“Too big to fail”… The expression refers to banks whose failure could have disastrous consequences for the entire global financial system, but also for the real economy. If one of these establishments is in great difficulty, States have no choice but to come to their aid to prevent it from spreading. Since the 2008 crisis, they have had to comply with stricter rules.
Credit Suisse, “too big to fail”
The Swiss bank created panic in financial markets on Wednesday. At its lowest point, its shares lost more than 30% before closing down 24%. Following the overnight announcement of a Swiss central bank loan that could be as much as 50 billion Swiss francs, its shares soared at the stock market open on Thursday morning. The worst has been avoided.
It is one of those elite international banks that cannot afford to default without risking the collapse of the entire financial system. There are only 30 in the world that are “of global systemic importance,” as the Financial Stability Board (FSB), an international watchdog, calls them.
The CSF updates its list every year and, by November 2022 at the latest, Credit Suisse is alongside French banks such as Société Générale and Crédit Agricole – whose shares fell on Wednesday after those of its Swiss counterpart – but also US banks. . , Chinese, Canadian and even German banks.
Complete list of “systemically important” banking institutions:
JP Morgan Chase, Bank of America, Citigroup, HSBC, Bank of China, Barclays, BNP Paribas, Deutsche Bank, Goldman Sachs, Industrial and Commercial Bank of China, Mitsubishi UFJ FG, Agricultural Bank of China, Bank of New York Mellon, China Construction Bank, Credit Suisse, Groupe BPCE, Groupe Crédit Agricole, ING Mizuho FG, Morgan Stanley, Royal Bank of Canada, Santander, Société Générale, Standard Chartered, State Street, Sumitomo Mitsui FG, Toronto Dominion, UBS, UniCredit and Wells Fargo.
special requirements
Due to their size, their interdependence and their activity on a global scale, these banks are not treated in the same way as others.
In particular, they are required to have a higher share capital corresponding to a percentage of their risk-weighted assets.
Concretely, what does this mean? Thanks to this larger capital ‘cushion’, they must be able to absorb losses caused by potential defaults. This cushion is more or less thick depending on the bank’s “systemic” risk, that is, the danger it poses to the entire financial sector.
Thus, for example, the Financial Stability Board considers Credit Suisse to be less systemic and therefore less dangerous than JP Morgan Chase. The US bank, which is at the top of the ranking of systemic banks on a global scale, should, in fact, have higher capital reserves, equivalent to 2.5% of its risk-weighted assets. For Credit Suisse, the rate is 1%.
The trauma of the 2008 crisis
These rules, along with many others that affect the entire banking system, arose in the aftermath of the 2007/2008 subprime mortgage crisis that left deep trauma in financial markets and beyond.
In effect, the fall of the American bank Lehman Brothers had plunged finance and the world economy into the unknown, and countries, to avoid being deceived by it, agreed to international standards.
The Basel Committee, which oversees the global banking system, explained it this way in 2013:
“During the financial crisis that erupted in 2007, […] Supervisors and other competent authorities had limited options available to prevent the difficulties of certain institutions from spreading […] Given the economic and financial cost of these interventions and the consequent increase in moral hazard, additional measures must be implemented to reduce the likelihood and severity of problems caused by the failure of systemically important financial institutions globally.”
Source: BFM TV
