Rules for winding up big banks do not work, Swiss finance minister warns

The global regulatory regime for “too big to fail” banks set up after the 2008 crisis does not work, according to Switzerland’s finance minister.

In an interview with Swiss newspaper NZZ on Saturday, Karin Keller-Sutter — who was at the centre of Swiss authorities’ rush to rescue Credit Suisse last weekend — said following the emergency protocols that are at the centre of the regulatory architecture for big banks “would have triggered an international financial crisis”.

Capital buffers and extra regulatory rules on risk have been useful for navigating times of stress, Keller-Sutter said, but in a real crisis, plans to facilitate the orderly rescue or wind-down of big banks are inadequate.

“Personally I have come to the conclusion . . . that a globally active systemically important bank cannot simply be wound up according to the ‘too big to fail’ plan,” she said. “Legally this would be possible. In practice, however, the economic damage would be considerable.”

Last weekend was “clearly not the moment for experimentation”, she added in her first interview since the crisis erupted. “The crash of Credit Suisse would have dragged other banks into the abyss.”

The finance minister, who took up her post at the end of December, said concerns over Credit Suisse’s liquidity had been her first question to civil servants when she started in office.

She said she asked three months ago: “When will the point be reached at which the authorities have to intervene; at which point will Finma come to the conclusion that CS is no longer viable?”

Keller-Sutter sat at the centre of the emergency negotiations, representing Switzerland’s governing Federal Council and co-ordinating with the Swiss National Bank and market regulator Finma.

The eventual rescue plan, in which the bank was taken over by its bigger rival UBS, has come under intense criticism, much of it focused on the decision by Finma to wipe out SFr16bn of convertible bonds while preserving some value for Credit Suisse equity holders.

Bondholders have pledged to take Swiss authorities to court in what could be a lengthy and high-profile litigative process.

Keller-Sutter did not answer questions on the decision to wipe out Credit Suisse’s subordinated debt holders, but told NZZ that the takeover by UBS was the only viable option, and the government did what it could to facilitate the deal while seeking to reduce any burden on Swiss taxpayers.

Domestically, the merger of the country’s two biggest banks — for which the government has written a SFr9bn guarantee and authorised a SFr100bn liquidity line from the SNB — has proved deeply unpopular.

A poll released on Friday showed that three-quarters of Swiss people surveyed supported legislation to break up the new entity, with a majority harbouring serious concerns that the government had overstepped its authority.