The crisis at Credit Suisse Group AG this year, which led to its near collapse and takeover by UBS Group AG, demonstrated that existing financial regulation can end up slowing the response to stress situations, Switzerland’s central bank said.
The design of loss-absorbing bonds known as AT1s, as well as the functioning of liquidity requirements, during the episode meant that Credit Suisse didn’t take steps to address the emergency as quickly as needed, the Swiss National Bank said in its annual Financial Stability Report on Thursday.
“In a period of stress, regulatory metrics are relatively narrow and may delay corrective action,” the SNB said. “The experience with Credit Suisse shows the need for a review of the Too-Big-To-Fail framework in order to facilitate early intervention.”
Following the closing of the historic takeover deal earlier this month, UBS Chief Executive Officer Sergio Ermotti is now beginning a highly complex fusion of the two global banks that’s likely to involve thousands of job cuts. The combined bank will face gradually higher capital requirements from 2025 as a result of its larger size and systemic importance.
Confidence Collapse
The SNB argued that the features of AT1 bonds, developed following the financial crisis in 2008 to shore up capital and absorb losses in stress situations, didn’t work as planned in the case of Credit Suisse. During the rescue the Swiss government decided to impose total losses on the holders of some $17 billion worth of Credit Suisse AT1s.
Credit Suisse didn’t cancel interest payments on AT1 bonds as it experienced financial distress, which could have brought relief, as doing so would have worsened the decline in market confidence, the SNB said.
Amid the rapid slump in its share price and outflows of client funds that begin in late 2022, the liquidity situation at Credit Suisse also outstripped the regulations intended to ensure banks have enough funds to meet their obligations, according to the report.
“The bank’s liquidity buffers and the collateral prepared for central bank facilities were not sufficient to cover the massive liquidity outflows and the higher prepositioning requirements,” the SNB said, adding that the issue was exacerbated by needing to meet operational needs as well as requirements from payment agencies and clearing institutions.
When the crisis struck, Credit Suisse also didn’t have enough ready collateral to access sufficient funds from the central bank. In March, the SNB introduced a special uncollateralized facility to bridge the bank until the rescue by UBS could be brokered.
“Going forward, banks should be required to prepare a minimum amount of assets that can be pledged at central banks.”
The SNB said that the Swiss authorities will carry out an in-depth review of the crisis in the context of the Too-Big-To-Fail regulations and present a report to parliament within 12 months.
(Updates with details on liquidity)
