Things accelerated over the weekend of 18 March. Close to a knockout, , a knight in shining armour whose hand was somewhat forced by the Swiss National Bank.

Why such a rush to save a bank that has been unprofitable for years and whose reputation, following the repeated scandals of recent years, does not enhance either the Swiss Confederation or its financial centre? A bank that many Swiss professionals no longer hesitate to describe quietly as a ball and chain?

First of all, there is an internal political reason. If things had been left to run their course, bankruptcy would have been inevitable. This would have meant finding--even more urgently--a buyer for the whole establishment or for its activities sold off in pieces. The buyer or buyers would not necessarily have been Swiss, which would have sent a disastrous message for the country and its financial centre. This would not have cost the Swiss taxpayer a single franc, as was the case in 2008 when UBS had to be saved and the takeover option was ruled out--a decision that is still being criticised today.

Did UBS really have a choice? It seems that the general interest prevailed. UBS was able to get a good discount in passing.

The limit of all regulation

It was also necessary to move quickly to prevent the uncertainty surrounding the fate of Credit Suisse from causing further market turbulence and a domino effect in the banking sector.

But just how is such a domino effect still possible given the layers of regulation that have built up since 2008? Have the layers of regulation that have been built up since 2008 to ensure the soundness of the banking sector and to contain its tendency to exuberance in the markets really served any purpose? Yes, according to many observers, because banks’ solidity has been strengthened. Today, they are theoretically able to absorb counterparty losses and a lack of liquidity. But from a technical point of view and from an accounting point of view only, because regulation can’t cover one purely subjective criterion: confidence.

The worst case scenario would be that the markets start to look at players not on the basis of their financial criteria, but through the subjective prism of confidence. A loss of confidence can sweep even the strongest bank off its feet. Without trust, problems can only multiply… and this is the scenario that was looming. Major European banks, notably BNP Paribas, were beginning to cut ties with Credit Suisse. The takeover of UBS therefore avoided a “second Lehman moment” and increased market volatility.

Of course, the rescue of Credit Suisse does not in itself mean that all crises of confidence will disappear. It will just be slower and therefore more controllable. And who will, or can, be given this control task? The central banks. 

Measuring the effects of rising interest rates

For the moment, central banks are all absorbed in the fight against inflation and the end of their so-called “accommodating” policies.

The effects on inflation are not obvious. However, the rise in interest rates has had a strong impact on the sources of financing for US banks, which traditionally pay low interest on deposits, their main source of financing. With the rise in interest rates, the resources of American banks have become more expensive and less stable, which has forced the Fed to intervene. The result: $165bn in loans to guarantee deposits and prevent panic. And the Swiss National Bank put up CHF 200bn in guarantees. This is a big cut in the central banks' balance sheet reduction regime.

Whether it’s Credit Suisse or Silicon Valley Bank, they will have had the merit of shedding light on a problem that had been ignored: the loss of value of certain assets in the face of rising interest rates. These assets are invested for the long term--managed well with rising interest rates--but cannot cope with sudden problems, such as massive liquidity withdrawals in the event of a loss of confidence.

Central banks are entering a phase of acute schizophrenia. And given the paranoia in the markets, one wonders whether we should not--in the short term--replace chief economists with psychiatrists. Or even call in philosophers.

They could discuss the adage “too big to fail” and what it implies. From a purely philosophical point of view, ‘too big to fail’ appears to be a ‘metaphysical’ aberration in the sense that it threatens the legitimacy of the whole capitalist system, which is to value risk-taking. ‘Too big to fail’ is absolution, papal indulgence... and a blank check for all kinds of excesses. Those prone to sarcasm will also be happy to point out that to save a bank that was too big to fail, a bigger one was called in. A bank that will grow even bigger. 

This story was first published in French on . It has been translated and edited for Delano.