SNB head calls for banks to be better prepared for crises
The events surrounding Credit Suisse are to remain an isolated case. As a matter of principle, the Swiss National Bank (SNB) does not want to grant emergency liquidity to financial institutions without collateral.
The extraordinary liquidity assistance granted to Credit Suisse during the crisis should not become a regular monetary policy instrument of the SNB, SNB President Thomas Jordan said at an event on Wednesday.
Credit Suisse had prepared too little collateral for deposit with the SNB to receive extraordinary liquidity assistance on a massive scale, Jordan noted in his opening speech at the conference “The SNB and its Watchers” in Bern. However, the case of CS had also shown in an exemplary manner that customer deposits could now flow out much faster and more extensively than had been assumed in the previous regulation.
In March, the SNB provided CS with ELA+ liquidity assistance (“Emergency Liquidity Assistance”) based on an emergency decree issued by the Federal Council. CS did not have to deposit any collateral for these loans; only an SNB bankruptcy privilege applied. It supplemented the traditional liquidity assistance (ELA) and the loans guaranteed by the federal government (Public Liquidity Backstop PLB). At its peak, the SNB provided Credit Suisse with 168 billion francs, Jordan said.
Lessons for the future
The SNB President drew lessons for the future: “First, liquidity regulation must be geared to the new reality of potentially faster and larger outflows of deposits.” Second, he said, it was of the utmost importance for the future that banks prepare sufficient collateral for transfer to the SNB and other central banks.
And third, he said, there needs to be an effective PLB that allows the SNB to lend liquidity to banks in difficulty that do not have sufficient collateral. PLB stands for Public Liquidity Backstop and was another loan by the SNB, but for which the federal government is liable.
“This approach corresponds to the established division of roles between the federal government and the central bank in a banking crisis. ELA+ should not become part of the SNB’s ordinary set of instruments,” Jordan maintained in his speech.
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Distribution of roles
The SNB’s willingness and ability to provide liquidity was crucial for overcoming the acute crisis at Credit Suisse and thus for avoiding a financial crisis with major economic consequences for Switzerland and the rest of the world. But, says Jordan: “Even in an acute crisis situation, the National Bank must adhere to the legal framework and the distribution of roles of the authorities provided for therein.”
In his speech, Jordan did not address allegations that arose after the CS rescue that the SNB should have intervened earlier. He simply emphasized: “There are legal limits to the National Bank’s scope for action in the area of financial stability. Other tasks that are also important for the stability of the financial system fall within the remit of other authorities.”
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