Authorities are still debating how to address the bank’s weaknesses a year after the Credit Suisse banking crisis brought the bank to its knees. This is especially true in Switzerland, where the firm’s acquisition by rival UBS formed a massive entity.

The run at little-known U.S. regional institution Silicon Valley Bank in March 2023 put out the immediate fires, which were stoked by the Swiss government’s bailout of Credit Suisse and U.S. bank salvages.

However, discussions about how banks could better withstand deposit runs and whether they require wider access to emergency liquidity are just now beginning to be addressed by politicians and regulators.

a prominent international banking watchdog has cautioned, opening a new tab Given the risk that the financial system would face from the failure of UBS, which is currently among the largest banks in the world, Switzerland needs to tighten its banking regulations.

“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.”

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

Regulations put in place following the 2008 financial crisis did not prevent the crash of last year, when customers withdrew money from banks at a rate never seen before.

A primary vulnerability that surfaced in the previous year was the inadequacy of banks’ liquidity requirements. Within a few days, billions of deposits were withdrawing from Credit Suisse, consuming what had looked like safe reserves of money.

The liquidity coverage ratio (LCR), which was first introduced in the wake of the 2008 financial crisis, is now a crucial metric for assessing banks’ capacity to meet customer demand for cash.

Banks are required under LCRs to maintain an adequate amount of convertible assets in order to withstand severe liquidity crisis for a period of thirty days.

According to one individual with knowledge of the conversations, European authorities are discussing whether to decrease the duration of acute stress in order to test the reserves banks require over shorter timeframes, say one or two weeks.

The action would be in line with suggestions made by Michael Hsu, the acting Comptroller of the Currency for the United States, who also advocated for a new ratio to cover stress over a five-day period.

The managing director of regulatory affairs of the Institute of International Finance, a bank advocacy group with headquarters in Washington, Andrés Portilla, stated that “banks would need to hold higher levels of liquid assets and park more assets at the central banks” if such regulations were implemented. “Financing may ultimately become more expensive.”

According to reports citing sources, industry-wide adjustments are unlikely to occur until next year in Europe since banks are still working through the final implementation of Basel III, the post-financial crisis regulations that compel banks to set aside more capital.

The European Central Bank is stepping up its examination of individual banks’ liquidity buffers due to concerns that another bank could be threatened by a similar quick run, a second source familiar with the talks told Reuters.

For this piece, the ECB declined to provide a comment. Following the Credit Suisse bailout, it has determined that monitoring of new tab liquidity is of utmost importance.

The focus of the regulatory discussion in Switzerland is on expanding the availability of emergency loans.

Lenders must offer certain assets, commonly referred to as collateral, in exchange for loans from central banks. These assets must be simple to value and sell on financial markets. In the event the lender is unable to repay, taxpayers are protected.

The Swiss National Bank (SNB) was forced to provide cash to Credit Suisse without security when the lender ran out of securities to pledge due to its extraordinary withdrawals.

A new tab has been opened by a group of specialists to allow the SNB to accept a larger range of assets, including corporate loans and loans secured by securities.

The universe of eligible collateral is formed through ongoing reviews and discussions with the banks, according to the SNB.

There were no comments on the issue from a spokesperson for UBS.

Due to UBS’s massive balance sheet, which is almost twice the size of the Swiss economy, the nation is also reviewing its too-big-to-fail regulations, which are a set of regulations that penalise systemically important institutions.

“All significant domestic and international banks have evolved into public-private partnerships. According to Peter Hahn, an emeritus professor of banking and finance at The London Institute of Banking & Finance, “no government can risk their instability.”

Next month, the Swiss government is anticipated to release a report. Some experts have cautioned that it might impose tougher capital requirements for UBS.

Sergio Ermotti, the chief executive of UBS, stated this week that he cannot completely rule out the possibility.

“We fixed the problem only in the short term. What we did sets the stage for a much bigger problem later,” said Cédric Tille, professor of economics at the Geneva Graduate Institute of International and Development Studies, who sat on the Swiss National Bank’s supervisory council until last year.

“UBS has become too big to save.”

The ECB has instructed certain bankers to keep an eye on social media in order to spot early bank runs, amid worries that 2023 may happen again. Later this year, global financial regulators are expected to release a “deep dive” on the ways in which social media can expedite the withdrawal of deposits.

“A run on deposits happens in a matter of hours, not months,” Xavier Vives, an economics and finance professor at Barcelona’s IESE Business School, stated. “Regulation must be amended.”

(Adapted from ProInvestor.com)