by Sean Farrell
17 October 2008
After Britain and the US Injected
Massive Amounts of Capital Into Their Banks, Switzerland Has Taken
Emergency Measures to Try to Shore Up
Its Banking System.
In an extraordinary move for a nation proud of
its financial prudence and stability, Switzerland was forced to take
emergency measures yesterday to shore up its two biggest lenders to prevent
a collapse in confidence in the country's banking system.
The state will inject SFr6bn (£3.1bn) into UBS, its biggest bank, in return
for a 9.3 per cent stake, and will allow UBS to unload $54bn (£31bn) of
toxic assets, including sub-prime mortgages and Alt-A securities, into a
fund controlled by the central bank.
Credit Suisse, the No 2 Swiss lender, obeyed instructions from the central
bank by raising about SFr10bn from investors in the market, including the
Qatar Investment Authority, which is already a big shareholder and is a
major stakeholder in Barclays. The fundraising, which allows Credit Suisse
to meet tough new Swiss capital rules, represented about 12 per cent of the
bank's existing equity.
Switzerland had to act to underpin confidence in its prized banking system
after Britain, the US and others announced massive capital injections into
their major lenders. Without doing likewise, the Swiss banks would have been
left exposed to market jitters and speculation.
The country of 7.5 million people houses SFr3.46trn of bank deposits, almost
seven times its gross national product. That is less than Iceland, whose
deposits are nine times GDP, but much higher than the UK where deposits are
close to double GDP.
"It's clear that we have a confidence problem,"
Philipp Hildebrand, the
Swiss National Bank's vice president, said. "It is notably the two large
banks that are affected."
The woes of its banks, and UBS in particular, have rocked Switzerland, where
the financial sector accounts for almost 15 per cent of output. The
government said it did not intend to hold the stake in UBS for many years
and hoped to sell it to private investors soon. It will impose changes in
corporate governance and risk controls in return for the state's support.
The capital increase will lift UBS's tier one capital ratio to 11.5 per cent
by the end of the year from 10.4 per cent. After its fundraising, Credit
Suisse's tier one ratio would have been 13.7 per cent at the end of
September, compared with the 10.8 per cent the bank reported.
The Swiss government also said it would follow other European governments by
increasing its depositor protection scheme from the current SFr30,000 level.
It stressed that the country's other banks were generally sound.
UBS said the government's measures should help it reverse withdrawals of
client assets. Wealthy clients have been taking money out of the bank's core
wealth management business because of a stream of write-downs at the
investment banking division, which expanded into structured credit just
before the market imploded in the summer of 2007.
Net outflows of SFr49.3bn hit the wealth management business in the third
quarter, while the global asset management division leaked SFr34.4bn. The
withdrawals increased as the financial crisis worsened in September after
the bankruptcy of Lehman Brothers in the US. UBS recorded a small net profit
of SFr296m for the third quarter, though it was helped by benefits from the
reduced value of its own debt and tax gains.
UBS said its biggest need was to reduce its exposure to illiquid assets,
whose plunging value has caused massive losses and shattered confidence in
the bank, and that the central bank's fund would help it get back to running
its business as normal.
The investment bank made new write-downs and losses
of $4.4bn on top of $42bn of write-downs since the start of the credit
"All European governments intervened and this left the Swiss banks at a
competitive disadvantage," Dirk Becker at Kepler, the brokerage, told
Reuters. "The Swiss have recapitalized their banks and made them the best
capitalized banks in the world."
Credit Suisse saw strong inflows at its wealth management business of about
SFr14bn in the quarter but made a net loss of about SFr1.3bn due to new
The government also said that if refinancing problems emerged, it would
guarantee banks' new short- and medium-term interbank liabilities and money
market transactions. The move would follow a key step announced by the UK as
part of its rescue package for the sector.
Shares in the two banks rose after the rescue package was announced but fell
at the end of the session in line with the wider market after gloomy
employment numbers from the US increased fears about the world economy.
Credit Suisse dropped 0.9 per cent to SFr45.5 while UBS lost 4.9 per cent,
closing at SFr19.09.
Like other governments, Switzerland has acted to try to stop the financial
crisis wreaking havoc on the wider economy.
With banks refusing to lend to
each other, the cost and lack of credit for small businesses and
corporations threatens to turn the economic downturn into a punishing
"This package of measures will contribute to the lasting strengthening of
the Swiss financial system," the government said. "The resulting
stabilization is beneficial for overall economic development in Switzerland
and is in the interests of the economy as a whole."
Ukraine and Baltic states also hit hard by the financial crisis
With even the mighty Swiss banking system needing government support, it
will come as little surprise that a swathe of emerging market economies are
suddenly looking fragile.
Ukraine emerged yesterday as the winner of the title "the next Iceland",
International Monetary Fund offering the former Soviet republic up
to $14bn (£8bn) to shore up its financial system.
An IMF delegation landed
in the country on Wednesday to try to stabilize the country's battered
banking sector and ailing currency, hit hard by the global financial crisis.
The central bank was forced to impose restrictions on deposit withdrawals
and lending after panicked savers rushed to empty their accounts, draining
the banking system of more than $1.3bn. The authorities also had to rescue
two key banks and battle a sharp fall in the currency as the stock market
Ukraine emerged as the biggest crisis after Hungary agreed to borrow up to
€5bn from the
European Central Bank. Capital Economics warned that there
were risks for a swathe of emerging European economies in the Baltics and
the Balkans, including Lithuania and Latvia.
Their problem is that they have been living beyond their means by borrowing
to finance increases in their standard of living.
Jitters spread to Asia yesterday after Standard & Poor's, the credit rating
agency, warned that Korean banks would struggle to repay their debt.