Today the Swiss National Bank presented its Financial Stability Report 2009. A large part of which, understandably, is dedicated to giving some historical background of the current crisis from 2007 to now, not specific to Switzerland. In this review the report also describes the measures used to help UBS as follows:
The resilience of UBS, on the other hand, was strengthened by both private capital – some of it already raised in the early stages of the crisis – and a package of government measures taken in October 2008. The main element of this package, put together by the Swiss government, the Swiss Federal Banking Commission (SFBC; now the Financial Market Supervisory Authority – FINMA) and the SNB, was the possibility for UBS to transfer up to USD 60 billion(1) of illiquid assets to a special purpose vehicle (SPV) of the SNB (the SNB StabFund) in order to facilitate their orderly liquidation.
Did they really write orderly liquidation? Yes they did. Interestingly enough, the same language was used in the introductory remarks by Thomas Jordan, one of the three directors of the SNB, to SNBs end-of-year media conference in Zurich in December 2008:
orderly liquidation of troubled assets.
I am perplexed – well not really. This was sold to the Swiss as a transfer of currently illiquid assets from UBS to the SNB StabFund with the idea that there was a chance of recovering most, if not all of the investment and possibly even make a profit, if the assets just were held to maturity.
However, this now sounds more like a permanent liquidation (read write-off) which hardly allows for recovery of all the investments made, let alone a profit.
It is not surprising, since it was clear from the beginning that in order to cleanse UBSs balance sheet, the worthless crap needs disappear from it.
SNBs outlook for 2009, which is already half over but never mind, is for a strong and generalized economic downturn:
A sharp decline in real GDP is forecast form many countries, including Switzerland, in 2009. For instance, the SNB expects the Swiss economy to contract by 2.5% to 3%. The uncertainty regarding the length and severity of this economic downturn is large, however. Given this uncertainty, the SNB uses two scenarios in its stability of the Swiss banking sector. First, a baseline scenario hat represents the most likely developments in economic conditions based on the most recent forecasts. Second, in order to assess the impact of significantly worse developments than currently expected, the SNB also considers an adverse scenario.
Specifically, the SNB finds that the housing market in Switzerland was sound and sharp price corrections were expected to be relatively unlikely.
Credit quality in Switzerland is expected to deteriorate, but not as much as in the US and EU.
Profitability of the Swiss banks will be deteriorating, but unevenly as show in Fig. 1.
The SNB writes (emphasis mine):
The outlook for the profitability of the Swiss banking system remains gloomy. The profitability of both the big banks and the banks with a domestic business focus is expected to be significantly affected by the anticipated deepeneing of the worldwide recession and any associated decline in credit quality in Switzerland and abroad.
Furthermore, and of particular relevance for the two big banks, income from fees and commissions should remain relatively low, due to both cyclical and structural factors. Reputational factors are likely to reinforce the marketwide impact of slowing economic activity and low equity prices on revenue from wealth management and investment banking businesses.
So, we are making the money with fees and commissions and not with brilliant investment decisions then, eh? Nice to hear that admission from the well respected SNB herself.
Fig.1 Profitability of Swiss banks
The Swiss banking market is divided into a home market and an international market. As you can see from the report, the local Swiss banks have done their homework well at home and have not participated in that irresponsibility – at least not too much.
The two big international banks have, and their irresponsibility could well break the country’s neck. The three largest banks in Switzerland control 76% (UBS and CS control 73%, Raiffeisen 3%) of the total assests in the country.
Fig. 2 Structure of Swiss banking sector
In this light, Philipp Hildebrand said in his introductory remarks:
Nontheless, better capital and liquidity requirements do not rule out the posssibility that banks will again face existential difficulties in the future. The SNB therefore considers all of the efforts that are going into facilitating orderly wind-downs of large international institutions in future to be just as important. The lack of any clearly defined and internationally coordinated wind-down procedure contributes to a de facto obligation on the part of the sate to provide assistance to these institutions. Any rescue of a large financial institution brings more than just high costs. The ‘too big to fail’ issue also has a tendency to harbour incentives for banks to enter into excessive risks. In Switzerland, the ‘too big to fail’ question is particularly relevant and, in many respects, unique, given the importance of the big banks for the country’s banking sector and its economy.
One cannot but agree with the moral hazard stuff. Normal, read decent, Swiss citizens, which have been acting responsibly, have paid their bills and taxes and have never succumbed to the greed or shown any criminal intent, are wondering where their bail-out is.
If they have learned a lesson, then it is the one that acting irresponibly bordering on the criminal does pay.
Thanks for nothing.
Full Financial Stability Report 2009: