Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Switzerland’s decision last year to merge Credit Suisse with UBS was an “unhelpful” way to deal with a failing global bank and US regulators would not shrink from a full shutdown in a similar situation, the chair of the Federal Deposit Insurance Corporation has warned.
Martin Gruenberg spoke to the Financial Times as his agency issued a paper detailing how it would handle the collapse of a global systemically important bank (G-SIB) such as Credit Suisse. He said the FDIC was seeking to remind shareholders, creditors and executives that they cannot rely on government bailouts similar to those that stabilised the financial system after Lehman Brothers collapsed in 2008.
“The fact that Swiss authorities did not put Credit Suisse into resolution . . . was frankly unhelpful and ultimately a missed opportunity,” Gruenberg said ahead of a speech on Wednesday about shutting down global banks. “The purpose for this work . . . was to reaffirm that we believe we are prepared to apply the resolution framework.”
US authorities have never used the authority they were given after the 2008 crisis to handle global bank failures. The FDIC employed its standard bank closure powers to handle last year’s regional banking crisis including the shutdowns of Silicon Valley Bank, Signature and First Republic.
Those turned out to be three of the most costly bank failures in history, but Gruenberg insisted the US was now prepared to deal with larger collapses.
“I would put JPMorgan or another G-SIB into a resolution process,” he said. “We think this is doable . . . [and] it would be vastly better from a financial stability standpoint and a market standpoint, and an equity fairness standpoint to be able to manage an orderly failure of one of these firms.”
The US has eight G-SIBs: JPMorgan, Citigroup, Bank of America, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, State Street and Wells Fargo.
Global banking watchdogs have been working together since the 2008 crisis to make sure the biggest cross-border banks have credible resolution plans, known as living wills. While the early drafts drew criticism as inadequate, Gruenberg said the updated plans were much better: “They are much more resolvable today than they were 10 or 12 years ago. Night and day.”
The living wills must be updated every two years, and the heads of the central banks, treasuries and banking regulators in the US, UK and EU meet every other year to war game the failure of a G-SIB.
US plans for shutting down a global bank call for removing top management, wiping out the shareholders and imposing losses on creditors of its holding company. But the living wills are intended to ensure crucial operating subsidiaries can stay open for business, limiting the contagion.
The post-crisis Dodd-Frank financial reform law created new legal authority for this kind of decapitation, separate from the procedures the FDIC uses for smaller banks, including the three big failures last year.
A post mortem by the Financial Stability Board found Swiss authorities would have been capable of shutting down Credit Suisse.
“They had the opportunity and they had the capability and they chose not to do it,” Gruenberg said.
Instead, they engineered a rescue by rival G-SIB UBS and imposed losses on some bondholders while allowing shareholders to retain some value from their equity, a controversial decision that reversed the traditional capital hierarchy.
The Credit Suisse experience was one reason why “we do want to remind investors that [bank] debt is at risk and we do have a resolution process”, Gruenberg added.
On Wednesday, the Swiss government published a series of proposals designed to strengthen its banking sector following an in-depth study of the failure of Credit Suisse.
The package of 22 recommendations, which will be submitted for discussion in the Swiss parliament, includes bolstering the powers of Finma, the financial regulator, as well as tightening capital requirements on the country’s biggest banks.
Many of the proposals had been preemptively suggested by UBS, by far Switzerland’s biggest bank, but the lender has argued it should not be subjected to tougher capital requirements.
“I am sure the banking industry doesn’t agree with all the proposals but we have to make this financial industry as safe as possible,” said Swiss finance minister Karin Keller-Sutter, when announcing the report.
Read the full article here
