The Credit Suisse Dilemma

Hans Gersbach, Sebastian Zelzner and Jihao Zhang

No 19846, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The collapse of Credit Suisse highlights the limitations of bail-in mechanisms in preventing bailout. Regulatory authorities, faced with the decision of triggering bail-inable debt, may ultimately opt for alternative solutions, effectively sidestepping these mechanisms. This paper explores what we term the "Credit Suisse Dilemma"—a situation where bail-in bonds, designed to reduce government intervention during a banking crisis, can inadvertently increase the scale of such intervention if banks are bailed out without activating these bonds. We present a simple model illustrating this problem and discuss potential solutions, including a novel exchange mechanism whereby banks would replace bail-in bonds with higher levels of common equity at a pre-determined conversion ratio.

Keywords: Credit Suisse; Bailout; Bail-in bonds; Banking regulation; Capital requirements (search for similar items in EconPapers)
JEL-codes: E44 G21 G28 G33 (search for similar items in EconPapers)
Date: 2025-01
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