How can you prevent the total collapse of the Swiss economy? A group of experts has published recommendations on the so-called “Too big to fail” problem, or how to regulate big banks like UBS and Credit Suisse. And Switzerland’s recommendations are ahead of the international pack. WRS’s Tony Ganzer reports:
What makes the expert recommendations noteworthy is how far they are above the new regulations agreed upon by the Basel committee, a secretive group of world financial players setting standards for banks to live by. Whereas so-called Basel III regulations required a bank to have capital equaling 10% risk weighted assets, the Swiss experts suggested almost double at 19%. In layman’s speak, banks need to be able to have a large amount of cash, or solid investments, that could protect them in case of a crisis.
Reiner Skierka is a banking analyst with Bank Sarasin in Zurich. The Swiss finish he mentions is how far beyond the Basel Committee’s standards these Swiss experts have suggested. Skierka says Switzerland has always been among the most strict countries in terms of banking regulations, and capital requirements, because it relies heavily on its two major banks—UBS and Credit Suisse. If one of those banks fell, shockwaves would ripple throughout the Swiss economy.
The experts also recommended diversifying how risky banks’ assets are, and changes to organizational structure in a bank to make sure vital services always have enough money.
Susan Emmenegger is director of the Institute of Banking Law at the University of Bern. She also was not surprised by Switzerland going beyond the Basel III rules, and says on a global scale, adequate regulation will ultimately depend on piecemeal approaches from national governments. But in a globalized world, with money needing to flow to so many places, national regulation can only take the system so far.
Changing the way banking is regulated is not easy, and Emmenegger says it is ultimately a political issue, whether in the US or in Switzerland. Analyst Reiner Skierka agrees.
It is unclear major financial players like Germany or the US would also enact strict rules, because they just have more banks to spread the risk. Switzerland’s strict rules simply come out of necessity—if Credit Suisse or UBS were to collapse, the damage to the Swiss economy would be immense.