Swiss ‘too big to fail’ banks pose little risk to the economy

Savings deposits, loans and jobs could be threatened if a major Swiss bank were to collapse. © Keystone / Gaetan Bally

Three of Switzerland’s “too big to fail” banks no longer threaten to cause a seismic shift in the economy should they collapse, says the financial regulator.

Zurich Cantonal Bank, PostFinance and the Raiffeisen banking group are now deemed to have put into place credible plans for an orderly bankruptcy. The trio focus primarily on the domestic market, giving loans to businesses, individuals and homeowners plus providing savings and current accounts.

Their financial links to the Swiss economy, including the large number of staff they employ, are so important that it would cause a huge shock if any were to go bust. Following the financial crisis of 2007/8, five large Swiss banks were ordered to adapt their business to reduce the likelihood of collapse and to cushion the blow of such an event should it occur.

Safety measures

Before the financial crisis it was widely assumed that banks had enough in-built safety devices to avoid sinking. This proved incorrect, so the largest banks around the world were ordered to conduct a safety re-fit.

These compulsory measures include boosting capital reserves to absorb losses and reorganising corporate structures to protect businesses units (eg wealth management) from being dragged down by catastrophe in other areas (eg investment banking).

The Swiss Financial Market Supervisory Authority (FINMA) gives an update every year on this process. Commenting on the three domestic-focused banks, FINMA stated on FridayExternal link that: “For the first time they all have a credible resolution strategy.”

UBS, CS

Switzerland’s two largest banks, UBS and Credit Suisse, which conduct a global business strategy, are also deemed “too big to fail”. “The large banks were also able to achieve further progress in their global resolvability, by building up the necessary capabilities or removing obstacles to the implementation of the resolution strategy,” FINMA stated, adding that UBS was lagging behind in the task of shielding business units from collateral damage from other areas of the bank. 

Due to their size and international links, UBS and Credit Suisse have more to do to satisfy the regulator. But FINMA said that the process was more or less on track, acknowledging that the authorities in Switzerland and abroad have yet to finalise all the measures that need to be taken.

FINMA also took a look at other critical financial infrastructures provided by dominant stock exchange SIX. These securities trading and depositary facilities “have improved since 2019, but do not yet meet the high requirements for approval”.