A year on from Credit Suisse's rescue, banks remain vulnerable

A year after the banking crisis that felled Credit Suisse, authorities are still considering how to fix lenders' vulnerabilities - including in Switzerland, where the bank's takeover by rival UBS created a behemoth.

The Swiss government-sponsored rescue of Credit Suisse and US bank salvages in March 2023 doused the immediate fires kindled by a run at little-known US regional lender Silicon Valley Bank.

But regulators and lawmakers are only starting to address how banks could better withstand deposit runs, and whether they need easier access to emergency cash.

A top global financial watchdog recently warned, opens new tab Switzerland must strengthen its banking controls, highlighting the risk that a failure of UBS - now one of the world's biggest banks - would pose to the financial system.

"The banking system is no safer," said Anat Admati, professor at the Stanford Graduate School of Business and co-author of the book "The Bankers' New Clothes: What's wrong with banking and what to do about it."

"Global banks can cause a lot of harm," she added.

Rules introduced after the 2008 financial crisis did little to avert last year's crash, as clients pulled cash from banks at unprecedented speed.

One of the key weaknesses that emerged last year was that banks' liquidity requirements proved insufficient. Credit Suisse saw billions of deposits exiting in a matter of days, burning through what had appeared to be comfortable buffers of cash.

Introduced after the 2008 financial crisis, the so-called liquidity coverage ratio (LCR) has become a key indicator of banks' ability to meet cash demands.

LCRs require banks to hold sufficient assets that can be exchanged for cash to survive significant liquidity stress over 30 days.

European regulators are debating whether to shorten the period of acute stress to measure buffers banks need over shorter timeframes, of say one or two weeks, according to one person with knowledge of the discussions.

The move would echo calls by the acting Comptroller of the Currency in the United States, Michael Hsu, who also made the case for a new ratio to cover stress over five days.

If such measures are put in place, "banks would need to hold higher levels of liquid assets and park more assets at the central banks," said Andrés Portilla, managing director of regulatory affairs at the Institute of International Finance, a Washington-based bank lobby group. "Ultimately funding could become costlier."

Industry-wide changes are only likely to take place next year in Europe as banks are still working through the final implementation of post-financial crisis rules, so-called Basel III, which will require banks to set aside more capital, the person told Reuters.

Amid worries that a repeat of a rapid run could threaten another bank, the European Central Bank is intensifying scrutiny of liquidity buffers of individual banks, another person familiar with the discussions told Reuters.

The ECB declined to comment for this article. It has identified, opens new tab liquidity supervision as a priority after the Credit Suisse rescue.

In Switzerland, the regulatory debate has homed in on how to make emergency loans more widely available.

When borrowing from central banks, lenders need to provide certain assets in exchange, also known as collateral, which must be easy to price and sell in financial markets. That protects taxpayers in case the lender cannot repay.

As Credit Suisse suffered unprecedented outflows, the lender ran out of securities to pledge to the Swiss National Bank (SNB), forcing the central bank to offer cash to the struggling lender without security.

A group of experts has called on the SNB, opens new tab to accept a wider pool of assets, including corporate loans and loans backed by securities.

The SNB said the universe of eligible collateral is reviewed on an ongoing basis and developed in dialogue with the banks.

A spokesperson for UBS declined to comment.

UBS's imposing balance sheet of more than $1.6 trillion, nearly twice the size of the Swiss economy, is prompting the country to also review its too-big-to-fail rules, a package of regulation that disciplines systemically important banks.

"All domestic and globally systemic important banks have become public-private partnerships. No government can risk their instability," said Peter Hahn, emeritus professor of banking and finance at The London Institute of Banking & Finance.

The Swiss government is expected to publish a report next month. It might announce stricter capital requirements for UBS, some analysts have warned.

UBS Chief Executive Sergio Ermotti said this week that he can't rule out that could happen.

"We fixed the problem only in the short term. What we did sets the stage for a much bigger problem later," said Cédric Tille, professor of economics at the Geneva Graduate Institute of International and Development Studies, who sat on the Swiss National Bank's supervisory council until last year.

"UBS has become too big to save."

Amid concerns about a repeat of 2023, the ECB has asked some lenders to monitor social networks to detect early bank runs. Global financial regulators are due later this year to unveil a "deep dive" into how social media can speed up deposit outflows.

"A run on deposits doesn't happen in a month, it happens in a few hours," said Xavier Vives, professor of economics and finance at IESE Business School in Barcelona. "Regulation must be amended."