Switzerland: politicians need to act now
Hansruedi Ramsauer is one of the foremost German-language finance bloggers, writing over at the Swiss site Zeitenwende. In a recent post, he draws attention to the dire state of Swiss banking and calls on Swiss politicians to act now to secure the industry during this global credit crisis.
With UBS due to report earnings and fears running high about writedowns and job losses at the venerated Swiss bank, Zeitenwende’s call is urgent. The solution, however, is still murky.
Below is the translation of his post from the original German.
Swiss politicians are called to act now
Politicians of every stripe have been swearing to the citizenry, almost mantra-like, that our banks are safe — even as the horror scenario of a bank run menaces them. However, the unwillingness of the banks to lend to one another shows how credible such statements are. The interbank market has completely dried up.
Why should the people trust politicians, if the banks themselves have no trust? Who knows better here?
These political slogans are anxiety pills [dispensed] in order to forestall the inevitable. But the inevitable has already become fact in many places – the promises of bank managers and politicians in recent months have mostly turned out, just days later, to have not been worth a single cent.
The words of the new Swiss Finance Minister Eveline Widmer-Schlumpf exemplify this:
The big [Swiss} banks “belong to thewell capitalised banks, as they always have,” the Minister said.
The banks are well-capitalized banks only on the basis Bank for International Settlements (BIS) risk models. The unfortunate thing is that these risk models have failed. If one uses the core capital ratio as a basis for security, then things look bleak.
More information here: Is the BIS is the cause of the credit crisis?
At UBS, share capital of 44 billion Swiss francs stands against a balance sheet total of 2,077 billion Swiss francs [$2 trillion US]. This gives an equity ratio (core capital) of 2.11 percent. (Source). A year ago, 51 billion Swiss francs stood against total assets of 2,539 billion Swiss francs [nearly $2.5 trillon US]. At the time, the equity ratio stood at 2%. The financial crisis was, therefore, not surprising — the same is true for many other banks with comparablly high leverage (use of debt).
The losses at UBS in the American mortgage market were, when compared with total assets of CHF 2,539 billion and with the low equity, FATAL! However, UBS was lucky because the crisis hit it with its full force first, so that it could increase share capital and shrink the balance sheet sooner than many others.
Today, UBS is in relatively good condition in comparison to the other heavyweights in the financial industry. The situation is still catastrophic with recession in Europe and the U.S. looming. You do not need much imagination to estimate how little it would take for UBS to crater on a share capital raio of 2.11 percent. The fact that other European banks are worse off or that Credit Suisse is not in much better shape, should be of little comfort.
Back to politics: The fact that Minister Widmer-Schlumpf is passing out anxiety pills to calm investors and customers of big banks is, from a national political perspective, understandable if not mandatory. However, merely hoping that one could slide through this crisis is not a strategy for a country whose financial industry is one its major employers and taxpayers. So what can one do?
An estimated 600 billion Swiss francs are lying in Swiss pension fund coffers. The amount accumulated and invested in the financial markets per capita is a record worldwide. The financial crisis would have destroyed decades of provisions made by Mr. and Mrs. Swiss overnight. But thanks to world-wide state intervention in favor of overly indebted financial institutions, this capital – despite still unknown losses – has remained relatively stable.
A large part of this capital flowed until now into the bond market and financial institutions, which have long dominated that market. But this is history now. Investors, just like the pension funds, no longer want these bonds in their portfolios – so large is the uncertainty. Such investor behavior is increasingly drying up liquidity, and it’s only a matter of time before other companies, which have financed themselves in the short-term capital markets, get into difficulty.
Now for my solution
UBS and CS are, on the one hand, too big to fail for Switzerland. However, Switzerland is also too small to save the big banks. Since the [Swiss] Confederation cannot draw upon sparring partners in the EU, it needs a different solution and my solution is: Pension funds!
The pension funds can re-capitalize the major Swiss banks. The yield, in a purely economic sense, would be many times greater than current investment returns — if the big banks can be saved long-term and if no tax funds are needed and if — and this is important — the paralyzing fear of all Swiss citizens that their savings will taken in a single stroke can be laid to rest.
Jetzt ist die Schweizer Politik gefordert – Zeitenwende