The Swiss government and central bank are trying to stop the run on Credit Suisse with huge sums of money. The Swiss economist and host of the monetary policy podcast “money castIn an interview with ntv.de, Fabio Canetg explains why he thinks this plan is promising. The banking giant created by the takeover by UBS, on the other hand, poses considerable problems for Switzerland in the long term.
Fabio Canetg is a journalist and holds a doctorate in economics. The monetary policy expert moderates the “money cast” on swissinfo.ch, among other things. In his podcast he reports in detail about the Credit Suisse rescue.
(Photo: Fabio Canetg)
ntv.de: The emergency takeover of Credit Suisse by UBS has created an even more gigantic bank. Critics fear that this “monster” is too big for the Swiss state and can no longer be controlled in the event of a crisis. Is that true?
Fabio Canetg: It’s helpful to think about the relative size of the new bank and its home country: the total assets of Credit Suisse and UBS together is two to two and a half times the gross domestic product of Switzerland. The ratio of the federal government’s annual budget to the assets under management by the new bank is 1 to 21. In other words, the new giant bank manages assets worth approximately 21 annual Swiss government budgets. That is the dimension that is at stake should this bank ever falter.
This topic was also addressed at the press conference at which the takeover of Credit Suisse was announced. If I remember correctly, the position of the government and the financial regulator was that they wanted to regulate and supervise the new big bank so tightly that it would not falter. Is that enough or do you not have to make provisions for a crisis and have a plan B ready?
Of course, it is a noble goal to want to prevent the bank from falling into crisis. But we know that banks are inherently fragile entities. A bank run can also throw a healthy bank into liquidity problems. So we definitely need a plan B.
What could that look like for a bank of this size?
Basically, there are always two ways to save a bank from collapse. Possibility one: takeover by a larger bank. But that will hardly be possible at UBS in the future – at least not through a Swiss bank. After the merger of Credit Suisse and UBS, there is no other major bank left in Switzerland. And the takeover of this last major Swiss bank by a foreign institution would be politically sensitive. Option two is a temporary takeover by the state. That was also considered in the case of Credit Suisse. That would have meant that the government would have gone “all in” and assumed all the risks to an unpredictable extent. In the case of the new giant bank, these risks would potentially be even greater than they would have been had Credit Suisse been nationalized temporarily. It is interesting that UBS itself has announced that it will wind down parts of Credit Suisse after its takeover, meaning that it will downsize the bank again in the future.
Back to Plan A, to regulate the merged bank more strictly according to its size than was previously the case with Credit Suisse and UBS individually. What could that look like?
There are three parameters: the capital requirements, the liquidity requirements and a resolution plan in the event of a crisis. With much higher capital and much tighter liquidity requirements, you can create buffers and reduce the risk of a collapse, but you can’t reduce it to zero. Whether a resolution plan can also be implemented in practice, we will only ever see in the crisis. The basic problem that this new bank is even more “too big to fail” will always remain.
It has long been criticized that there is too much proximity between the banks and the Swiss financial regulator. That’s why the supervisors at Credit Suisse, for example, were too soft and didn’t take action earlier and more consistently. Would you agree with that?
This proximity between banks and supervisors is unavoidable. Switzerland is a small country. If you want financial regulators to have professionals who really understand what’s going on in banking, then you almost have to have them out of the banks. In my opinion, they work in a highly professional manner and probably more effectively than if you had graduates with no experience in the industry. Incidentally, we now know that the financial supervisory authority, the National Bank and the government have been well informed about the worsening situation at Credit Suisse since last October.
But didn’t they act?
It was considered to pass a planned law to secure the liquidity of the banks, the so-called Public Liquidity Backstop, in an accelerated procedure. But that was rejected for fear of sending a signal of crisis and even more causing panic. So you hoped for the best and prepared for the worst.
This “worst case” has now occurred. How do you rate the crisis management as a result?
Overall, one has to acknowledge that the state institutions managed to piece together a deal within a few days to prevent a disorderly collapse of Credit Suisse with potentially catastrophic consequences not only for Switzerland but for the global financial markets. It is certainly debatable whether this is the best possible solution that has emerged. The takeover by UBS at least limited the financial risk for the state.
What sums are we talking about?
On the one hand, the government is providing UBS with a guarantee of nine billion francs for possible losses from the Credit Suisse portfolio. On the other hand, it guarantees CHF 100 billion to the Swiss National Bank, which in turn provides the two banks with a credit line for possible liquidity bottlenecks. In addition, the National Bank has granted another 100 billion as a credit line. In addition, there are the regular liquidity aids available to all banks. Altogether, at least 209 billion Swiss francs of government money are at risk. That is almost twice as much as the federal government’s current debt level.
Will that be enough to master the current crisis?
The logic of the central bank’s handling of a bank run is to demonstrate its willingness to do whatever is necessary to stop the bank run. So to signal to the customers: You can withdraw as much as you want, we will prevent a liquidity bottleneck from occurring. If people believe that, then the situation should calm down and the aid doesn’t have to flow at all.
And how confident are you that this will work now?
Whether this plan works depends on the credibility of the central bank and whether the sums are large enough. I think the measures taken by the Swiss National Bank currently meet both criteria. An indication that the market accepts this approach is the UBS share price, which has since stabilized after an initial slump as a result of the takeover deal.
Max Borowski spoke to Fabio Canetg