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Banks failing: Lessons learnt from the Credit Suisse collapse - Part 3

 Written by Dr Giuliano Bianchi | Jun 13, 2023 4:00:00 PM 


What is actually being debated?

Dr. Bianchi: There are several issues currently being mulled over. In the blue corner, there is the question related to the protection of shareholders (both CS and UBS). And in the red corner, there is the question related to the market power that this monster will have.

 That’s just it: The combined balance sheet will be bigger than that of the Swiss National Bank. Does this present a systemic risk? What happens when ‘too big to fail’ becomes ‘too big to rescue’ for a national bank?

Dr. Bianchi: The power of the Swiss National Bank depends more on the level of confidence that it inspires than its actual financial firepower. If the markets do not believe in the SNB's strength and start speculating against it, the SNB would not be able to carry out its monetary policy. In the past, the SNB was able to rescue UBS and maintain a fixed exchange rate. But, do we really believe that if the international markets were to start speculating against the SNB’s decisions, the SNB would be able to respond to such attacks? Personally, I think it is actually more of a Nash equilibrium issue, in which no one wants to be the first to start speculating against the bank’s decisions. Thus, as long as the SNB maintains its sterling reputation, I do not think the banks will be too big to be rescued. It is worth, however, repeating this rather pernicious point: The SNB must maintain its reputation.

Deposit holders ran for the exits, withdrawing some $69bn in the first quarter of 2023, in a textbook example of a bank run.

Dr. Bianchi: There is indeed uncertainty, but we’re a long way off from the scenes of panic we saw in Greece and the UK after the 2008 meltdown. The key difference is that now, in Switzerland, there is a general confidence that the system works. Again, everything relies on reputation. The opacity of the system and the genuine (not to say naïve) idea that the Swiss banking system is “Swiss” (i.e., stable) helps immensely. There is a general feeling that, if needed, the government will step in and provide a backstop to halt a run on the banks. However, if we look a bit closer, we see that this idea is not grounded in fact.

 What do you mean? Isn’t the Swiss banking system known for its stability?

Dr. Bianchi: Yes of course, but historically Swiss bankers have tried to keep the government away from the finance industry under the motto: “We know, you don’t”. An example? According to Article 37a of the Swiss Banking Act, deposits are fully guaranteed “only” up to an amount of CHF 100,000 by ESISUISSE, a private, self-regulated association of Swiss banks and security firms. That is to say: in the event a bank fails, up to CHF 100,000 in deposits will be paid by ESISUISSE. Not the government. In the event the association does not pay (the law has anticipated this possibility), the deposit holder will be placed in the second class of bankruptcy claims (which, de facto, is a third class out of four as it comes after payments to debt holders and employees). Again, the government has no obligation to step in."

"

Now that the nuts and bolts are being hashed out, how will the broader landscape in Switzerland (and beyond) be affected?

Dr. Bianchi: Switzerland used to have five systemic banks running the show: UBS, CS, Postfinance, Raiffeisen and the Zurich Cantonal Bank. Now that the two biggest banks are merging, and the concentration of the industry has increased, the 3-billion-franc question is whether the other players will follow the lead of the new monster and consolidate or compete against it. In the first scenario, competition decreases and clients will eventually suffer; while under the second scenario, bank users will simply acknowledge that a historical institution now belongs to history."

SOURCE:

https://www.google.com/amp/s/hospitalityinsights.ehl.edu/banks-failing-lessons-learnt-credit-suisse-collapse-part-3%3fhs_amp=true


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