it was also a problem that many weak and under - capitalised banks that did not have a viable business model did not fail. they did not fail prior to the crisis – even though they probably should have – and they could not fail during the crisis either. but not letting banks fail creates some huge problems further down the road. let ’ s discuss why banks should be able to fail, but often were not able to do so. why banks must be able to fail ( but often were not allowed to ) why was it that in the past banks were often not allowed to fail? the answer is simple : the failure of a bank can trigger a financial earthquake. banks engage in maturity transformation : they accept short - term deposits and make longer - term loans. banks depend on public trust. if that trust disappears, they may suffer a bank run. and that can affect the stability of the whole system. this happens because banks are highly interconnected – either directly or indirectly. the failure of one bank may trigger the failure of other banks. such contagion can occur by banks being exposed to each other. when a bank defaults on its debt, creditor banks suffer direct financial losses. but contagion can also be more subtle. the failure of a bank may cause investors and depositors to wonder about the health of other banks. trust then evaporates and funding sources dry up. even sound banks might find themselves in the midst of a liquidity crisis. this is what happened in the financial crisis. either way, a bank ’ s failure can infect the entire banking system. and in this respect some banks are considered to be riskier than others. i am talking about banks that are big, complex, interconnected, and which cannot easily be replaced. their failure can disrupt financial stability big time. such banks are systemically important. if they fail, the financial system can grind to a halt. and not only that : the flow of credit stops, investment and consumption stall, and jobs are destroyed. the social costs can be huge. to prevent all this from happening, governments have repeatedly bailed out systemically important banks with public money. even medium - sized banks were bailed out for fear of contagion. but the short - term gain of preserving financial stability comes at a great cost in the long term. the belief that banks would be bailed out whatever the cost created bad incentives. banks got used to an implicit and costless government guarantee, which kicked

investment activities are shielded from confidential monetary policy information. effective risk management requires that all relevant risks be identified and assessed regularly, in a manner that is as unbiased as possible. experience has shown that technical failure is seldom at the root of serious losses. the greatest losses result from a lack of risk consciousness, from a total failure even to recognise significant sources of risk. this danger exists when risk assessment is restricted exclusively to easily measurable quantitative risk variables, excluding areas such as processes or legal risks, which are referred to as'operational risks '. for this reason, we also include operational risks in our assessment. however, while pursuing this broader route, we certainly do not neglect the regular quantitative measures for assessing financial investment risks. no single key figure, taken alone, is capable of providing a comprehensive picture of the risks involved. therefore, our risk assessment is based on a range of key figures developed to measure risk, each of which has its own justification along with certain limitations. in order to evaluate the overall risk of our investments, we use the value at risk method ( var ). additional risk analyses are also necessary because of the method - related limitations of var ( it provides no information about possible extreme losses ; moreover it tends to underestimate the risk of large losses, particularly in times of low volatilities ). we therefore conduct a number of additional stress and scenario analyses. for all of these risk calculations we take account of the snb's tendency towards a long - term investment horizon. the methods used to assess and limit the risks linked to our active management of investments include the'tracking error'method. this shows us the extent to which our actual investments deviate from the given benchmarks. our risk management unit has a complete and up - to - date picture of all investment positions. this is based on a dedicated it solution which aggregates all positions from different supplier systems on a daily basis and evaluates them according to different criteria. this permits any critical developments to be identified in good time. within the bounds set by monetary policy, we work to achieve the greatest possible diversification of financial risks and to attain adequate compensation for the risks we enter into. in other words, we always assess the risks in conjunction with the expected benefit. one example of a poorly compensated risk, from the point of view of a swiss franc investor, is the usd currency risk on bonds. our experience has been that expected earnings on bonds in other currencies, such as euros