by Sean Farrell

17 October 2008

from TheIndependent Website




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 crunch.

"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 write-downs.

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 recession.

"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", with the 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 plunged.

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.


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