Swiss banks have been charged with the task of distributing cash to companies suffering from the coronavirus effect. At the same time, they have to make sure to safeguard their own liquidity. There are signs of concern emerging in the money market, information obtained by finews.com shows.

Bankers don't like talking about this in public: but liquidity has become the major theme of the coronacrisis. The government has released 40 billion Swiss francs in emergency loans for companies in need – using the banking industry as a transmission vehicle. The amount pledged by the government is quickly evaporating as large sways of the economy remain in lockdown.

But while the government cash is in the focus of public attention, a scenario is emerging in its wake that has been a concern ever since the financial crisis of 2008: banks are hoarding cash. The unsecured money market, where banks normally lend money to rivals, has become much more narrow and expensive, several sources said. Surcharges of as much as 50 basis points have become the norm.

Who's Sitting on Bad Loans?

Instead, banks are surging to the security of the repo market. There, banks exchange liquidity for a security deposit, a deal that works well enough but adds little to the liquidity position of individual firms. «Outstanding loans aren't being extended and companies keep the liquidity instead,» a source familiar with the business said.

And yet, the banks aren't acting irrationally. Following the crash of March, they must assume that some companies are sitting on bad loans – and no partner likes to grant money to such partners, especially when liquidity has become a costly good.

Concern About Savings Ratio

There is an enormous need for more cash from businesses and all bankers surveyed by finews.com believe that the emergency package released by the government won't suffice. This leads to a fault line in the provision of liquidity. Normally, banks receive money back from the firms as cashflow.

It is also unclear what the crisis will do to the savings ratio of companies and consumers: the main part of retail banks' refinancing is generated through the savings of their clients.

«The need for liquidity is rising, but supply isn't,» one source said. As yet, the liquidity crunch is symmetric and there are no winners of the crisis, so to speak. In 2008 Postfinance and cantonal banks attracted an enormous amount of cash.

Concern About the «Swiss Finish»

The industry won't be looking to the regulator or the central bank for help in the situation that is emerging. The Swiss National Bank (SNB) will only hand out liquidity in exchange for collateral, while the regulator is sticking to the liquidity coverage ratio (LCR). The ratio was established in connection with Basel III and puts the short-term liquidity risk of a bank in relation to expected outflows.

Swiss banks must make sure that they don't infringe on the LCR, and that prompts them to keep hold of their liquidity. It is a purely Swiss phenomenon, because the European Central Bank has already loosened its rules. No wonder there is concern in Swiss banking about the so-called «Swiss Finish».

A Perverse Outcome

The measures prepared are counter-productive in some sense too. When the SNB increased the amount of sight deposits that banks were allowed to keep at the bank without having to pay negative interest, it came as a welcome boost for the operative business of the industry. But the companies reacted other than expected and started to deposit more money at the bank – after all, it had become free of charge. Hence the market was devoid of several billion francs of liquidity.

Analysts expect that the transmission mechanism for liquidity will remain impacted as long as the lockdown stays in place. The Swiss money market is just one more actor keenly awaiting the easing of measures taken to stop the virus.