Hence the spectacular failure of models during the crisis: most, if not all, were constructed on the assumption that stable and predictable (usually normal) distribution probabilities could be used to describe the different states of the financial system and the economy. They collapsed when extreme events occurred with a frequency that no one ever thought would be possible. -  Uncertainty itself has huge consequences. As shown by Caballero and Krishnamurthy episodes of flight to quality and liquidity hoarding can be best explained by a regime shift, from an environment where risk can be measured and probabilities attached to different states of nature to a world of total uncertainty. Such regime changes are "tipping points" for the system as a whole, whose behavior is suddenly transformed. When they occur, agents respond by making decisions using “worst-case” scenarios and covering themselves against the possibility of their own demise. Doing so, they faced and created a collective action problem since the general rush for protection only aggravates the stress . This is the best way to rationalize and understand the liquidity and market freezes which occurred in August 2007 and, again, in September 2008. Facing such unprecedented reactions, policy makers may have wondered, "does the market know something that we don't". Actually, markets participants knew that they could not know. Because they were directly involved, they were aware it was impossible for them to fully master the complexity they had themselves created. And they acted accordingly.
Fritz Zurbrügg: Swiss banks from a financial stability perspective Introductory remarks by Mr Fritz Zurbrügg, Member of the Governing Board of the Swiss National Bank, at the Media News Conference of the Swiss National Bank, Berne, 10 December 2015. *  *  *  In my remarks, I will start with an analysis of the situation at the Swiss banks from a financial stability perspective, looking at both the big banks and the domestically focused banks. I will then finish with some information on the new banknote series. Big banks Since the publication of our Financial Stability Report in June, the two Swiss big banks have improved their capital situation further. The improvement was especially pronounced at Credit Suisse, following a capital increase. The Swiss National Bank (SNB) acknowledges the progress made by both big banks in this area. However, a further strengthening of the leverage ratio in particular is necessary. Strengthening the leverage ratio – and hence resilience – will be achieved by means of the measures recently decided upon by the Federal Council as part of the revised ‘too big to fail’ regulations. The substantially increased leverage ratio requirements will put Switzerland back among the international leaders in this regard. Given that the ‘too big to fail’ issue is particularly pronounced in Switzerland compared to other countries, these measures are, in our view, essential.