by With Remo Isch-Taudien and Cyril Monnet. Swiss Journal of Economics and Statistics 162:7, May 2025. PDF. Journal website. The proposed revision of the Swiss Banking Act introduces a public liquidity backstop (PLB) for distressed systemically important banks (SIBs), in part to facilitate resolution. We examine the impact of the PLB on fiscal balances, welfare, and the incentives of bank shareholders and management. A PLB, like too-big-to-fail (TBTF) status, acts as a subsidy for non-convertible bonds, which can create negative externalities. Corrective measures should be implemented before the PLB is activated to align incentives with societal interests. We conservatively estimate that UBS Group’s TBTF status results in funding cost reductions of at least USD 2.9 billion in 2022. The
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Dirk Niepelt considers the following as important: Bank, Credit default swap, Implicit subsidy, Liquidity, Public liquidity backstop, Research, Switzerland, Systemically important bank
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With Remo Isch-Taudien and Cyril Monnet. Swiss Journal of Economics and Statistics 162:7, May 2025. PDF. Journal website.
The proposed revision of the Swiss Banking Act introduces a public liquidity backstop (PLB) for distressed systemically important banks (SIBs), in part to facilitate resolution. We examine the impact of the PLB on fiscal balances, welfare, and the incentives of bank shareholders and management. A PLB, like too-big-to-fail (TBTF) status, acts as a subsidy for non-convertible bonds, which can create negative externalities. Corrective measures should be implemented before the PLB is activated to align incentives with societal interests. We conservatively estimate that UBS Group’s TBTF status results in funding cost reductions of at least USD 2.9 billion in 2022. The risk for Switzerland of hosting SIBs warrants additional precautionary savings.