The Swiss Bankers Association (SBA) doesn't always attract as many guests to its media conferences as it did on Thursday morning. This was, of course, due to the topic, as the association promised to present and refine its positions on the  report on banking stability published by the Federal Council in April 2024 in response to the Credit Suisse (CS) debacle in March 2023, and thus on the too-big-to-fail (TBTF) problem.

The SBA focused on four areas: firstly, on the provision of liquidity, where the introduction of a Public Liquidity Backstop (PLB) is welcomed. Secondly, the Seniors Managers Regime, where it supports the strengthening of the legal foundations for remuneration systems. Thirdly, on corporate governance and supervision, where the SBA wants to stick to the dual supervisory model and rejects the power to impose fines on the Financial Market Supervisory Authority Finma. Finally, regarding own funds, the Association of German Banks is calling for a comprehensive assessment of the Federal Council’s proposed measures and greater international coordination.

Never Waste a Good Crisis

The fact that supervisory authorities are using the opportunity («never waste a good crisis»), to enforce other long-cherished wishes is not a new phenomenon, but it is apparently occurring again here. Overall, the Federal Council had packed too much into the report that had nothing to do with promoting stability, said Roman Studer, CEO of the SBA, fest. For example, CS (international) was the bank with the most fines from supervisory authorities – against this backdrop, an additional fine competence for Finma would hardly be expedient.

It is not a fundamentally new assessment compared to the first statement, Studer clarified. However, in recent months, around 700 specialists from member banks in various working groups have thoroughly analysed the measures proposed in the Federal Council's report – which by no means only affect the systemically important banks actually addressed by TBTF (i.e. UBS, Postfinance, Raiffeisen and ZKB).

PUK Report: The Missing Piece of the Puzzle

The position paper that is now available has been unanimously approved by the Board of Directors. This is not a matter of course, given that the differences in interests among the heterogeneous membership (which ranges from the small private bank to the colossus UBS) are inevitably considerable in the TBTF regulation.

Studer pointed out that a great deal of work has been done since the CS case, including the expert opinion by Professor Manuel Ammann on behalf of the Federal Department of Finance (May 2023), the report by the Expert Group on Bank Stability (September 2023), the Finma report ‘Lessons Learned’ (December 2023) and the Federal Council report (April 2024).

Maintaining Proportionality

However, one central element is still missing for a final assessment: the report of the Parliamentary Commission of Inquiry (PUK), which is expected before the end of this year. The SBA emphasizes that a meaningful discussion requires waiting for further developments, thus showing deference to parliament, which will be tasked with revising the TBTF legislation in the coming years. In doing so, the SBA tactfully acknowledges parliament’s crucial role in this process.

In assessing the measures proposed by the Federal Council, the SBA is guided by principles that are generally easy to understand. Regarding proportionality, the SBA opposes a 'self-inflicted demise of a single bank as a catalyst for widespread regulation.' Instead, it advocates for a graded, category-specific supervisory approach that is pragmatic. Additionally, Studer cautioned against jeopardizing international competitiveness, stating, «Only strong banks are stable banks.»

Why Banks Don't Want to Pay a Premium for Additional SNB Liquidity

However, the SBA did not avoid taking unpopular stances on certain issues. For instance, it supports the introduction of the Public Liquidity Backstop (PLB) for systemically important banks—as seen during the Credit Suisse emergency—as a third line of liquidity defense, following the bank's own resources and the Extraordinary Liquidity Assistance (ELA) it can request from the Swiss National Bank (SNB).

Nevertheless, the association does not want the banks to pay «insurance premium» (ex-ante lump sum compensation) for this. The banks have no legal claim to this liquidity assistance, and with the PLB, the federal government alone guarantees the SNB the repayment of the funds that it additionally lends to a bank in a crisis. Neither the management, nor the shareholders or creditors of a bank benefited from this. According to Studer, the SNB's bankruptcy privilege would, in fact, leave creditors worse off.

Does the PLB Really Fit Into the TBTF Concept?

Nonetheless, the SBA was unable to answer the fundamental question of the extent to which the PLB element fits in with the basic idea of the TBTF concept. The PLB was only added to the concept later. This is originally based on the idea that only solvent banks are rescued and that they by definition have enough assets that they can use as collateral to obtain liquidity from the SNB via ELA.

Be that as it may, the PLB has established itself internationally, and the CS exercise (in which the SNB even created ELA+, a new instrument to provide unsecured liquidity) with emergency law was a regulatory mess. From this point of view, the anchoring of the PLB in ordinary law is perhaps the lesser evil.

Resolution: Is the SBA flogging a dead horse?

The CS story has also deeply shaken the belief that a globally active systemically important bank can actually be wound up in accordance the rules that have been in place for years and were created at enormous expense and internationally coordinated specifically for such an eventuality (resolution). Nevertheless, the SBA adheres to this pillar of the TBTF concept and tirelessly supports measures to ensure its resolvability.

Studer was careful not to venture too far out on a limb when it came to the question of the appropriate amount of additional equity capital that UBS should hold (particularly for foreign subsidiaries). However, he did point out that the big bank is already well capitalised, that no tightening is planned internationally in this area and that more capital also drives up costs.