Thomas Jordan: Bank regulation - what went wrong? What will improve?
Summary of a speech by Mr Thomas Jordan, Vice-Chairman of the Governing Board of the
Swiss National Bank, at the Forum für Universität und Gesellschaft, Berne, 24 March 2010.
The complete speech can be found in German on the Swiss National Bank's website (www.snb.ch).
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The financial crisis has caused enormous damage. Massive losses were recorded in the
global banking system. Many countries have gone through the worst recession since the
Second World War. Government rescue measures had to be implemented to stabilise the
financial system. Existing bank regulations were not able to prevent the crisis, nor were they
able to at least contain the damage to such an extent that government rescue packages
would not have become necessary.
While before the financial crisis, there was considerable uncertainty about possible
shortcomings in bank regulation, these have now become apparent and will have to be
tackled. In addition, the provision of implicit state guarantees has made the need for action
even more urgent. Big banks - believing that they will receive government assistance if they
run into problems - have even stronger incentives now to take on excessive risk. This
increases the risk of another crisis and erodes the fundamental principle of the market
economy - competition. Once again, in the future, banks will have to bear their own risks.
The failure of a bank should no longer jeopardise the stability of our financial system. Only
then, will our financial system become less prone to risk and will the extent of future crises
clearly decrease.
In order to achieve this goal, several measures have been decided on in Switzerland. First,
new capital adequacy requirements were enacted in 2008. Big banks will have to double
their risk-weighted capital. In addition, they will have to hold a minimum amount of equity
capital, irrespective of the risk models they use internally. This is because the crisis has
shown that internal risk models massively underestimated the risks taken. Second, new
liquidity regulations will be adopted. In the future, big banks will have to hold a sufficient
amount of high-quality liquid funds to be able to cover unexpected liquidity losses for a period
of at least 30 days. The reason for this is that, in the financial crisis, even solvent banks had
liquidity problems. Finally, measures to solve the "too big to fail" issue must be put into
practice. No bank should be so systemically important that governments feel forced to rescue
it from impending failure, fearing the economic costs such a failure would cause. Possible
solutions to the "too big to fail" issue are the creation of incentives to encourage banks to
reduce their size or change their organisational structure.