FRANKFURT (MNI) – The too-big-to-fail problem has to be addressed
as soon as possible, Swiss National Bank Vice President Thomas Jordan
urged Friday.

Speaking during a panel discussion on the “Future of Financial
Regulation,” Jordan said authorities must find ways to minimize the risk
of systemically important institutions failing and “minimize the cost
should one fail anyway.”

“It is necessary to have a solution as soon as possible,” Jordan
said.

In search for such solutions, the SNB suggests focusing on a few
measures that include capital, liquidity and organizational structure,
Jordan said.

It is important to have “more and also better capital” in those
institutions considered too-big-to-fail. Banks should raise liquidity
levels to be in a position to “absorb a very high drain of liquidity”
without having to resort to the central bank for help.

With regard to structure, Jordan said banks should be prepared to
“ensure continuation of essential functions” and regulators “in a
position that we can orderly resolve those institutions” if they run
into trouble, Jordan said.

In contrast, Jordan said he does not favor taxes on banks, limiting
banks’ activities, or imposing direct restrictions on size.

“Direct size limits on banks is not the optimal solution,” Jordan
said. “It is much better to have a progressive capital surcharge as it
gives [banks] an incentive to reduce systemic risks,” Jordan said. At
the same time, it leaves decisions of optimal size, which is hard to
determine, to the market, he said.

Placing extra charges on banks does not only have the drawback of
draining money from the banking system but could also create some moral
hazard as banks might take on more risks thinking they have already paid
an insurance fee, Jordan said.

Jordan recognized that “regulation is never a free lunch” and that
implementation will have to be stretched out over a protracted period.
However, this should not stand in the way of finding solutions now, he
asserted.

–Frankfurt bureau: +49-69-720-142; email: jtreeck@marketnews.com

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