Swiss tackle 'too-big-to-fail' problem

Zurich : Switzerland may need tougher rules than elsewhere to solve the "too big to fail" issue given the size of its bank giants UBS and Credit Suisse, the future Swiss National Bank chairman said.

SNB Vice-Chairman Philipp Hildebrand, who will take over as chairman next month, said yesterday the central bank was investing "substantial resources" in trying to avoid a situation whereby large banks take risky bets on the assumption they would be rescued by the state in a crisis.

"Given the particular importance of the banking sector, with two big banks which hold a key position in the domestic loan and deposit market, the ‘too big to fail' and ‘too big to rescue' issues have particular significance for Switzerland," he said speaking after the bank's quarterly policy setting meeting.

"Consequently, we need to be very conscious of the fact that measures may be needed over and above international standards."

Just over a year ago, the failure of former US investment bank Lehman Brothers brought the global financial system on the verge of collapse and governments and central bank had to pump hundreds of billions of dollars into banks and markets to prevent a complete financial breakdown.

Injection repaid

In Switzerland, the government injected 6 billion Swiss francs (Dh21.46 billion), now repaid, into UBS to help it weather the crisis.

Hildebrand said addressing the issue of the virtual guarantee enjoyed by banks with a large size relative to the economy was the biggest regulatory challenge.

"A guarantee of this kind contradicts the basic principle of the market economy and presents us with a situation that cannot be tolerated," Hildebrand said.

"It must be possible for any financial institution, even a large one, to fail, without threatening the future of either the financial system of the real economy."

The Financial Stability Board is due to unveil proposals on the "too big to fail" issue by the end of October 2010.

One key element of a possible solution to the problem involves replacing current bilateral business relationship between fin-ancial actors with central counterparts that could absorb even the collapse of a large player without creating a domino effect.

"The SNB is supporting the banks' ongoing efforts to clear a larger part of the enormous over-the-counter derivatives market though central counterparties," Hildebrand said.