Indeed, having enough capital and hence being considered robust is – undoubtedly – also in the interest of the banks themselves. Although we dealt with the crisis competently – here, I am referring to the successful bail-out of UBS in autumn 2008 – there is unfortunately no guarantee that our country will come off so lightly in future crises. The Swiss TBTF proposal As the above remarks make clear: big, interconnected financial institutions can destabilise the financial system and an entire economy, with dramatic consequences. How can they be made more secure? And how can the problem of the implicit state guarantee be reduced? The package put together by the Federal Council in Switzerland is precisely targeted at these two questions.2 A central component of the Swiss approach is that systemically important banks should markedly improve their capital base and liquidity positions, both qualitatively and quantitatively, and reduce their risk exposure to other banks.3 This will make systemically important banks more stable in future and reduce the likelihood of them running into difficulties. Furthermore, organisational measures aim to ensure that systemically important functions can continue to be performed during a crisis, while simultaneously liquidating the big bank in an orderly manner. This reduces the need for state intervention. These measures may have different starting points and goals, but they all harmonise with each other.
However, this is exactly what the proposed measures on convertible capital take into account. They create better conditions, so that capital structure will have less influence on a bank’s financing costs. Independently of this finding, it is argued that the reduction of the state subsidy – which is one aim of the new regulation – will lead to an increase in lending rates for clients. There are various arguments against this. On the one hand, structural factors within Switzerland’s banking sector limit the big banks’ scope for setting prices even today: There is a sufficient  5  Cf. Modigliani, F. and Miller, M. H., 1958. The Cost of Capital, Corporation Finance and the Theory of Investment. BIS central bankers’ speeches  3  number of domestic lending providers in the market, which keeps margins relatively low. On the other hand, the reduction in the subsidy will tend to lead to even more competition. The current disadvantage suffered by other banks active in the domestic market is lessened – the package of measures thus levels the playing field in the Swiss customer business segment. In this environment, an increase in lending rates by the big banks would lead to a loss of market share. A reduction in the subsidy is therefore more likely to manifest itself in lower returns on equity or lower compensation for the bank management than in higher lending rates. Empirically, there is no connection between the capital ratio and the credit volume, either.