Pricing Liquidity Support: A PLB for Switzerland

Cyril Monnet, Dirk Niepelt and Remo Taudien

No 20309, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: 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.

Keywords: Central bank; Public liquidity backstop; Too-big-to-fail; Subsidy; Banks (search for similar items in EconPapers)
JEL-codes: E42 E58 G28 G38 H81 (search for similar items in EconPapers)
Date: 2025-05
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