Liquidity Rules Gaps Revealed By Credit Suisse Bank Run‍

As a result of renewed outflows over several days last month, Credit Suisse AG came close to going into bankruptcy, despite having enough funds to cover a month's worth of withdrawals, even when the bank was supposed to have enough reserve funds to cover a month's withdrawals.

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This week, Credit Suisse executives and Swiss officials emphasized the extent to which the emergency sale prevented the firm from collapsing, while they highlighted the severity of the run. Despite the fact that it was estimated that it would have to use 120 billion francs to cover the net outflow of 83 billion francs over the harsh 30 days to come, the bank said that by March 14 that ratio had improved. In the days that followed, though, it was on the verge of collapse.

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In light of this, lenders are being pressed to prove that they are prepared to handle a crisis and return funds to depositors when necessary. The Swiss Finance Minister Karin Keller-Sutter, as well as Marlene Amstad, the head of Swiss financial watchdog Finma, both commented that Credit Suisse was on the verge of bankruptcy before the government-backed rescue on March 19, 2012. A press conference held on Wednesday by Amstad indicated that Credit Suisse had suffered a "unprecedented" bank run on Wednesday.

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As Trade Algo eported in an article, regulators are investigating how quickly depositors who are not covered by insurance schemes can withdraw their funds when there is a doubt about the viability of the bank. It seems as though there's a growing consensus that the so-called runoff rate among retail deposits is obsolete due to the ease with which money can be moved, and because how quickly destabilizing rumors can spread on social media.

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A couple of days ago, Swiss authorities told the 167-year-old bank it had met all regulatory capital and liquidity requirements, but was forced to undergo a weekend emergency takeover in spite of the fact that the bank had already met all regulatory capital and liquidity requirements. Since Finma first requested larger liquidity buffers from Credit Suisse a few years ago, it has been ratcheting up demands on the lender ever since.

It is important to note that, when Finma rescued Credit Suisse, it also prepared a bankruptcy plan for the bank, Amstad said. It is likely that the bank would have failed if it had been allowed to fail. If it had, then runs would have swept across other banks, and that is the main reason Finma pushed for a rescue.

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It was only a few weeks ago that Credit Suisse suffered the second bank run following a first run of client money in October, when they lost an estimated 84 billion Swiss francs in client funds. It was later found that the lender had no choice but to lose their liquidity, which meant that when depositor panic flared up again in March, the lender had less to fall on to rely on. 

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In spite of that, if banks are forced to hold a greater amount of cash, they may not be able to maximize their profitability, which could result in the slowing of the buildup of capital buffers, which in turn may increase concerns over the banks' financial condition. In addition to government bonds that fell sharply in value last year, there are also securities that are considered high-quality liquid assets.

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Despite the fact that this metric was designed in response to the financial crisis in order to ensure that banks are prepared for short-term periods of severe stress, executives at Credit Suisse touted it in the run up to Credit Suisse's collapse as a sign of strength, as it indicates the bank has the capacity to withstand short-term bouts of severe stress. Basically, it compares the amount of cash available to clients with the maximum amount of money that is expected to leave the bank. In order to make sure banks and regulators understand the level of stress that will be experienced by their clients, they have to estimate how quickly and intensely different clients will respond to signs of strain at banks.

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The Chairman of Credit Suisse, Axel Lehmann, commented on Tuesday, referring to the March bank run, that he had always believed that a turnaround would be successful until the beginning of that fateful week. He said, however, that a confluence of negative events, including bank failures in the US, led to fears that global contagion might follow. 

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There was a frenzied response to the attacks due to the proliferation of social media and digitalization, Lehmann said. "This hit us at our most vulnerable point in mid-March."