Swiss central bank calls for overhaul of banking regulations after Credit Suisse rescue

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The Swiss National Bank has called for a review of banking regulations as it warned that existing global rules on capital and liquidity do not safeguard systemically important lenders from collapse, in its first public reflections since the rescue of Credit Suisse.

“The experience with Credit Suisse shows the need for a review of the Too-Big-To-Fail framework in order to facilitate early intervention,” the SNB said in its annual financial stability report, published on Thursday.

The report contains a number of damning preliminary observations from the emergency rescue of Switzerland’s second-biggest bank, when it was taken over by its rival UBS in March in a government-engineered deal greased with a SFr260bn ($291bn) liquidity support package.

The SNB warns in the report that dependence on existing regulatory capital and liquidity rules may even have contributed to the bank’s problems.

“The experience with Credit Suisse has shown that in a period of stress, regulatory metrics are relatively narrow and may delay corrective action,” the SNB said,

The SNB, which is responsible for overseeing financial stability in Switzerland alongside the market regulator Finma, said it had identified three principal concerns.

First, it said Credit Suisse’s higher-than-required capital ratios had provided little reassurance. It also said it had concerns over exactly what was permitted to be classed as regulatory capital under existing rules, citing deferred tax assets. As the bank’s situation deteriorated, the existing accounting rules for those tax assets created a SFr2bn hole on the bank’s balance sheet, the SNB said.

Second, the SNB said additional tier 1 bonds issued by Credit Suisse — a debt instrument that has been one of the banking world’s most popular capital-raising tools in the post-2008 regulatory environment — were not fit for purpose.

The bank should have been able to wipe out the value of the AT1 bonds far earlier to improve its balance sheet, the SNB said, which was supposed to be the instruments’ regulatory purpose, but could not because the trigger point which was tied to capital ratios was an inadequate barometer of the bank’s financial health.

By the time the bonds were wiped out — in a controversial decision that has launched a ferocious legal battle in Switzerland — it was too late, the SNB said.

Third, the SNB said regulatory liquidity buffers were nowhere near adequate for Credit Suisse to cope with its situation.

“The bank’s liquidity buffers and the collateral prepared for central bank facilities were not sufficient to cover the massive liquidity outflows and the higher prepositioning requirements,” the report states.

The report proposes that in the future Swiss banks should be required to set a far higher minimum level of assets held on their balance sheet at any given time which are eligible to be pledged to the SNB as collateral for emergency liquidity lines.

The central bank is conducting a more in-depth investigation into the Credit Suisse crisis which will be delivered to Swiss parliamentarians next year.