On March 16, 2023, Switzerland’s second largest investment bank, Credit Suisse, announced their request for a loan of fifty billion Swiss Francs ($54 billion USD) to boost their liquidity. This request came less than a week after regulators closed United States-based Silicon Valley Bank (SVB) and Signature Bank due to insolvency issues. Three days after the Credit Suisse loan request, the largest bank in Switzerland, UBS, announced they were acquiring Credit Suisse for a deal that is believed to cost around $3.2 billion. The SVB and Signature Bank collapses served as the second and third largest bank collapses in United States history and one expert stated that a possible collapse of Credit Suisse would rival the Lehman Brothers collapse in 2008. This represents a larger concern about the stability of the global banking market, the security of individuals in their deposits and investments, and the risks of consolidation in the banking market.
Internationally, banks have been struggling throughout the month of March, as banks listed on Europe’s Stoxx 600 Banks index are down 17.1%. Rather than a crisis spawning from banks being overleveraged in bad investments, such as subprime mortgages, this crisis is what experts are calling a “sentiment contagion.” In such a case, investors are increasingly growing scared of an impending crisis, pulling their money from banks, leaving banks with less money to cover their debts and causing them to slip further towards insolvency. This negative feedback loop is pushing us further into a crisis that stems from fear in its incipiency. To quash those fears, banking regulators around the world have tried to be proactive by preventing further runs on the banks and a worsening of the issue before it’s too late.
The United States was quick to put the FDIC into gear, with Treasury Secretary Janet Yellen releasing a statement that the FDIC would be protecting all SVB and First National depositors beyond the statutory $250,000, the traditional FDIC insurance maximum for bank depositors. The statement emphasized that none of these costs would be borne by taxpayers. Instead, the FDIC covered the amounts above the statutory minimum with the Deposit Insurance Fund, created in the wake of the 1933 banking crisis to place the burden on banks to insure the results of their possible mismanagement.
While Yellen’s order for greater FDIC insurance maximums presents a positive for investors in these banks that have lost their money due to insolvency, there are also concerns about breaking from the traditional insurance amount and reimbursing depositors for their full amounts lost. The largest of these concerns is that if more banks were to fall into insolvency, the fund would quickly be depleted by attempting to fully reimburse all depositors – a precedent that the treasury has now set. However, the benefits of ensuring that depositors have confidence in their deposits vastly outweighs this risk. Because this crisis seems to stem from the lack of confidence investors have in banks, reinforcing this idea that deposits will be secured regardless of the statutory cap nominally helps ensure that customers will not pull their money out in fear that it may disappear in the event of insolvency.
Swiss regulators similarly stepped in by providing a loan of fifty billion Swiss Francs and offering to further step in to protect liquidity of the bank if the need arises prior to the UBS buyout. FINMA, the Swiss regulator, also helped facilitate the agreement between UBS and Credit Suisse to help the bank survive. In the aftermath of the Credit Suisse fallout, several other banks, including German Deutsche Bank and two major French banks, saw share value slide nearly 10%. These banks have been able to rebound largely due to the public support of regulators. These regulators have assured investors that the banks meet the rigid financial requirements put in place after the 2008 crisis, including reduced leverage and improved capital.
In light of these regulation changes, it is now up to United States regulators and Congress to increase their own requirements and regulations on banks to try and shore up the market. One possible solution is to create clawback provisions, similar to those found in the Sarbanes Oxley Act, wherein executives who oversee companies where material misstatements are made in financial documents to federal regulators are forced to pay back any bonuses or profits made on dispositions of company stock. For bank executives, a similar provision should apply for bank executives that take on unnecessary or unreasonable risks ensuring that they are more cautious, thus avoiding liquidity and insolvency issues in the future. This “clawed back” money can be used to replenish the Deposit Insurance Fund, ensuring that it remains fresh as future problems arise. This supports the Fund without burdening taxpayers , and without consumers facing higher banking fees to make up for the money that the banks are statutorily required to pay.
Federal regulators should also consider more strict capital requirements and limits on downside risks, similar to those that European regulators have imposed on their larger banks. These have proved effective in stabilizing markets in Germany and France for the time being. In Switzerland, meanwhile, things appear to be stabilizing for the moment, with regard to Credit Suisse and UBS. One concern that should be noted moving forward, however, is that typically in a merger containing such a large convergence of market power, antitrust regulators would likely highly scrutinize some of the consumer and employee related impacts. However, due to the serious consequences that could arise from any delays in this merger, these considerations have been paid less attention. One immediate impact will be layoffs of staff – in order to reduce the duplicitous staff between the two banks – which will certainly have its own economic consequences moving forward.
Author Biography: John Tuley is a Moderator of the International Law Society’s International Law and Policy Brief (ILPB) and a JD Candidate at The George Washington University Law School. He has a B.A. in Writing and Rhetoric and a B.S. in Legal Studies from the University of Central Florida.
Editor: Samantha Hoover, George Washington Law School, J.D. Candidate, 2024.