Switzerland’s economy depends far more on financial services than the U.S. economy, which could be why they’re making the right move on financial reform. Katharina Bart of the Wall Street Journal notes the findings of a Swiss national commission on next steps:
“Our expert commission concludes that based on our four criteria, the two major banks can clearly be defined as ‘too big to fail’ in their current size and structure,” Swiss National Bank director Thomas Jordan said.
The expert group outlined a raft of measures, including requiring higher capital and liquidity buffers, as well as a “balanced” approach to risk-taking. The government is expected to address the experts’ recommendations as early as next week.
Specific capital measures the commission is backing include having banks issue so-called contingent convertible bonds, which can convert into shareholders’ equity in the event of a bank crisis. Banks must also hold enough liquidity to withstand a period of crisis without outside help, the commission said.
“This ensures ample time to implement crisis measures, and all options remain open for continuation or orderly winding down” of the bank, the commission wrote in its 51-page report.
My sense is that we could learn from the Swiss. The emphasis on higher capital and liquidity buffers strikes me as particularly important, and the support for contingent convertible bonds is shrewd.
This is one reason I think the Brown-Kaufman proposal shouldn’t be dismissed by conservatives. The size cap might be arbitrary, but the tight leverage requirements strike me, a non-expert, as a very wise idea. Simon Johnson, who invests far more hope in the efficacy of size caps than I do, describes its provisions.
I have to say, I think that Johnson is spending too much time advancing a problematic political economy story and less time beating the drum on the central importance of tight leverage requirements. My sense is that size matters much less if we have uniform rules on leverage and capital across financial institutions.