In a recent paper, the chair of the Federal Deposit Insurance Corporation cautioned against Switzerland's decision to merge Credit Suisse with UBS, labeling it as unhelpful for handling a failing bank. The FDIC is prepared to handle the collapse of global systemically important banks, emphasizing that government bailouts similar to those after the 2008 crisis may not be relied upon. Global banking watchdogs have been working to ensure that the biggest cross-border banks have credible resolution plans, but the post mortem on the Credit Suisse failure highlighted the need to remind investors that bank debt is at risk and a resolution process is in place.
Key Takeaways
- Switzerland’s merger of Credit Suisse with UBS was criticized as an unhelpful response, indicating the futility of relying on government bailouts.
- US regulators are prepared to handle potential collapses of global systemically important banks, such as JPMorgan, and emphasize the necessity of orderly failure processes over bailouts.
- The US has eight G-SIBs, and global banking watchdogs have been enhancing the credibility of resolution plans for cross-border banks.
- US plans for shutting down a global bank involve removing top management, imposing losses on creditors, and ensuring the continuity of crucial operating subsidiaries.
- Switzerland has proposed 22 recommendations to strengthen its banking sector following the failure of Credit Suisse, including bolstering the powers of the financial regulator and tightening capital requirements.
News Content
The chair of the Federal Deposit Insurance Corporation has warned that the decision to merge Credit Suisse with UBS by Swiss authorities was unhelpful and a missed opportunity for handling a failing global bank. The US regulatory agency is now prepared to shut down global systemically important banks and has the legal authority to remove top management, wipe out shareholders and impose losses on creditors, aiming to manage an orderly failure of these firms.
In response to the Credit Suisse failure, Switzerland has published 22 proposals to strengthen its banking sector, including bolstering the powers of the financial regulator and tightening capital requirements on the country’s biggest banks. The Financial Stability Board found that Swiss authorities would have been capable of shutting down Credit Suisse, emphasizing the importance of reminding investors that bank debt is at risk and there is a resolution process in place.
Analysis
The merger of Credit Suisse with UBS, as warned by the chair of the Federal Deposit Insurance Corporation, has potential far-reaching consequences. This decision could affect global financial stability, impacting not only the Swiss banking sector but also the broader international financial landscape. The proposed measures to strengthen the banking sector in Switzerland could lead to increased regulatory scrutiny and potentially decreased investor confidence. The warning from the US regulatory agency about shutting down global banks and imposing losses on creditors signals a shift in approach to handling failing banks, potentially setting a precedent for future bank resolutions globally. This could also affect the financial instruments and shareholders of these banks, as well as the reputation of top management.
Do You Know?
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Global systemically important banks (G-SIBs): These are large banks whose failure could potentially have a significant impact on the global financial system. They are subject to additional regulatory requirements and oversight to ensure their stability and prevent disruptions to the global economy.
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Financial Stability Board (FSB): An international body that monitors and makes recommendations about the global financial system. It assesses and designates G-SIBs, and provides guidance on regulatory and supervisory policies to promote financial stability.
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Bank resolution process: This refers to the procedures and mechanisms in place to manage the failure of a bank in an orderly manner, minimizing the impact on the wider financial system. It includes measures such as removing top management, imposing losses on creditors, and ensuring that there are plans in place for the winding down or restructuring of a failing bank.