Switzerland’s “too big to fail” regime

“Too big to fail” (TBTF) refers to a situation in which the disorderly failure of a financial market participant would be devastating for financial stability and the real economy due to its size or complexity. The resulting disruptions to the financial system and the economy as a whole would be too serious. In addition to other financial market participants, individuals and companies could be adversely affected because, as depositors or borrowers, they would no longer be able to utilise the services of the defaulting financial market participant and there would be no suitable alternatives. Domino effects could also lead to other players, such as creditors of the directly affected borrowers, feeling the repercussions of the default.

In the past, due to a lack of alternative measures, governments have used public funds to prevent the disorderly closure of such institutions and to mitigate the negative effects. Such government interventions are very problematic because they are paid for by taxpayers and lead to distortions of competition and moral hazards. As a result, large institutions can knowingly increase their risks, as they can expect to be rescued in an emergency.

In the wake of the global financial crisis of 2007 and 2008, this TBTF problem was therefore addressed at national and international level and a range of measures were developed – including in Switzerland. On the one hand, this is intended to increase resilience and thus reduce the likelihood of a crisis. On the other hand, the ordering of insolvency measures should be possible without jeopardising the stability of the system.