Switzerland is world-famous for its developed banking industry, and the local banking industry contributes more than 50% of the added value of financial services. Because of this, the Swiss government is planning to establish a new support mechanism in order to avoid the huge impact of the failure of large banks, and the central bank is ready to take action at that time to ensure the crisis response capability of the so-called important banks in the system.
Like developed countries in the West, during the 2008 financial crisis, the Swiss government could only follow the “too big to fail” rule and use public financial funds to rescue the troubled local largest banking group, UBS. To prevent that from happening, the Swiss government has pushed for a new rule in recent years to ensure big banks have enough liquidity to absorb shocks from the outside world.
The new rule is expected to take effect in July this year. The new rules will significantly increase the reserve requirement ratio of the big banks to 19% and ensure that the big banks can separate vital parts of the national economy from the rest to achieve partial bankruptcy in the event of a problem and avoid the government having to step in again. rescue situation.
Despite this new regulation and the existing Emergency Liquidity Assistance (ELA) mechanism, the Swiss government is still worried and worried that large banks may still fail under extreme circumstances, so they decided to set up a third preventive measure.
The Swiss government said in a statement on Friday that “even if liquidity requirements increase, there may be a situation where the liquid assets of systemically important banks are insufficient for a successful liquidation.”
“In order to increase market participants’ confidence in the viability of a recapitalized, systemically important bank, a third line of defense is planned to provide temporary additional liquidity through public liquidity guarantees,” the statement said.
The government-proposed guarantee would allow the Swiss National Bank to provide funds to any systemically important bank in the form of state-guaranteed loans in the event of a failure of any systemically important bank. Liquidity guarantees help provide a mechanical guarantee for banks to access cash in a crisis, thereby reducing the risk of a bank run, or preventing customers and counterparties from trading with failed banks for fear of funding.
In addition to UBS, Switzerland’s second-largest bank, Credit Suisse, as well as unlisted banks Raiffeisen Group, Zuercher Kantonalbank and PostFinance are also listed as systemically important banks.
The Swiss government has given the Ministry of Finance to prepare draft legislation by mid-2023.
“Internationally, public liquidity support is part of standard crisis tools,” the Swiss government said, warning that “it should not be confused with national bailouts.”