Moody's takes a look at the effects of state guarantees behind the UBS-Credit Suisse merger. The consequences are manageable and remain within bounds. Unless contagion spreads.
Upon UBS's takeover of Credit Suisse, the Swiss National Bank (SNB) provided 200 billion Swiss francs of liquidity, while the Swiss government provided loss guarantee protection of nine billion francs.
While the event is relevant to Switzerland's credit profile and has raised its assessment of banking sector risk, it concludes that «wider credit implications for the sovereign are contained,» according to a report from Moody's rating agency Wednesday.
Financial Stress
Still, there are risks. Switzerland's credit quality could suffer if financial stress manifests itself in the newly formed banking group or a loss in confidence in the broader banking sector significantly raised the likelihood of large contingent liabilities crystallizing on the government's balance sheet, the report warned.
In its overall assessment of Switzerland's sovereign credit profile, Moody's said the banking sector is the main driver of its overall assessment of event risk. The banking system's assets represented about 450 percent of GDP at the end of last year.
«The large size of the combined entity means the system faces even higher concentration risks, which has prompted us to raise our assessment of banking sector risks,» according to the analysis.
Financial Strength
«While unlikely, the need for further government guarantees or direct fiscal support to the banking system alongside a retrenchment in credit provision to the economy would indicate that government financial strength, while still very robust compared to peers, is lower than we have previously thought.»
However, the relatively small share of financial services in the country's gross value added of about nine percent would mitigate the impact on economic strength if Switzerland were to become less attractive as a financial sector destination.
First-Class Institutions
In a negative scenario, a prolonged period of uncertainty about the financial health of the banking industry could lead to a reassessment of the quality of supervision and the authorities' ability to manage these risks. This could affect the assessment of Switzerland's substantial institutional strength.
Long term, it is important to restore investor confidence in the predictability of regulatory decisions to maintain the highest possible valuation of Swiss institutions.
Strong Capital Buffers
The impact on the creditworthiness of the Swiss government is considered by the agency to be limited for the time being, assuming the banking sector crisis does not escalate.
«The decisive and coordinated response of the federal government, the Swiss Financial Market Supervisory Authority (FINMA), and the SNB reinforce our view of Switzerland's significant institutional strength and gives us confidence that they will take future action to maintain domestic financial stability if necessary,» Moody's said.
