The Swiss National Bank (SNB) may impose size limits on Credit Suisse and UBS due to "unique" systemic risks in the Swiss financial system, it revealed on June 18.
The SNB said in its latest financial stability report that, as a result of the two banks' market share and their balance sheet size in comparison with the country's gross domestic product (GDP), the question of whether a bank can be 'too big to fail' is "particularly relevant" in Switzerland.
The central bank is looking at ways to address this problem. In 2008 it heavily intervened in the banking sector, offering capital assistance and liquidity programmes. However, according to Philipp Hildebrand, vice-chairman of the bank's board, "although the measures taken so far in this area are heading in the right direction, some of them do not yet go far enough".
The bank said it is now considering "alternative approaches" to managing system-wide risks. One suggestion is that the "root cause" of the problem - the size of the institutions - should be tackled. Measures that put a direct cap on the size of banks, by setting a limit on their market share or on their balance sheet to GDP ratio, are "conceivable".
However, SNB said it will also consider "indirect incentives" to reduce systemic concerns. Under this umbrella, systemically important financial institutions could be required to hold especially large capital and liquidity buffers - capital requirements based upon a firm's size should "reduce a bank's incentive to inflate its balance sheet without restraint", Hildebrand commented.
Introducing into the regulatory framework a plan for winding down important financial institutions in a crisis would be a final option. However, SNB considers this option "almost impossible" without an internationally co-ordinated agreement.
Systemic risk has grabbed the attention of regulators in many other jurisdictions following the fall of Lehman Brothers and the near-collapse of American International Group in September last year.
On June 17, Mervyn King, governor of the Bank of England, voiced concerns in a speech at the annual Lord Mayor's banquet in London. "If some banks are thought to be too big to fail, then, in the words of a distinguished American economist, they are too big. It is not sensible to allow large banks to combine high-street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure," he said.
"Either those guarantees to retail depositors should be limited to banks that make a narrower range of investments, or banks which pose greater risks to taxpayers and the economy in the event of failure should face higher capital requirements, or we must develop resolution powers such that large and complex financial institutions can be wound down in an orderly manner. Or, perhaps, an element of all three," he continued.
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