Swiss Central Bank Eases Access to Liquidity Help for Banks

(Bloomberg) — The Swiss National Bank is reforming how it provides liquidity to banks under stress, responding to criticism of its existing framework that followed the Credit Suisse crisis.

Switzerland’s central bank will enable lenders to draw a pre-set amount of money from the new Extended Liquidity Facility without having to confirm that they have already exhausted market funding or that they are solvent, Vice President Antoine Martin said in a speech on Tuesday. 

The new facility will encompass the current Emergency Liquidity Assistance, known as ELA, and aims to reduce the stigma associated with drawing money from it, he said in Geneva.

“With the simplified access to limited volumes of liquidity, the ELF brings liquidity support closer to standard operations and reduces its ‘emergency’ nature,” Martin said. “Thus, the ELF encourages banks to seek liquidity support at an early stage if they need it, without hesitation.”

During the 2023 crisis, the SNB provided 168 billion Swiss francs ($204 billion) to Credit Suisse and UBS Group AG, in part through a makeshift facility that was introduced via emergency law. Some post-crisis analysis has focused on whether Credit Suisse could have saved itself if it had turned earlier to central bank liquidity. 

The SNB has also been criticized for being too restrictive on which kinds of securities it accepted as collateral for liquidity. Officials have responded by saying it’s not more restrictive than other monetary institutions.

“The limiting factor today is not the collateral we take but the ability of banks to pledge collateral to us,” Martin said on Tuesday. “An important prerequisite is that it must be possible to legally transfer or pledge the collateral to the SNB. Banks need to do their homework.”

The situation at Credit Suisse he described as “there was a bunch of collateral, we had been telling them for years that they have to make it ready. And when push came to shove, not enough collateral was readied.”

He added that “we are happy to talk to banks” with respect to what the SNB considers acceptable as collateral. The range of assets will “continue to evolve,” he said.

For the new facility, accepted collateral includes mortgages on real estate in Switzerland as well as bonds, securitizations and shares in various currencies, Martin said, adding that this covers most Swiss business loans.

After discussions with the government, Martin also touted that Swiss banks will face a legal obligation to prepare a minimum amount of eligible collateral.

The SNB is currently working with lenders and stock-exchange provider SIX to make the new facility available on a large scale to all Swiss banks, he said. The process will “take some time,” he added.

He also said that the ELF will cost banks a higher interest rate than they would pay on the open market. This is supposed to ensure that it remains a “backstop facility” and is not attractive when markets are not stressed. 

Additionally, he highlighted that the broadened access to liquidity help doesn’t mean that the SNB reduced its standards with respect to lenders’ solvency. If doubts on this arise for a bank, the institution can revoke its access to ELF.  

“Central banks are not in the business of propping up Zombie banks,” Martin said.

Separately, the SNB will also consolidate its intra-day and liquidity-shortage financing facilities into a new “Payment System Support Facility,” or PSSF, he added. Both together are supposed to form a “comprehensive liquidity framework, allowing the SNB to address a wide range of liquidity needs – from routine payment flows to unexpected liquidity shortages and, in extreme cases, financial stability crises.”

(Updates with additional comments throughout.)

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