Armin Jans: «Are Swiss Banks More Crisis-Resistant?»

A lot has changed since UBS had to be rescued by the Swiss state during the financial crisis. But are Swiss banks truly more resilient today, Armin Jans asks in an exclusive essay for finews.first.

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There have been four banking crises in Switzerland over the past 120 years:

• From 1910 through 1913, about one hundred local and regional banks disappeared after realizing unsustainable losses following a strong expansion of their credit business.
• From 1931 to 1936, the eight big Swiss banks at the time suffered as Germany froze their assets in the country. Comptoir d’Escompte Genève shut down, almost all other big banks had to get help from the government.
• In the early 1990s, inflation accelerated to almost 6 percent. The Swiss National Bank (SNB) tightened its monetary policy very swiftly. Due to the rate increase (rates for first mortgages intermittently reached 7 percent), residential property prices fell by about 20 percent. A third of Switzerland’s banks, primarily local and regional banks, folded under the ensuing losses. Some of the cantonal banks also struggled, and Swiss Volksbank was taken over by Credit Suisse. Spar- und Leihkasse Thun went bust and was liquidated.
• In 2008, UBS was saved by the government. The bank made huge losses due to risky investments in the U.S. and as a consequence of the global financial crisis. It was not able to absorb the losses because of its thin capital base.

These banking crises happened in hugely different regulatory environments. There was no federal banking law in Switzerland before 1936 and therefore no national banking regulator, there was no lender of last resort and no depositor protection. In the meantime, this has all changed. Since the 1980s, new international standards for equity were introduced step by step. The rules based on Basel I and Basel II were introduced into Swiss law before the global financial crisis broke out.

«Switzerland was one of the countries to implement Basel III the fastest»

It wasn’t enough though to fully protect Switzerland from the fallout of the global financial crisis that began in 2007: UBS needed a state-sponsored rescue package the following October. After the financial crisis, international standards on capital requirements, liquidity and too-big-to-fail were overhauled completely with Basel III.

Switzerland was one of the countries to implement these the fastest, and in part tightened them further (the so-called «Swiss Finish»). This was not only to prevent having to inject taxpayers’ money into struggling banks that are relevant for the system. More to the point, it was about taking account of the high risk exposure (from an international perspective) of the banking system and its resilience and therefore about improving its reputation.

Was the Goal Achieved?