Credit Suisse’s Wilson Ervin
explains how his Lehman experience led to the creation of
bail-in, and describes some of the innovations by the Swiss
No one who was there will forget it. All those present in the
offices of the Federal Reserve Bank of New York during the
infamous weekend in September 2008, when Lehman Brothers went
bankrupt, will find it hard to shake the memory, as policy
makers and Wall Street's most senior bankers tried, ultimately
unsuccessfully, to avoid a devastating collapse. One man found
it harder to forget than others though.
Wilson Ervin, at the time Credit Suisse's chief risk officer
(he is now vice chairman in the bank's executive office) was
determined to prevent another such crash. He was adamant there
had to be something better than a destructive collapse or
another taxpayer bail-out. Along with other executives at
Credit Suisse, he went about trying to crack the problem, and
invented a new approach called bail-in. It has evolved from a
novel suggestion into a global policy initiative driven by the
G20 and touted as a key solution to handling future systemic
crises. Here he speaks with IFLR about the genesis of the idea,
the challenges he and his colleagues faced in launching it, and
Switzerland's progressive regulatory response.
Bail-in is obviously a hugely important aspect of
post-crisis reforms, and it's your brainchild. Could you talk
about the early days of the idea?
Back in 2009, as the crisis was ebbing and the discussion
turned to reform, a number of us at Credit Suisse were debating
the ideas. At that time, there were so many reforms in the air
– from legislators, from academics, from media people
– but it seemed like most of them missed the central
issue of the crisis. Policy makers didn't have a credible
approach to handle the failure of a large bank and once the
market saw that first-hand with Lehman, we entered into a level
of panic that we hadn't seen since the 1930s. That was a
gigantic hole at the center of the crisis for both the
financial system and the real economy.
outcome haunted me, personally. It was a puzzle that
kept chewing at me"
We kept thinking about our own recent experiences from the
crisis, and the twists and turns we had to navigate. We had
been around the table during Lehman Brothers weekend (in 2008)
and tried to figure out what could have been different. It was
something that haunted me, personally. It kept chewing at me
– both because of its importance, and because it's a
remarkable puzzle. Why was the collapse so devastating, both
for markets generally, and for creditors? The bankruptcy
mechanisms worked well enough in legal terms, but it was a
disaster in economic terms. Within the Lehman puzzle, the ex
ante losses were probably around $25 billion, but the ex post
liquidation losses were more than $100 billion bigger. Where
did all that money go? It's a giant sum even by the standards
of the crisis.
To me, that was a really important problem. If you don't
know where that $100 billion went, you have some real
challenges getting the credit markets to work. You need to have
a mechanism that doesn't destroy enormous value – that
doesn't start a downward spiral.
One insight that helped us was the work we do every day with
troubled corporate borrowers. In the US, you have restructuring
tools like Chapter 11, and can often find a way to keep the
good parts of the business going while you fix the capital
structure. I remember going from one of those meetings to a
policy reform discussion and thinking about the parallels. Why
does recapitalisation work for corporates but seem impossible
for a bank?
So we started to think about what you would have to do to
adapt this technique from a corporation to a bank. What needs
to change? Could you really make this work?
We had thought about some really primitive versions of this
on Lehman weekend. But things were moving too quickly, and
there were no legal preparations in place. We didn't see any
way we could figure out the legal impediments in 48 hours. We
would probably have needed a consensual solution with thousands
of creditors, which struck us as a little far-fetched for a
So a consensual restructuring was off the table for Lehman
weekend, but we kept coming back to that idea. The bones of the
concept just seemed to make sense. And the key issues started
to unravel pretty nicely as we worked through different
elements. With a bit of preparation – and a lot of
legal and regulatory work – it seemed like a bail-in
of creditors could have a strong answer to the so-called Lehman
problem. It could have saved everybody a lot of money, and also
kept the system from spiraling out of control.
How was the concept initially received by colleagues, peers
and ultimately regulators?
There were a lot of sceptics initially. If you'd said five
years ago that this would now be a global policy initiative,
you would have been laughed out of the room!
At first, we had to think through a lot of legal and
economic issues. It's sort of the mother of all corporate
finance projects. Our general counsel in the US, Neil Radey,
gathered a small team to work through some initial legal
issues. We made enough progress to decide it was a realistic
idea and that it could make a contribution. The Economist was
kind enough to publish it as an Op Ed that I co-authored with
the late Paul Calello (then the head of Credit Suisse's
investment bank), and that's where it started getting some
That is due to the leadership of a few people on the
regulatory side. People like Paul Tucker at the Bank of England
and Jim Wigand at the Federal Deposit Insurance Corporation
(FDIC) got interested early, worked on the key issues, and
ultimately breathed life into the idea. Mark Carney was very
important in his role as Financial Stability Board (FSB) chair.
Lawyers like Randy Guynn at Davis Polk and Simon Gleeson at
Clifford Chance were also critical in the early days. In
projects like this, you run into a lot of naysayers. But there
are also people who are more interested in solutions than
settling for a bad status quo – and they're a lot more
fun to work with. They helped turn this from an intriguing
notion into a built-out policy with an implementation plan.
What are your concerns, if any, for the ultimate success of
I think we've crossed the Rubicon in the US. I agree with
Paul Tucker that you have both the will and the tools to do
this today if any of the big US banks ran into trouble. Europe
is more complicated, but it's moving very quickly to a solution
now that the Bank Recovery and Resolution Directive (BRRD) is
in place and getting implemented.
What are the challenges from here? A key element is to
ensure continuity of functions for customers, and prevent a
tripwire termination of business. The International Swaps and
Derivatives Association (Isda) protocol is perhaps the most
important market there. The FSB helped coordinate a major
agreement there last year. There are some other markets to
tackle, but that was the critical one.
The final step is making sure that banks are set up to make
resolution possible, and that they're prepared for a high-speed
restructuring if they hit the rocks. Lehman happened to have a
structure that worked well for bail-in. They had a holding
company with a lot of unsecured debt that could have been
swapped into equity. But banks around the world are funded in
lots of different ways, and you need to make sure there is a
resource to make bail-in work. That's why the FSB has launched
a big initiative around total loss-absorbing capital (TLAC)
– to ensure that all banks have a financial structure
that works for bail-in in an emergency. For example, both of
the large Swiss banks are changing their corporate structures
to make bail-in work under Swiss law. It will be a big effort
across Europe, but it's well underway.
Mark Carney spelt out measures in November last year to
guard against contagion with TLAC, including curbs on banks'
ability to count debt they sell to one another as TLAC. Will
that be sufficient to prevent the problem?
I think so. In the crisis, there were lots of questions
about contagion caused by direct linkages, and these measures
should ensure we don't run into that. A related issue is
something people call correlation – that is contagion
through a concern about a lookalike firm. For instance, when a
retailer fails, people automatically look around for the most
similar firm to worry about next. When Lehman failed, investors
immediately wondered what bank was the most similar, and might
be next to fail. But I think we can handle that issue as long
as we have a system that is well defined, and prepared for that
an early adopter of reform. For a small country to move
first takes some courage"
Some people say that people will run from TLAC the first
time it is bailed in. But TLAC is a term instrument –
you can't run. And if bail-in can preserve value – and
avoid those huge additional losses that hit Lehman, the
pressure to sell won't be nearly as bad. In 2008, the incentive
to panic was clear. I'm sure there will be stress and some
price pressure in the market, but bail-in will change the
calculations from last time and should be much more stable.
So continuity and TLAC are the two things that are getting
solved now and will help to make this reform durable. There are
also two longer-term issues to watch: cross-border cooperation
and central bank liquidity. Those are harder to follow, because
they're behind the regulatory curtain, but both are
How is cooperation being addressed?
Within the EU you have a fair amount of coordination and
legal super structure to enforce that. The more challenging
elements come in when you move across other borders –
for example between the US and the EU or when an emerging
market is involved.
Crisis management groups are putting regulators together and
walking through these scenarios. That's important progress
already. Some would go much further and aim for a United
Nations Commission on International Trade Law (UNCITRAL)
change, or a treaty to ensure people work together better. I
support that, although many in the legal world would tell you
not hold your breath for those.
In the medium term, I think the best approach is to set up
incentives for so-called home and host regulators to work
together. If you can see that the best outcome is a cooperative
solution, you reduce the pressure to take adverse action.
That's one of the subtle things in the new TLAC proposal. For
the first time, the FSB is starting to talk about the internal
structure of banks, with an eye on incentivising home and host
regulators to work together.
The FSB has put a framework on the table to get the
discussion started. There are some good parts, but also some
parts that need work to improve the incentives for cooperation.
For example, the internal TLAC requirements are very focused on
pre-positioning capital into specific host countries. That
should provide comfort to host regulators, but comes with the
cost of restricting flexibility. More flexibility might help
avoid other problems, like capital being stuck in one place
when you need it in another country. A broader approach might
help avoid that drawback.
Another element that might help is for countries to have a
duty to consider broader financial stability issues –
not just the stability in their own jurisdiction when they are
executing a resolution. We live in a pretty interconnected
world. If you just frame your actions to protect local
conditions, you may end up causing problems elsewhere. In
today's world, that cannot only cause problems elsewhere, but
can ricochet back to your home market. It would help if
supervisors could take a broader view from the outset.
And where do you stand on the risks that these TLAC
measures might now pose for asset managers investing in this
sort of debt?
It will create some challenges for asset managers –
but also some opportunities for people who do their homework.
The size of the TLAC market is estimated at around $4 trillion.
Investors won't be able to assume that they will be bailed out
next time – but they are also getting paid better for
taking credit risks than pre-crisis. I'm sure there are some
who would like to keep the extra spread, but not the extra risk
of getting bailed in. But that's not how real capitalism is
supposed to work, and I don't think governments or taxpayers
have the stomach for more bail-outs. Smart investors will adapt
to this. As long as we're transparent about how this process
works, and we focus on preserving value in resolution, I think
markets will adapt.
Switzerland has obviously taken a proactive and more
conservative approach to post-crisis regulation than the EU. As
a senior figure within a Swiss bank, how do you feel Finma has
Switzerland was an early adopter of reform. And for a small
country to move first takes some courage. Switzerland had an
expert commission that proposed a contractual bail-in system,
built on so-called CoCo bonds. A number of people were
sceptical at the time as to whether you could really raise
serious money from CoCos, but Switzerland had confidence in
their principles and their ability to design a workable,
investible regime. They were right. Switzerland has established
a contractual bail-in system that already provides a large
amount of loss absorbency. And while it's not the cheapest
system, it was the first one that was possible. I think you
have to give the official sector a lot of points for doing the
intellectual preparations and having the determination to
implement that into an early solution.
Both Credit Suisse and UBS have already created a lot of
TLAC via this system. There will be more to do when the final
rules come in, but Switzerland has gone a long way to launching
an early version of TLAC concept before it was even called
Since then, the world has moved much further towards bail
in. Switzerland has also pursued this in their legal regime, so
that we can include a statutory resolution process as well.
That's the direction that the US and EU have taken, and it
allows for more efficient financing models now that the global
discussion has moved so far
Vice chairman in the group executive office, Credit
Wilson Ervin is a vice chairman in the group
executive office at Credit Suisse, based in New York.
In this role, he works on a variety of strategic
projects, especially policy reforms related to bank
capital and ending so-called too-big-to-fail. He also
chairs the Credit Suisse Americas Foundation and the
partner asset facility.
Prior to his current role, Ervin was the chief risk
officer of Credit Suisse and a member of the executive
board. During this period he chaired the capital
allocation and risk management committee and managed
the risk division.
Before his roles in risk management, Ervin worked at
Credit Suisse financial products where he headed
corporate marketing and product structuring in the
Before 1990, he held various responsibilities at
Credit Suisse First Boston, including positions in
fixed income and equity capital markets, Australian
investment banking and in the M&A group. He joined
the bank in 1982.
Ervin received his A.B., summa cum laude, in
Economics from Princeton University.