SVB and Credit Suisse: When rules yield, it is time to change the system

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There are two countries (the US and Switzerland), two regulators (the Fed and the Swiss Financial Market Supervisory Authority (FINMA)) and two banks (SVB and Credit Suisse). There are also regulatory structures and processes in place for failing banks. The question, however, is whether these processes were followed in the case of SVB and Credit Suisse. It seems that they were not. The regulatory system that was put in place after the global financial crisis was a bail-in system – alongside other tools that were added to the toolkit, like systemic stress testing, living wills, etc. The bail-in process for dealing with failing banks means that a bank’s creditors take a haircut in order to cover the losses that the bank has made. But the bail-in process was not applied to either of these two banks.

The SVB and Credit Suisse cases illustrate the failure of (part of) the global regime put in place after the great financial crisis – a failure of supervisory practice. Neither SVB nor Credit Suisse should have failed in the first place. When politics meets rules, rules yield. What happened in both the US and Switzerland, was a political resolution at the highest possible political level. In taking it, the rules became secondary. If we keep changing the rules without changing the system, we won’t get far. Instead of regulating by risk and buffers, it is now time to make the financial system more shock-absorbent and diverse, and to bring individual accountability to the forefront.

Apostolos Thomadakis, Ph.D. is Research Fellow at ECMI and CEPS.

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