Switzerland’s Banking Compliance Rules Need a Major Overhaul, Economist Argues

By Adriel Jost, Fellow at the Institute for Swiss Economic Policy (IWP) and President of Liberethica

Switzerland’s banking compliance rules require a significant overhaul, according to economist Adriel Jost. The country’s dependence on banks is highlighted by the Swiss National Bank’s (SNB) provision of necessary liquidity when required, implicitly guaranteeing that deposits are safe.

A State-Dependent Banking System

The state’s involvement in resolving bank problems is more pronounced than for other companies due to the potential risk of jeopardizing state money. Bail-in bonds, introduced after the financial crisis, were not triggered during Credit Suisse’s difficulties, as this could have caused uncertainty and undermined confidence in the banking system.

The Authorities’ Response

The authorities recognized that debt capital was heavily protected, with the SNB securing Credit Suisse’s liquidity and crossing its own red lines to ensure depositors could withdraw their funds. This highlights the state’s implicit guarantee of deposits, making it difficult for banks to fail like other companies.

A Choice Between Government Intervention and Personal Responsibility

Swiss politicians face a decision on the direction to take: more government intervention or more personal responsibility for banks. Those favoring industrial policy argue that the state should assume further risks to strengthen confidence in the bank, including introducing a public liquidity backstop and giving the financial regulator, FINMA, more powers.

The Dangers of Moral Hazard

However, this approach increases moral hazard, incentivizing banks to take greater risks or promote foreign business, leading to further crises with even greater state involvement. A liberal perspective suggests that delegating responsibility to the state is not the way forward.

A Way Forward for Swiss Banks

Instead, Swiss banks should focus on their own stability by investing in (hard) equity and covering deposits with valuable collateral as much as possible. They should also assume responsibility for foreign transactions that could jeopardize Switzerland’s stability and independence.

Conclusion

The views expressed in this article are solely those of the author and do not necessarily reflect the views of SWI swissinfo.ch.