Swiss banks: The concept of “too big to fail” is being further cut down to size. Regulators in Switzerland have followed close behind their US and UK counterparts with similar proposals to ensure banking giants are prevented from becoming so big that they endanger the financial system. But the Swiss are also pushing the last-resort concept of capping a bank’s size, a taboo notion that authorities elsewhere have yet to discuss publicly.
Switzerland has reason to consider more aggressive ideas. Its all-important reputation as a hub for wealth management has taken a hit as a result of the troubles at UBS, which operates the world’s largest private bank. The country’s SFr4.4 trillion (E2.9tr) of bank assets amounted to eight times GDP last year, even after considerable pruning that reduced the ratio from nine in 2007. Credit Suisse and UBS accounted for nearly three-quarters of the total. The Swiss may have stronger reserves, currency and banking tradition than, say, Iceland or Ireland. But after the blow-ups that put frights into the authorities and taxpayers of both those countries – where the respective bank assets to GDP ratios were nine and five – a fallback plan makes sense.
The Swiss National Bank rightly seems to think less radical remedies should come first. Imposing higher capital charges on systemically significant banks would encourage them to shrink while also cutting down on moral hazard. The Swiss also look supportive of having contingency plans in place to wind down big institutions to minimize the fallout of failure. The preparation of such “wills” should help reduce the kind of shock global damage that resulted from the collapse of Lehman Brothers.
Such orderly wind-downs will require global coordination. And even though national regulators have been working with each other more closely, there’s still a big risk that financial regulation will start to fall down the list of political priorities, especially if economic conditions worsen. There’s every reason to be sceptical about the ability of regulators to come together to devise a practical and harmonized global scheme.
This is why it’s right for Swiss authorities to talk about last-ditch self-help measures. Among these would be limiting a bank’s maximum market share or the percentage of assets it holds compared to the country’s GDP. Keeping banks small is, of course, no sure-fire stop-gap. The simultaneous collapse of many small US thrifts in the late 1980s is just one example of how size isn’t always the cause of a crisis.
But Switzerland should not be alone in contemplating extreme notions to combat too-big-to-fail. UK bank assets are more than four times GDP. In the Netherlands, the ratio is five, in Belgium six. And this crisis should have made clear that such banking problems are rarely just a domestic issue.
