Its assessment of the Swiss approach was positive, considering it appropriate in an international comparison. 21 At the same time, the Federal Council concluded that further action was needed in relation to certain parameters. In particular, it stressed that, due to the special significance of ‘too big to fail’ in our country, Switzerland should be at the forefront when it comes to setting resilience requirements. Consequently, it prescribed an increase in capital requirements. These changes have been criticised in some quarters. Concerns were voiced that some of the adjustments were unreasonable and would put banks at a competitive disadvantage internationally. 22 How justified is this criticism? c) … and are designed to be cost-effective  All regulations inevitably meet with resistance because they create added costs for the regulated institutions. But it is often the only way to bring about the desired change in conduct. In any discussion of the costs of regulation, it is important to weigh the private costs incurred by those subject to the regulations against the costs to the economy as a whole. As long as the private costs are less than the macroeconomic benefit, then the regulations make economic sense. Yet such a cost/benefit analysis is complex and fraught with uncertainty. The literature is unambiguous on the macroeconomic costs and benefits of the post-crisis increase in capital requirements. 23 The benefits far exceed the costs involved. The benefits of the higher capital requirements are that they reduce the likelihood and the severity of a banking crisis.
The fact that we were obliged to burden the state and the taxpayers with an exposure worth billions to stabilise a big bank made a lasting impression on me. The lack of resilience in the banking system forced governments across the world to plough huge sums into bank bail-outs. It was the only way to protect their economies from the enormous damage that a banking system collapse would have wrought. The financial crisis demonstrated in no uncertain terms that the banking system was not sufficiently ‘weatherproof’. The financial crisis also showed clearly that particular risks stem from large, highly interconnected banks. Owing to their size and market position, such banks cannot exit the market without severe consequences for the banking system and the real economy. In industry jargon, they are ‘systemically important’. Thus, they enjoy an implicit guarantee that the state will intervene in an emergency. This form of market failure is now known the world over as the ‘too big to fail’ issue. In my speech today, I will be looking into this issue, one that is particularly relevant to Switzerland. I will start by discussing the causes and effects of ‘too big to fail’, and how it manifests itself in Switzerland, before moving on to the reasons why banking regulation before the crisis did not sufficiently address the risks posed by ‘too big to fail’ banks.