LONDON/ZURICH - A year after the banking crisis that felled Credit Suisse, the 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 salvages of banks in the United States 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 that 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 Professor Anat Admati 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.

“Global banks can cause a lot of harm,” she added.

Rules introduced after the 2008 financial crisis did little to avert the crash in 2023, as clients pulled cash from banks at unprecedented speed.

One of the key weaknesses that emerged in 2023 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 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.

The move would echo calls by the acting Comptroller of the Currency in the US, Mr Michael Hsu, who also made the case for a new ratio to cover stress over five days.

Mr Andres Portilla, managing director of regulatory affairs at the Institute of International Finance, a Washington-based bank lobby group, said that if such measures are put in place, “banks would need to hold higher levels of liquid assets and park more assets at the central banks”.

He added: “Ultimately, funding could become costlier.”

The person with knowledge of the matter said industry-wide changes are only likely to take place in 2025 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.

Another person familiar with the discussions told Reuters that amid worries that a repeat of a rapid run could threaten another bank, the European Central Bank (ECB) is intensifying scrutiny of liquidity buffers of individual banks.

The ECB declined to comment for this article. It has identified liquidity supervision as a priority after the Credit Suisse rescue.

Banking behemoth

In Switzerland, the regulatory debate has homed in on how to make emergency loans more widely available.

When borrowing from central banks, lenders need to provide certain assets in exchange, also known as collateral, which must be easy to price and sell in financial markets. That protects taxpayers in case the lender cannot repay.

As Credit Suisse suffered unprecedented outflows, the lender ran out of securities to pledge to the Swiss National Bank (SNB), forcing the central bank to offer cash to the struggling lender without security.

A group of experts has called on the SNB to accept a wider pool of assets, including corporate loans and loans backed by securities.

The SNB said the universe of eligible collateral is reviewed on an ongoing basis and developed in dialogue with the banks.

A spokesperson for UBS declined to comment.

UBS’ imposing balance sheet of more than US$1.6 trillion (S$2.14 trillion), nearly twice the size of the Swiss economy, is prompting the country to also review its too-big-to-fail rules, a package of regulation that disciplines systemically important banks.

London Institute of Banking & Finance emeritus professor of banking and finance Peter Hahn said: “All domestic and globally systemic important banks have become public-private partnerships. No government can risk their instability.”

The Swiss government is expected to publish a report in April. It might announce stricter capital requirements for UBS, some analysts have warned.

UBS chief executive Sergio Ermotti has said he cannot rule out this could happen.

Geneva Graduate Institute of International and Development Studies professor of economics Cedric Tille said: “We fixed the problem only in the short term. What we did sets the stage for a much bigger problem later.”

Prof Tille, who sat on the SNB’s supervisory council until 2023, added: “UBS has become too big to save.”

Amid concerns about a repeat of 2023, the ECB has asked some lenders to monitor social networks to detect early bank runs.

Global financial regulators are due later in 2024 to unveil a “deep dive” into how social media can speed up deposit outflows.

“A run on deposits doesn’t happen in a month, it happens in a few hours,” said professor of economics and finance Xavier Vives from IESE Business School in Barcelona.

“Regulation must be amended,” he added. REUTERS