Thursday, December 10, 2009

MegaBank Failure must become a Viable Option

Author: David Schwartz David Schwartz

The Swiss National Bank believes that resolution measures are needed to liquidate international banks without terminal damage to the real economy.  “Too big to fail” and “too big to rescue” are the biggest challenges facing regulators today:

Swiss National Bank: From the point of view of the FSB, the possibility of conducting an orderly resolution of a failing cross-border financial institution is an important element in finding a solution to the “too big to fail” and “too big to rescue” issues. Effective communication between the relevant supervisory authorities as well as forward-looking elaboration of emergency procedures are indispensible in this process. Internationally recognised regulations for the dissolution of systemically important institutions that can be enforced under any jurisdiction are no doubt a splendid objective. In the real world, however, different national regulations will continue to exist in this field. From our point of view, reciprocal recognition of national regulations that are mutually compatible, and the associated adjustment of structures and processes, are a more realistic objective. …

Consequently, we need tools that will substantially reduce the costs of a crisis. The legacy of the current crisis is a banking system with large international institutions that now enjoy a virtual state guarantee. The fact that systemically important banks enjoy such a guarantee is now openly recognised to be a problem by the banking sector, too. A guarantee of this kind contradicts the basic principle of the market economy and presents us with a situation that cannot be tolerated. It must be possible for any financial institution, even a large one, to fail, without threatening the future of either the financial system or the real economy. [1]

[1] Philipp Hildebrand, Vice-Chairman of the Governing Board of the Swiss National Bank, Zurich, 10 December 2009.