According to a story by Reuters, the global banking watchdog, the Financial Stability Board (FSB), has recently dismissed the need for significant changes in international banking rules following the rescue of Credit Suisse. The FSB, comprising central bankers, regulators, and officials from leading global economies, released a report outlining the lessons learned from the Credit Suisse situation and concluded that the existing framework remains robust.
Credit Suisse, once a symbol of Swiss financial strength, faced a catastrophic failure, leaving Swiss officials and regulators grappling with the aftermath. This event was not only a significant test for Credit Suisse but also for the rules and regulations that were put in place after the global financial crash of 2008.
Following the 2008 crisis, regulators worldwide devised a framework to address the issue of “too big to fail.” This framework aimed to prevent banks from holding authorities hostage during a financial crisis and ensure that taxpayers were not left to bail out failing banks. The framework included options such as debt write-downs to replenish capital and the transfer of deposits to healthier banks.
The FSB report did not criticize Switzerland, despite comments from Bank of England Governor Andrew Bailey that Switzerland did not adhere to the prescribed “playbook.” Instead, the FSB praised Switzerland for taking actions that preserved financial stability, albeit through means other than the resolution approach.
The key takeaway from the FSB report is that the existing international banking rules are fundamentally sound. While the Credit Suisse incident highlighted certain areas for improvement, such as how the rules are applied, the core substance of the regulations remains effective.
One of the key findings of the report is the importance of having an adequate public sector backstop in place to support the resolution of failing banks. This backstop could come in the form of central bank support, deposit insurance funds, or fiscal lending.
The report also underscores the need for authorities to be better prepared for the rapid speed at which bank runs can occur in today’s digital age. With round-the-clock access to payments, mobile banking, and social media, it is crucial to have mechanisms in place to address and mitigate the impact of such events.
FSB’s assessment of the Credit Suisse debacle indicates that the international banking rules established after the 2008 financial crisis have proven effective. While some enhancements in their application may be necessary, there is no need for a substantial overhaul. The key lesson here is that preserving financial stability requires a robust public sector backstop and readiness to address the challenges posed by modern banking practices.
