Emergency legislation enacted to allow UBS to take over Credit Suisse violated the central tenet of Swiss monetary policy and undermines the independence of the SNB, says a Swiss economic think tank.
In the takeover of Credit Suisse by UBS, an important detail went largely unnoticed. By allowing the issuing of guarantees worth billions, the Swiss Federal Council has undermined the Swiss National Bank's (SNB) independence and principles of monetary policy, Avenir Suisse, a Swiss think tank for economic and social issues, wrote in a commentary (in German).
The Federal Council not only prescribed the amount of the SNB's new liquidity loans, but it also required the SNB to forego collateral for the new instrument. For the authors of the commentary, Juerg Mueller, Lukas Schmid, and Laurenz Grabher this is skating on thin ice because it involves nothing less than the essential foundation of an independent monetary policy.
Breaking a Taboo
«The lack of collateral for the SNB's new liquidity loans is the real taboo breaker,» they write. It is not simply a limit imposed by the Federal Council on the SNB that is at stake, but the essence of the monetary policy framework which was set as it was for good reasons. There is much to be said for a central bank lending money to private banks only against sufficient collateral, according to the authors.
Socializing Losses
While a central bank has to ensure the supply of liquidity at all times as the lender of last resort, it should not assume extensive counterparty risk vis-à-vis an individual bank in the process. By doing so, it runs the risk of monetizing private losses, since in the event of bankruptcy its loans would have to be written off, the authors write.
From a regulatory and economic point of view, if a bank is in such dire straits that it can no longer provide collateral, the possibilities of an independent central bank are exhausted and it lacks the legitimacy to grant additional loans.
It is generally wrong to socialize private losses. However, when a situation such as the one with Credit Suisse arises and there is no other option than government intervention, «then at least the mistake should not be compounded,» they write.
Undermining the SNB's independence to finance bank rescues via the central bank is a «conceivably bad idea.» If rescuing or stabilizing the institution fails in such a case, the costs will be monetized, threatening a corresponding devaluation of money. This is «an extremely unfair and non-transparent way of passing on private losses to society.»
Restoring the SNB's Independence
The authors go on to say that parliament can still deny this taboo-breaking precedent. To restore the SNB's independence and enforce the central principles of Swiss monetary policy, the provisions on Emergency Liquidity Assistance Plus, (ELA+) must be repealed, they say.
To compensate for the loss of that backing, there should be a corresponding increase in the public liquidity backstop (PLB) to ensure financial stability. The default guarantee of the Confederation will increase accordingly because if hidden financing by the SNB via ELA+ is dispensed with, the default guarantee will reflect the true risk for the citizen, according to the authors.
Such transparency should not act as a deterrent. Only by abolishing the ELA+ and increasing the PLB can policymakers restore the constitutionally required separation between fiscal and monetary policy.
«Parliament must now show backbone. The stakes are high. At stake is nothing less than an independent central bank and thus confidence in the Swiss franc,» they warn.
