A Year Since Credit Suisse, Banks Still Vulnerable
A year ago, Credit Suisse was merged with the UBS to circumvent a huge financial crisis. Credit Suisse’s chances were few and the best option available ahead was the merger with its rival UBS, which could bring in stability in a global setting and also for Switzerland, by this, the Swiss economy would be protected in the short term. A year after, the banks are still vulnerable, experts call for stronger banking regulations.
The merger of Credit Suisse and UBS created a behemoth. Now, a year after the crisis that brought Credit Suisse down, the challenges are still out there – on how to deal with the lender’s vulnerabilities, the global and in Switzerland. In a report on this, Reuters says that regulators and law-makers are starting to realise, how to survive deposit runs and on whether they should have access to emergency cash in an easier manner.
There is a warning that the banking controls of Switzerland should be made stronger. Any failure at the UBS, one of the biggest banks of the world, could become disastrous for the financial system. The collapse of Credit Suisse has already damaged Switzerland’s reputation as a global and stable financial centre.
Anat Admati, a professor at the Stanford Graduate School of Business and co-author of the book “The Bankers’ New Clothes: What”s wrong with banking and what to do about it,” said that “The banking system is no safer,” and that, “global banks can cause a lot of harm.” After the financial crisis of 2008, rules were brought on to keep the financial system in good health but it did not prove helpful in preventing the 2023 downfall.
Among the major weakness that showed up last year was the level of liquidity requirements of the banks, liquidity requirements were insufficient. What was once a comfortable buffer for the bank turned blank when billions of deposits were taken out in a matter of days.
Following the 2008 crisis, the liquidity coverage ratio (LCR) was introduced as a regulatory requirement to tackle liquidity risk. LCR directs the banks to keep sufficient assets that can be switched for cash for surviving liquidity crunch for over 30 days. The regulators in Europe are thinking whether to bring down the time period to, one or two weeks. The acting Comptroller of Currency in the United States, Michael Hsu has also aired a similar view, a new time frame of over five days to cover stress.
If so, the shorter time frames could make funding more expensive, said Andrés Portilla, the managing director of regulatory affairs at the Institute of International Finance, which is a bank lobby based at Washington. She added, “banks would need to hold higher levels of liquid assets and park more assets at the central banks.”
In Europe, banks are still working out the final phase of post financial crisis regulations, the Basel III. Basel III requires banks to keep aside more capital. With this going on, more changes will have to wait till next year to take place. Meanwhile the liquidity buffers of all banks are being taken seriously by the European Central Bank.
In Switzerland, the debates have centred on how to make loans available more extensively. Lenders, while borrowing from the Central Banks, should have assets, also called collateral to exchange; the collateral should have an ‘easy to price and sell’ value in the market. This is, in case the lenders are unable to pay, it can protect the taxpayers. When Credit Suisse’s outflows turned out to be huge, the lender was left with no securities to pledge at the Central Bank. The Central Bank, with no other way, offered cash without any securities in return.
The Swiss National Bank (SNB) has been asked by experts to add corporate loans and loans backed by securities in the asset basket. The collateral is decided on the basis of dialogue with banks, the Central Bank had said. Some analysts say that there could be stricter rules regarding capital requirements for UBS in the expected report by the Swiss government next month. This cannot be ruled out; the UBS Chief Executive Sergio Ermotti had said last week. The UBS’s balance sheet is almost double the size of Swiss economy, it is more than $1.6 trillion.
Peter Hahn, emeritus professor of banking and finance at The London Institute of Banking & Finance said, “all domestic and globally systemic important banks have become public-private partnerships. No government can risk their instability.” The problem has been resolved only in the short term, a much bigger problem could be lurking. Amidst all this, the European Central Bank, in order to detect early bank runs, has asked lenders to keep an eye on social networks. Xavier Vives, professor of economics and finance at IESE Business School in Barcelona says that the run on deposits happens in few hours and not a month, he added that, “regulation must be amended.” Later this year, global financial regulators would unveil a “deep dive” into how social media can speed the outflows of deposits.
Credit Suisse is part of Switzerland’s identity and one of the oldest institutions in the country. The collapse of the institution has become a damage which cannot be reversed. This has dissected the belief that global banks are safer. With the fall of Credit Suisse and the open vulnerabilities currently seen, other wealth management centres such as Singapore could benefit. The best option would be to better understand what went wrong and to strengthen the global financial regulations.
(With inputs from Reuters, The mint and CNN Business)
