Liquidity has become a key issue for banking stability. A bank can be profitable, have a solid equity base, and fully comply with regulatory requirements, but it can still be vulnerable if it does not have sufficient liquidity to cope with a crisis of confidence on the part of its clients.
The collapses of Silicon Valley Bank (SVB) in the United States and Credit Suisse in Switzerland showed that, if it lacks sufficient liquidity, a bank, whatever its size or profitability, can be crushed by a bank run in just a few days.
After having learned the lessons from these incidents, FINMA is today strengthening its liquidity management expectations, issuing a new ordinance (LiqO-FINMA) which will come into force on 1 January 2027. This reform is part of a wider approach adopted by the Swiss authorities since 2023 and designed to change the ‘too big to fail’ model.
The aim is clear: to ensure that Swiss banks, regardless of their size, are better prepared to face a crisis of confidence and can continue to honour their commitments, even under extremely harsh conditions.
From a static to a dynamic approach
Until now, the approach was principally built on an adherence to regulatory ratios, such as the short-term liquidity coverage ratio (LCR), which requires banks to hold enough high-quality liquid assets to enable them to withstand periods of heightened tensions.
However, FINMA is looking to take a new approach based on the active management of liquidity risk, which, among other things, implies closer oversight of cash flows, regular analysis of crisis scenarios, better understanding of depositors’ behaviour, and clear governance of responsibilities during emergencies.
The key question is no longer, ‘How much liquidity does a bank have today?’, but rather, ‘How long can a bank function in various crisis scenarios and what measures can it take quickly?’.
This new ordinance requires banks to assess their ability to confront extreme but plausible situations: massive withdrawals of deposits, temporary closures of financing markets, downgrading of credit ratings, and pressure on certain currencies.
Particular attention has been paid to the structure of financing. A significant number of small deposits by individuals is generally considered to be more stable than a limited number of very large institutional depositors who are liable to move their cash quickly – a crucial issue for those banks operating in the international wealth management space.
If it lacks sufficient liquidity, a bank, whatever its size or profitability, can be crushed by a bank run in just a few days.
Another major development is that liquidity is increasingly becoming a strategic responsibility of banks’ senior management teams and boards of directors, and they have to factor it into their business decisions: lending growth, deposit policy, investments, acquisitions, and international expansion. This level of discipline is sometimes seen as a constraint, but is critical when a crisis emerges.
The consequences for banks will largely be felt internally. The new ordinance involves more cautious balance-sheet management, a more detailed analysis of certain commitments, and increased consideration of the quality and stability of sources of financing.
In order to manage their liquidity effectively, banks will have to have a consolidated view – indeed, almost in real time – of their positions: available liquidity, financing needs, maturities, callable collateral, and currency risks. IT systems thus become a critical element, especially in times of stress.
For clients of Swiss banks, these new rules should not bring about any obvious changes from a day-to-day perspective. This is because the rules do not mean that banks will trim their businesses or limit access to deposits: quite the opposite. The aim is to strengthen the security of the Swiss banking system.
A cultural shift rather than a regulatory restriction
Liquidity issues do not arise solely from a lack of regulation; they often appear when a range of factors coalesce: an excessive concentration of risk, heavy reliance on certain sources of financing, an overly sluggish reaction from management, or an underestimation of the speed with which crises can unfold. However, digitalisation has profoundly sped up financial movements. Today, significant sums can be transferred in a matter of hours. Worries shared on social media can also rapidly magnify a loss of confidence.
This new reality requires much more highly reactive liquidity management. Switzerland benefits from a long history of banking stability and the authorities want to maintain this reputation by further strengthening the financial system’s resilience. For Swiss businesses, liquidity has therefore become a real ‘confidence licence’.
In a world in which confidence can evaporate in just a few hours, the ability to manage liquidity is no longer just a regulatory duty: it has become a key factor for solidity, credibility and continuity.
