In its first public statement since Credit Suisse’s rescue, the Swiss National Bank called for a review in banking regulations. It warned that global capital and liquidity rules do not protect systemically important banks from failure.
The SNB’s annual Financial Stability Report was published on Thursday.
The report contains a number of damning preliminary observations from the emergency rescue of Switzerland’s second-biggest bank, when it was taken over by its rival UBS in March in a government-engineered deal greased with a SFr260bn ($291bn) liquidity support package.
In its report, the SNB cautions that the bank’s difficulties may have been caused by the fact that it relied on the existing capital and liquidity regulations.
The SNB stated that “the experience with Credit Suisse showed that regulatory metrics can be narrow in times of stress and delay corrective actions.”
The SNB, along with the Finma market regulator, is responsible for overseeing financial stability in Switzerland.
It said that Credit Suisse’s capital ratios were higher than required, but this did not provide much comfort. The SNB also expressed concern over what exactly was allowed to be classified as regulatory capital according to existing rules. It cited deferred taxes assets. The SNB stated that as the bank’s financial situation deteriorated the existing accounting rules created a SFr2bn gap on its balance sheet.
Second, SNB stated that additional Tier 1 bonds issued by Credit Suisse – a debt instrument which has been one the most popular capital raising tools for the banking industry in the regulatory environment post-2008 – were not suitable.
The SNB stated that the bank could have erased the value of AT1 bonds much earlier in order to improve its financial health, as was intended by the regulatory purpose of these instruments. However, it was unable to do so because the trigger point, which was linked to capital ratios, was not an adequate barometer.
The SNB stated that it was already too late by the time the bonds had been wiped out, in a controversial case that has sparked a fierce legal battle across Switzerland.
Third, SNB stated that regulatory liquidity buffers for Credit Suisse were not adequate to deal with the situation.
The report says that “the bank’s liquid buffers and collateral prepared for central banks facilities were insufficient to cover the massive outflows of liquidity and the higher requirements for prepositioning.”
The report suggests that Swiss banks will be required in future to have a much higher minimum amount of assets on their balance sheets at any time, which can be pledged as collateral to the SNB for emergency liquidity lines.
The central bank will conduct a deeper investigation of the Credit Suisse crisis, which it will present to Swiss parliamentarians in 2013.