Banks remain vulnerable

A year after the banking crisis that felled Credit Suisse, authorities are still considering how to fix lenders’ vulnerabilities, including in Switzerland, where the bank’s takeover by rival UBS created a behemoth.

The Swiss government-sponsored rescue of Credit Suisse and US bank salvages in March 2023 doused the immediate fires kindled by a run at little-known US regional lender Silicon Valley Bank.

But regulators and lawmakers are only starting to address how banks could better withstand deposit runs, and whether they need easier access to emergency cash.

A top global financial watchdog recently warned Switzerland must strengthen its banking controls, highlighting the risk that a failure of UBS — now one of the world’s biggest banks — would pose to the financial system.

“The banking system is no safer,” said Anat Admati, professor at the Stanford Graduate School of Business and co-author of the book The Bankers’ New Clothes: What’s wrong with banking and what to do about it.

Rules introduced after the 2008 financial crisis did little to avert last year’s crash, as clients pulled cash from banks at an unprecedented speed.

One of the key weaknesses that emerged last year was that banks’ liquidity requirements proved insufficient. Credit Suisse saw billions of deposits exiting in a matter of days, burning through what had appeared to be comfortable buffers of cash.

Introduced after the 2008 financial crisis, the so-called liquidity coverage ratio (LCR) has become a key indicator of banks’ ability to meet cash demands.

LCRs require banks to hold sufficient assets that can be exchanged for cash to survive significant liquidity stress over 30 days.

European regulators are debating whether to shorten the period of acute stress to measure buffers banks need over shorter timeframes, of say one or two weeks, according to one person with knowledge of the discussions.

Industry-wide changes are only likely to take place next year in Europe as banks are still working through the final implementation of post-financial crisis rules, so-called Basel III, which will require banks to set aside more capital, said a source.