the experience with Credit Suisse shows the need for a review of the TBTF framework in order to facilitate early intervention, the central bank said in its annual financial stability report published on Thursday.

It is now up to the authorities to carry out an in-depth review and draw lessons, also in view of the higher systemic importance of the combined bank and the associated risks for Switzerland, it said.

Credit Suisse had been one of 30 big international banks singled out for tougher scrutiny because of the potential impact of a failure on the global financial system.

The Swiss lender was forced into a government-engineered takeover with UBS after Credit Suisse's stock plunged and customers quickly pulled out their money in March. Authorities feared its collapse could further roil global financial markets after the failure of two US banks.

The hastily arranged marriage, which closed last week, has raised questions about the risks of creating an even bigger bank. Both Swiss lawmakers and the Swiss attorney general's office have approved setting up inquiries into the deal worth 3 billion Swiss francs (about USD 3.3 billion) and the events leading up to it.

The central bank noted that Switzerland's existing safeguards were in compliance with the international set of rules painstakingly agreed on after the 2008 collapse of US investment bank Lehman Brothers, but they still didn't stop the Credit Suisse meltdown.

The central bank's report questioned standards defining the size of the financial padding that banks need to hold to cover unexpected losses, saying that Credit Suisse was in excess of those safety requirements even as investors and customers lost faith in its ability to deal with its problems and return to consistent profitability.

And rules on financial buffers allowed the bank to count holdings that were needed to cover other requirements.

Bonds designed to automatically absorb losses wound up playing a role only after Credit Suisse's rescue and didn't help in the run-up to the meltdown. That's because the bank kept paying interest on the bonds for fear of sparking even more negative reactions from shareholders and depositors.

Taken together, these observations also raise questions regarding the ability of the TBTF framework to oblige a systemically important bank to take sufficient corrective action in a timely manner, so that it can recover by its own means in a stress situation," the report said.

"The experience made with Credit Suisse has shown that, in a period of stress, regulatory metrics are relatively narrow and may delay corrective action," it added.

Switzerland's central bank, which does not supervise banks or enforce banking legislation, said it would contribute to a government review of banking rules over the next 12 months.

The report was published as the bank raised its key interest rate Thursday, seeking to combat inflation and saying it cannot be ruled out that more hikes will be necessary.

Inflation declined significantly to 2.2 per cent in May but is above the target set by the bank, which warned that price pressures persist and would make themselves felt in coming months without action.

It said the decision to hike its key rate by a quarter-percentage point, to 1.75 per cent, was countering inflationary pressure which has increased again over the medium term.

It came on a busy day for central bank action in Europe, including rate decisions from the United Kingdom, Turkey and Norway.

Central banks around the world have sharply raised interest rates to combat an outbreak of inflation triggered by the rebound from the pandemic, higher energy prices and Russia's invasion of Ukraine.