Switzerland: A First Skirmish on Glass-Steagall between Parliament and Government

Following the historical defeat of the government in the debate over the bailout of Credit Suisse (cf. SAS 16/23), members of the National Council (lower house of parliament) took the first initiative for a real banking reform. On April 11, the Green Party filed a motion for a bank separation regime, along the lines of the U.S. Glass-Steagall Act of 1933, to which the government (Federal Council) announced its opposition on May 24. A Parliament debate should be scheduled now.

The text of the motion reads: “The Federal Council is instructed to take the necessary steps to introduce a bank separation system for systemically important banks in Switzerland.

“The renewed intervention of the state to rescue/take over a systemically important bank in Switzerland within 5 years requires a careful examination of the effectiveness of the existing regulation and possible alternatives. The bank separation system, as the U.S. knew it from 1933 to 1999, can lead to an unbundling of risky investment banking from commercial banks. If nothing else, this can reduce the investment banking culture (high returns, high leverage and high risk appetite) that is evident in universal banks today, and contribute to a more responsible management culture. In the TBTF [too big to fail] regulation, the option of a bank separation system was insufficiently explored and dismissed with the argument of too much restriction in the banks’ freedom of action. However, the past weeks have invalidated this argument, as despite TBTF regulation, government guarantees in the order of magnitude of the total existing government debt had to be issued in order to prevent further destabilizing effects on the financial markets and the economy.

“A report will therefore examine and explain how a bank separation system would work in day-to-day banking operations and in a crisis situation, what design options are available and what steps would be necessary for their implementation. In doing so, possible designs as well as the dependencies on the relevant capital and liquidity requirements will be examined and compared with regard to their feasibility and their respective advantages and disadvantages.”

In its reply, the government states that the Federal Department of Finances (EFD) will issue a report within one year on the too-big-to-fail regulation, and on a possible bank separation system.

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