Liechtenstein is about to remove the so-called state guarantee for the Landesbank, a move that may set an example for Switzerland.

The parliament of the principality in the capital of Vaduz on Wednesday has decided to remove the limited state guarantee for Liechtensteinische Landesbank with effect on July 1, 2019.

Adrian Hasler, the head of government in the summer of 2018 had urged for a cancellation of the rule, which the government says is but a logical step in the development of LLB. Soon, Liechtenstein no longer will guarantee client deposits and bonds issued by the bank in times of crisis. The bank supports the move by the government, it indicated in a media statement.

Distortion of Competition

In reality, the decision wasn’t really what the government and bank originally had in mind. But as a member of the European Economic Area, the guarantee was only going to remain for that long. The other members of the bloc see such guarantees as a distortion of competition.

The bank and government in 2005 had signed a temporary agreement that would have run its course in 2020. The European Economic Area would never have accepted an extension of the deal and the proposal by Hasler, therefore, was the only logical solution.

Swiss Guarantee to Fall Next?

The guarantee also is used by most Swiss cantons to back up their local cantonal banks. Twenty-one cantonal banks enjoy such state backup and are eager to retain this deal as it helps them secure capital more cheaply from third parties.

The cantons also want to keep the state guarantee. The governments receive a handsome reward for their support, through ordinary taxation, but also dividend payments.

No-Go for Rival Banks

The rest of Switzerland’s financial market is more or less critical about the rule. Thomas Gottstein, the CEO of Credit Suisse Switzerland, recently was most candid in expressing his ire. Earlier or later, the deals will need to be reviewed because the European Union itself may no longer accept such help from the state for private firms.

The EU tends to take a negative view on state support and with the framework agreement that is poised to replace the bilateral contracts between the EU and Switzerland, such deals may no longer be acceptable.