Too big to fail: Why new rules will also affect the real economy

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Switzerland doesn’t want another Credit Suisse-style crisis. And the Federal Council intends to ensure that never happens – for instance, through new capital adequacy rules. Banking law specialist Philipp Fischer provides an overview and says the rules should be shaped through dialogue with the industry.

The US and the UK are currently relaxing banking regulations. Not so Switzerland: as part of the ‘too big to fail’ dossier (banking stability), the Federal Council is calling for tighter regulation. “Driven by the political will to learn lessons from the Credit Suisse case, Switzerland is swimming against the tide – and that calls into question the competitiveness of the financial centre,” says Philipp Fischer, a specialist in banking law.

One of the key issues in the dossier is capital adequacy. Since 2025, the international Basel III standards have applied in Switzerland. Whilst many countries are delaying their implementation, Switzerland is taking matters a step further: systemically important banks are required to underpin the total value of their foreign subsidiaries with capital.

Capital is central to the banking business

Capital regulations are not a mere bureaucratic formality: they strike at the heart of the banking business – because they determine how banks can optimise their operations in balancing investments, investor confidence and costs.

At present, the new rule directly affects only UBS, but it has major implications. The bank estimates the cost of capital at around 10%. The proposed increase would thus incur additional costs of CHF 230 million – a threat to its competitiveness. Furthermore, other banks are also indirectly affected as they are clients of UBS.

However, the costs of stricter regulation are borne not only by the banking sector but also by the real economy, according to Fischer: “The new regulation could lead to more expensive lending and would therefore also affect SMEs.” UBS grants around a fifth of all SME loans.

Regulation for future risks rather than past crises

Philipp Fischer questions the stricter capital adequacy requirements drafted in the wake of the 2023 Credit Suisse crisis. It is by no means certain that more capital would have prevented the Credit Suisse debacle: “Credit Suisse was hit by an acute crisis of confidence that led to a liquidity problem. The root of the problem did not lie in capital.”

This is why Fischer fully supports public liquidity support, another measure in the ‘too big to fail’ dossier – not least because liquidity crises cannot be ruled out in the future: thanks to digitalisation, assets can now be moved with a single click.

“Regulations should not be designed to address past crises, but rather the challenges of the future,” says Fischer. However, he expects the Federal Council’s proposals – with some minor adjustments – to be implemented: “In light of the CS trauma, we must brace ourselves for new regulations.”

Do not jeopardise the diversity of the banking centre

For banking law specialist Fischer, it is essential that the principle of proportionality is taken into account during implementation. This is because some measures affect all Swiss banks – such as the new liability regime, which places greater responsibility on individuals. The diversity of the banking centre must not be jeopardised by new rules, he says: “We must avoid small and medium-sized institutions being disadvantaged by a regulatory reform that has its origins in the failure of a systemically important institution.”

That is why dialogue with industry associations is central to Fischer’s approach. Only through dialogue between the industry and the authorities can rules be developed that are comprehensible and, subsequently, implemented correctly. Whilst this is a lengthy process, it guarantees stability in the long term.

And “stability” – Switzerland’s defining USP – is, according to Fischer, as important today as ever: “Switzerland can serve as a counterpoint to the general turmoil – a rock in the storm.”

What is equity?

A bank’s equity comprises its retained earnings and the funds it receives from the sale of shares. For the most part, this money is not kept in the vault but is invested – for example, through loans, mortgages or the purchase of government bonds and shares.

Why is equity important?

Borrowed capital must be repaid – equity therefore serves to cushion losses and prevent insolvency. A high equity ratio also promotes:

Confidence – the risk of a sudden withdrawal of liquidity by customers and investors decreases
Creditworthiness – refinancing – i.e. loans for the bank – becomes cheaper
Stability – Absorbing short-term losses allows for long-term business planning rather than constant de-risking

What makes equity so ‘expensive’?

Equity from shares must be remunerated with dividends – because shareholders bear the full risk and therefore expect a financial incentive. This costs more than ‘debt capital’, such as customer deposits, on which banks pay only low interest rates.

And if a bank increases its equity by issuing new shares, this reduces the real value of all existing shares. At the same time, an equity increase through retained earnings can result in lower dividends – which in turn can undermine investor confidence.

The full interview is available in French on the podcast «À quel point les réglementations peuvent-elles être dangereuses ?»

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