08 May 2023

CEPR: Credit Suisse: Too big to manage, too big to resolve, or simply too big?

It argues that the reforms adopted after the 2007-2009 crisis are still insufficient for resolving systemic institutions. Going forward, authorities must be able to act promptly and implement correction actions before risks of failure become too severe.

The runs on Silicon Valley Bank and Credit Suisse in March 2023 revived attention on banking regulation, resolution, and government intervention. This column analyses the details of the run on Credit Suisse and its eventual takeover by UBS. It highlights multiple discrepancies between official statements and implemented measures, both by Credit Suisse and Swiss authorities. Furthermore, it argues that the reforms adopted after the 2007-2009 crisis are still insufficient for resolving systemic institutions. Going forward, authorities must be able to act promptly and implement correction actions before risks of failure become too severe. 

Before March 2023, bank runs seemed to be of historical interest only. They had played a fatal role in the Great Depression of the 1930s, but the introduction of deposit insurance and the actions of central banks as lenders of last resort seemed to have done away with that problem. The financial crisis of 2007-2009 saw primarily runs on money market funds and breakdowns of bank funding through money markets. ¹  

By contrast, the March 2023 runs on Silicon Valley Bank (SVB) in California and on Credit Suisse (CS) have received much attention. The run on SVB had systemic effects in providing information about mid-size US banks overall. Equally, Credit Suisse was one of 30 institutions that the Financial Stability Board had designated as ‘globally systemic’.

Many economists think of runs as resulting from a fragility that is an essential feature of banking and that requires government support. The 2022 Nobel Memorial Prize was given for research “on banks and financial crises” with the finding that “avoiding bank collapses is vital.” ² In the aftermath of the runs on SVB and Credit Suisse, many have called to stabilise banks by extending the coverage of deposit insurance and other government guarantees. Similar calls were made during the 2007-2009 crisis and again during the Covid crisis starting March 2020. Government guarantees and other supports expanded greatly in these crises already.

Calls to expand government guarantees are misguided. The breakdowns of SVB and Credit Suisse had little to do with the kind of fragility that Diamond and Dybvig (1983) studied in the research recognised by the Nobel Committee. In the Diamond-Dybvig analysis, runs are due entirely to depositors’ self-confirming prophecies about each other. Information about the value of the banks’ assets and their other liabilities plays no role. ³ By contrast, the runs on SVB and Credit Suisse were triggered by announcements that alerted depositors and other investors to deeper problems affecting the solvency of the banks. The failures of bank executives and supervisors to address these problems must be the starting point for any policy discussion...

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Authors

 

Anat Admati

 

Martin Hellwig

 

Richard Portes

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