This is the contingency plan for CS

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The CS wavers. Not only now, but on Wednesday, the share price of the Swiss bank fell so low that a bailout from the Swiss National Bank would be necessary – if only through a loan.

That seems to have helped for the time being, the share price stabilized again on Thursday. But Credit Suisse is not off the hook. There are already the first question marks as to whether a state rescue plan for CS will be necessary. Because the failure of a major bank like CS could trigger a financial crisis and take the Swiss economy with it.

This could be prevented in 2008 – at the time, the Swiss taxpayer saved UBS with a billion-dollar injection. To prevent this from happening again, the ‘Too big to fail’ regulation has been introduced. Blick explains what it’s all about.

Banks and insurance companies can be so large that a crisis can affect financial stability and damage the economy as a whole. In this case, one speaks of “systemically important” banks. The too-big-to-fail measures are intended to minimize the risk of bankruptcy.

The SNB determines which banks are systemically important. This is because banks are of a certain size, are very closely linked to the financial system and the economy, and have functions that are so important that they cannot fail. These are, for example, payment transactions and domestic deposit and lending activities. The two major banks UBS and CS, Postfinance, Raiffeisenbank and Zürcher Kantonalbank are considered systemically important in Switzerland.

These five banks must have more capital and liquidity reserves than other banks and also have crisis and contingency plans. These plans must be approved by the Swiss financial market regulator (Finma). The requirements are even stricter for UBS and CS because they operate internationally. Finma itself also draws up a restructuring or liquidation plan for these banks.

Systemically important banks must have more qualifying capital than other banks. There are two kinds:

1. With the so-called Going concern capital Banks are designed to absorb unexpected losses from ongoing business activities. The amount of this equity is calculated on the basis of so-called risk-weighted assets (RWA). This refers to the structure of the assets and their level of risk. In addition, there is the so-called leverage ratio, the unweighted equity ratio, which is calculated as a percentage of the total bet. It is considered an additional safety net.

The banks do not have to have the equity in cash in the vault. Ten percent of core capital is mandatory, i.e. shareholders’ equity and reserves. In addition, a part, up to a maximum of 4.3 percent, may be in the form of fixed-interest securities, which can be converted into shares if necessary.

2. In addition, these banks must withhold funds in the event of bankruptcy. This is called Lost capital. For the two major banks, the gone concern capital must be equal to the going concern capital, but Finma can grant discounts. According to information from CS, the total required capital amounted to CHF 97.4 billion last December, of which CHF 50.1 billion was working capital.

The capital of the disappeared company is usually in the form of so-called bail-in bonds. These are bonds that are converted into equity if bankruptcy threatens.

Systemically important banks must not only have a lot of equity capital, they must also be able to meet their payment obligations. You must therefore meet increased liquidity requirements. CS couldn’t – it had to borrow CHF 50 billion from the SNB to ensure its liquidity.

Big banks like CS should have contingency plans for crises. There are three types:

• Recovery plan: In it, the bank shows how it intends to stabilize itself in the event of a crisis. Finma must approve this plan. Such plans include the waiver of bonuses and dividends. If that is not enough, partial sale of business units, conversion of bonds into equity and other measures are possible.
• Swiss emergency plan: The bank shows how it can continue to perform systemically important functions for the Swiss economy – especially access to deposits and payments – without interruption in a crisis. Finma examines these plans and assesses their feasibility.
• Resolution plan: Finma draws up a “resolution plan”. This shows how the bank – in the case of UBS and CS, the entire banking group – would be recapitalised, restructured or liquidated in the event of a crisis.

Central to the “Resolution Plan” is the so-called bail-in. The aim is to recapitalize the bank in such a way that it once again meets the solvency requirements. A bail-in works as follows: First, the bank’s entire share capital is fully written off. This means that the previous shareholders lose their interest in the bank. The bail-in bonds (see above) are then converted into the bank’s equity, creating new shares. Due to the bail-in, the creditor – who has acquired such a bond – loses his entitlement to repayment of the agreed nominal value at the end of the term of the instrument. In return, he receives a corresponding share of the newly created shares and thus becomes the owner of the rehabilitated bank. Important for account holders: The deposit guarantee protects deposits up to CHF 100,000.

After the bail-in has been carried out, the bank will be restructured under the supervision of Finma. This may also include the sale or liquidation of certain business units.

It remains to be seen whether any of these plans will now go into effect – and whether it will work. The CS case would be the first practical test for “too big to fail” in Switzerland.

Source:Blick