Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School.
Related research from the Program on Corporate Governance includes Self-Fulfilling Credit Market Freezes by Lucian Bebchuk and Itay Goldstein.
Credit Suisse, one of the world’s largest 30 banks with assets exceeding $500 billion, melted down earlier this month. How this collapse quickly unfolded raises serious questions about the regulatory actions preceding it and the future of banking regulation.
On the afternoon of Wednesday March 15, the Swiss National Bank (SNB) and the Swiss banking regulator (FINMA) issued a joint statement expressing unambiguous confidence about the stability of Credit Suisse. SNB and FINMA unequivocally stated that Credit Suisse “meets the higher capital and liquidity requirements applicable to systemically important banks.” SNB also pledged to provide CS with liquidity if necessary.
Four days later, however, with CS facing significant withdrawals, SNB chose not to provide additional liquidity but instead forced CS to sell itself on Sunday March 19 to UBS for less than half of the market capitalization CS had just several days ago. And whereas shareholders at least got some value, the Swiss authorities chose to wipe out completely CS bondholders owed about $17 billion.
The actions that Swiss authorities took on Wednesday and on Sunday cannot be both right. If the SNB’s Wednesday March 15 statement about Credit Suisse’s situation was justified, then the assets of CS substantially exceeded its liabilities to enable CS to have the capital of dozens of billions of dollars that was required for a systematically important bank to be well-capitalized. If this were indeed the case, then SNB’s subsequent choices were highly problematic.
