Generally speaking, the Basel III rules introduced since 2010 (with substantially higher requirements on capital and liquidity) as well as the markedly lower interbank connectedness have clearly improved the crisis resilience of banks and the banking system. The answer to the question though has to be differentiated:

«It can't be excluded that the government and taxpayers would have to step in»

1. All banks need to survive small and medium-sized company-related crises. Board and executive management are required to adjust strategy, risk policy and governance of their bank accordingly.

2. Should single, not systemically relevant banks be affected by an existential crisis, the issue would first be one of a restructuring or takeover by another bank. If not possible, the bank would have to drop out of the financial market. The banking system however ought to absorb such a move.

3. The crisis resilience of system-relevant banks should primarily be secured through a bigger equity cushion. Should such a bank nevertheless slip into an existential crisis and a restructuring (in particular a «bail-in») prove impossible, the emergency plans for such a situation would kick in. The plan would need to make sure that the bank is able to provide essential services like account management, payment system, and loans provisions to Swiss customers and the economy.

The system-relevant banks have to retain so-called gone-concern capital for this purpose – an extraordinary capital cushion. The system-irrelevant parts of the bank would be liquidated. The financial market regulator Finma carries responsibility, as it has to approve the emergency plan that each bank has to update once a year, and is charged to closely supervise an eventual implementation. It is also relevant that the capital requirements only need to be reached by the end of 2019 (and considering the latest calculation methods for risk-weighted assets only in 2027).

The emergency plans have to be operative by 2020. It can’t be excluded entirely that at least during the transition period, the government and taxpayers would have to step in financially to prevent a breakdown.

4. If not individual banks, but the banking system as a whole were to be affected by a major crisis, it might exceed its resilience. In such a case the state would be called to prevent a breakdown of the system and the ensuing economic damage.

In conclusion one can say that Swiss banks and the banking system are substantially more resistant for times of crises thanks to the new regulation. There is one caveat to this: no rules elaborated in great detail will be guaranteed as crisis-proof. Legal provisions are primarily based on the experiences of past crises. Whether they are up to coming challenges – like cyber-war, cryptocurrencies, or shadow banks – remains to be seen.

Armin Jans was an economics professor at Zurich Universities of Applied Sciences and Arts in Winterthur until 2014. He was a member of the Swiss National Bank’s bank council from 1999 through 2011 and of Zuger Kantonalbank (2003–2014). He’s the co-editor of a recently published book (NZZ books) about the resilience of Swiss banks: «Krisenfeste Schweizer Banken? Die Regulierung von Eigenmitteln, Liquidität und Too big to fail».

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