With its report on banking stability last April, the Federal Council bristled the banking lobby. The government called for more equity for the country's largest banks; however, the Swiss Bankers Association (SBVg) would have preferred the federal government to focus on providing more emergency liquidity assistance.

For All Banks

The SBVg had previously called for a «de-stigmatization» of emergency liquidity assistance (ELA). They suggested that it should be a fixed part of banking regulation and applied to smaller banks as well: «This would apply to all banks and thus significantly increase system stability.»

So far, only the four systemically important Swiss banks—UBS, Raiffeisen Group, Zürcher Kantonalbank, and PostFinance—qualify for ELA.

High Requirements of the SNB

The Geneva-based Association of Swiss Private Banks (VSPB), which currently represents eight member banks with over 9,800 employees worldwide, echoes this sentiment. In their recently published annual report, the organization also calls for emergency liquidity for its members. «The Credit Suisse crisis showed that the range of collateral accepted by the SNB must be expanded and ELA must be accessible to all banks,» the report states.

The problem: The SNB, which provides emergency liquidity, launched an initiative last September to grant liquidity to all banks. However, it only accepts high-quality Swiss mortgages as collateral and additionally requires that the loans be registered on the inter-cantonal platform Terravis, maintained by the stock exchange operator SIX.

The Wrong Assets

This expansion bypasses private banks completely, as mortgages are at most a marginal business for them. «The most important illiquid assets of private banks are Lombard loans,» notes the VSPB. They demand that these should also be accepted as collateral like all other types of loans.

Lombard loans as collateral for emergency liquidity assistance: it remains to be seen how the regulator will respond. It is certain that the federal government, SNB, and authorities will have to come up with something regarding ELA. The fall of CS showed that the large bank did not have sufficient high-quality collateral to secure the necessary amount of emergency liquidity.

In Emergency, ELA Needed State’s Support

In the midst of the crisis, the state had to guarantee additional liquidity assistance to the SNB, which thus became the so-called ELA+.

Private banks are also raising their voices about another crisis instrument: the state-guaranteed emergency liquidity, the Public Liquidity Backstop (PLB). The Federal Council now intends to incorporate this into regular law, which has already met with resistance in the banking sector. Smaller institutions smell unequal treatment in favor of large banks.

There is talk of a new kind of state guarantee, although the use of a PLB would be decided on a case-by-case basis.

Quid Pro Quo Demanded

The VSPB is also apparently in the camp of critics. They believe Switzerland would do well to include the instrument in its «too big to fail» toolbox. «However, private banks point out that this ultimate state guarantee represents a competitive advantage that cannot be eliminated even by paying an annual flat-rate compensation.»

The PLB thus leads to a massive competitive distortion, at least in the perception of customers and the market.

Accordingly, the private bank lobby is now demanding a quid pro quo. Future banking regulations must, according to the VSPB, take this distortion into account by lowering requirements for non-systemically important banks, i.e., private banks.