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Swiss banker stresses importance of letting big banks fail

Published on 04/06/2010

Switzerland's top central banker stressed on Friday his commitment to creating rules which would allow big banks to go bankrupt in case of crises.

While acknowledging the importance of coordinating such plans internationally, Philipp Hildebrand, who heads the Swiss National Bank, said that Switzerland must come up with these plans as soon as it can, rather than wait for a global relegation to emerge.

“Irregardless of competition concerns, it would be irresponsible to wait here in Switzerland with a reform of the regulation until the international process of this regulation is ready,” he said.

“The common aim of the most important financial centres must be an internationally coordinated and ordered process, that allows for the dismantling of financial institutes of cross-border and systemic relevance in the case of a serious crisis,” said the central banker.

But Hildebrand also noted that “at the current stage, it is an unrealistic target for a single global regulation on the orderly dismantling of a bank.”

National regulations are likely to continue running parallel, he said.

He told businessmen at the Swiss Economic Forum that this did not mean that global cooperation could not be improved on the issue.

Hildebrand said that key financial centres must find a way to allow for banks that fail to go bankrupt, no matter their size.

This is aimed at avoiding a repetition of the financial crisis, when governments were forced to rescue some banks because of their relevance to the national economy.

“When you fail to keep your firm on the market, you have to close the doors of your companies. What is valid for you, is however not valid for all financial institutes in the current financial system,” he said.

“This goes clearly against the principles of the market economy,” he said.

“The future financial system must allow big financial institutes with systemic relevance to be able to be dismantled in case of the next crisis,” he said.

“Such a system must in particular ensure systemic relevant functions are allowed to continue running, without having to safe the entire company.”

Tackling the so-called “Too big to fail” problem is among key preoccupations of regulators in the aftermath of the financial crisis.

The collapse of major US investment bank Lehman Brothers in 2008 had such a devastating impact across the global economy that governments were forced to save their country’s banks when they were in turn threatened with bankruptcy.

Weeks later Switzerland unveiled a massive rescue package worth almost 60 billion dollars to bail out its biggest bank UBS, which was hurt by the US subprime crisis.