Here we must accept that we still have not dealt with the fundamental problem that systemically important banks cannot currently be allowed to fail. The truth is that, if tomorrow morning a systemic institution were once again to find itself on the brink of failure, we would again face the terrible choice between either coming to its rescue at the expense of taxpayers or putting the stability of the financial system at risk. Moreover, as long as banks can expect public support, market discipline will always be undermined. Moral hazard has been exacerbated by the fact that there is no longer any ambiguity about the willingness of the public sector to bail out large banks. In other words, we must acknowledge that the wide-ranging public support measures have aggravated the moral hazard problem associated with large and complex financial institutions. Frankly speaking, we have no choice but to address the specific challenges of banks that are “too big” or “too interconnected” to fail. If we are committed to a market-based system, the financial system of the future must expose financial institutions of all sizes and structures to the ultimate test of the market place. The very definition of a market economy is that it must allow for failure as a sanction of excessive risk taking or managerial incompetence. In the event that large, systemically relevant financial firms face the threat of failure in a next crisis, the financial system of the future must allow for their orderly resolution.
For how can we justify the costs of these efforts, which will have to be borne for at least a generation, without fundamentally addressing the flaws that got us into this terrible crisis in the first place? Ladies and Gentlemen, there are many areas in financial regulation that can and should be improved. Given what is at stake, there is a need to prioritise. I have attempted to lay out to you today where the SNB puts those priorities and where it will focus its greatest efforts in the months and years to come. Together with FINMA, it is our duty to provide robust analysis and to issue sound recommendations that will help put our financial system on a more sustainable foundation. In certain areas, like capital requirements, regulators can issue – and have issued – decrees intended to strengthen the resilience of the financial system. With respect to the “too big to fail” problem, political decisions are required. The topic is crucial. The consequences of not addressing it adequately could be severe in the event of a future crisis. Politicians need to become acquainted with and get involved in this matter. The sooner, the better! 17  17  The Swiss government has recently mandated a group of experts to make proposals to limit the risk associated with large firms. 8  BIS Review 145/2009