Lessons Learned from the Credit Suisse Crash: SNB Calls for Enhanced Resilience in Swiss Banking Sector

The recent crisis that resulted in UBS's emergency takeover of Credit Suisse, Switzerland's second-largest bank, has prompted the Swiss National Bank (SNB) to emphasize the importance of resilience measures in the country's banking sector.

In its 2023 financial stability report, the SNB highlighted the need to strengthen banks' resilience to prevent a loss of confidence and ensure effective options for stabilizing, recovering, or winding down systemically important banks in times of crisis.

Become a Subscriber

Please purchase a subscription to continue reading this article.

Subscribe Now

Following the completion of UBS's takeover of Credit Suisse, Switzerland now boasts a colossal banking and wealth management entity with a $1.6 trillion balance sheet and 120,000 employees worldwide. However, concerns have been raised regarding the regulatory challenges associated with overseeing such a massive institution. As a result, the SNB is pushing for stronger resilience measures to mitigate risks and ensure adequate oversight.

To address potential liquidity challenges, the SNB has proposed a requirement for banks to allocate a certain amount of assets to central banks. This measure aims to facilitate access to emergency liquidity in the event of panicked client withdrawals. By committing assets to central banks, banks can better navigate liquidity shocks and prevent destabilizing liquidity outflows that can harm their operations and erode public confidence.

The SNB acknowledges that assessing the newly merged UBS-Credit Suisse entity's resilience is a complex task. The report points out that the currently available data are insufficient to comprehensively evaluate the combined bank's ability to weather future challenges. Given the heightened systemic importance of the merged bank, the SNB underscores the need for a thorough examination of its resilience to mitigate potential risks and ensure Switzerland's financial stability.

The crisis has provided the SNB with valuable insights, prompting a reevaluation of existing practices. The report highlights three key lessons learned.

First, while capital requirements are crucial, they alone are not sufficient to build and maintain confidence in banks. Enhancing capital buffers must be accompanied by other measures to bolster trust and stability.

Second, the SNB notes that certain early loss capital instruments, such as AT1 capital instruments, did not effectively absorb losses until the point of non-viability was imminent, necessitating state intervention. This finding suggests the need for more robust mechanisms to absorb losses and protect financial institutions and their stakeholders.

Lastly, the report emphasizes that Credit Suisse's deposit outflows during the crisis were unprecedented and exceeded expectations based on liquidity requirements. This highlights the importance of reassessing liquidity risk management frameworks to ensure banks can effectively respond to large-scale deposit withdrawals, which can significantly impact their liquidity positions.

By learning from the crisis, implementing appropriate measures, and reassessing existing practices, Switzerland aims to safeguard its position as a global financial center while mitigating risks associated with large, systemically important banks.