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Thread: How Switzerland Saved Its Banking Industry

  1. #1

    Default How Switzerland Saved Its Banking Industry

    Did it?

    What the Swiss Did Right

    The Swiss faced one of the globe’s worst financial-sector blowups. Now they’re setting the gold standard for how to regulate their banks.

    During the financial panic of 2008, the Swiss had more reason than most to be frightened. The country’s banks, dominated by Credit Suisse and UBS, held assets worth an incredible 680 percent of Switzerland’s GDP (compared with U.S. commercial banks’ assets of 70 percent of GDP). No one knew how many of the Swiss holdings were toxic. What everyone knew was that these banks were far too big for tiny Switzerland to bail out in any full-blown banking crisis. Capital flight would crush the Swiss franc and the country’s economy right along with it. There were scary parallels to Iceland, another small nation with an independent currency and outsize global banks. After a severe blowout, Iceland is now in a deep recession and on life support from the IMF.

    Yet today, little Switzerland is a rock in the global tempest. The franc is one of the world’s strongest reserve currencies, and both Credit Suisse and UBS are among the globe’s most soundly capitalized big banks. Capital is flooding into the country and, yes, back into Swiss banks. It’s a far cry from the U.S., where the Federal Reserve is still pumping money into a shaky banking and mortgage sector that shows few signs of healing. Or Germany, another epic victim of the global financial crisis, where politicians fight phantom speculators and each month seems to bring fresh news of previously undisclosed toxic-asset losses. And unlike many of the countries sharing the euro, there was never any worry that Switzerland would not be able to pay back its debts.

    What did the Swiss do right? For one, the country’s regulators and central bank were faster and tougher than most. During the lull in the summer before the collapse of Lehman Brothers in September 2008, the Swiss were hard at work on a plan to deal with troubled assets at UBS, the worst of Switzerland’s problem banks—with a balance sheet more than four times the size of the entire Swiss economy. When disaster struck, the central bank swiftly nationalized part of UBS’s assets and recapitalized the rest. That’s unlike authorities elsewhere in Europe or Washington, who waited until the last minute to stitch together messy bailouts that left many problems to linger.

    Second, the Swiss decided early on that tighter reins on their banks wouldn’t just protect taxpayers from future crises and bailouts, but would ultimately be good for the banks’ own business as well. With trust in the global financial system only slowly re-emerging, the perception that Swiss banks have to adhere to much tougher rules—and are therefore sounder—helps win the trust of Switzerland’s most important customers: the global wealthy who let Swiss bankers manage their fortunes.

    In just about every area, the Swiss are stricter. New plans pushed forward by the Swiss National Bank’s ambitious 47-year-old chief, Philipp Hildebrand, will require UBS and Credit Suisse each to hold 19 percent of their total assets in capital to cover potential losses—almost three times the new global standard of 7 percent that will be phased in by 2019. Swiss banks are also required to hold more cash to prevent bank runs, and in 2009 were among the first to follow new guidelines regulating executive pay and bonuses—widely seen as an incentive to take excessive risks. Above all, Hildebrand has sworn that never again should taxpayers be held hostage to banks that are “too big to fail.” To that effect, regulators have proposed new rules that would force banks to divide their business among separate units that could be liquidated in a crisis without sinking the mother ship—something that banks like Credit Suisse are already beginning to implement. Here, too, Switzerland is far ahead of the pack.

    You’d think Hildebrand would be getting more credit for safeguarding Swiss banking’s future. Instead, the Swiss business press has accused him of being internationally isolated. The Institute of International Finance, an organization that represents the world’s largest banks, has repeatedly warned against individual countries “overreacting” to the financial crisis. Some countries worry that tough, Swiss-style rules will put their own banks at a disadvantage; for some of the weakest banks in Germany or the United Kingdom, new requirements to raise capital might require yet another infusion of taxpayer funds. Now that the crisis is starting to recede into memory, the pressure to regulate may weaken. Yet if the fast return to stability of the country’s banks, economy, and currency is any lesson, the world could do worse than follow Switzerland’s lead.
    http://www.newsweek.com/2010/12/27/h...-industry.html

    I am not all that happy yet. Of course we mastered the crisis, and the situation is now much better than it was two years ago. But the inherent problem is still that there are two banks to big to fail, and to big to save at the same time. As mentioned there is a task force working on a solution for this problem. But it is yet unsure if this task task force actually suggest a solution that has teeth and if this solution will be politicly accepted. It seem that there is a lot of wishful thinking is in the Newsweek article when it comes to that.

    Hildebrand is not that accepted within Switzerland for another reason. The national bank has been totally incapable to do anything against the raising Swiss Franc. The value of the Swiss Franc is currently at a level that is problematic if it stays for a long period this way. So far Hildebrand has rejected to have negative interest rates, and the selling of Euros by the national bank had no effect.

    One question that rises again is, what is the legitimation of the G20 to solve the financial problems of the world? It seems that the membership in this club is based only on political basis. What kind of solutions will the purpose and how would they want to impose them in the biggest financial markets outside the G20?
    "Wer Visionen hat, sollte zum Arzt gehen." - Helmut Schmidt

  2. #2
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    Isn't it also so that part of the problem with the Swiss Franc is the exact thing that saved Swiss banks ? The immense influx of money must have played some role in keeping the banks afloat.
    Congratulations America

  3. #3
    Indeed. And I struggle to believe that it was all aggressive regulatory action -- there are very specific reasons Swiss banks are such a large part of the economy. You have solid banking laws and protection that people have always trusted. Almost as importantly, you have low budget deficits and you don't have many other major economic sectors that could suck up resources.

    The generally high interest rates also help in my opinion. Though I realize it's scary to be so dependent on one sector of the economy. What do you think of some of the initiatives in the CH to spur consumer spending?

  4. #4
    Lower risk => lower returns. Putting extraordinarily stringent regulations and capital requirements on banks may calm markets for a brief period (though I'm skeptical is alone can solve a banking crisis) but in the long run it will really hurt those banks compared to their non-Swiss neighbors.

    Furthermore, a large part of the recovery has to do with stimulatory measures that other countries did to fix their credit markets. Because of the disproportionate size and international scope of the Swiss banking industry, they benefited a lot by the actions of the Fed, Treasury, and other central banks on stabilizing these markets.

    Don't get me wrong - carefully regulated banking systems did survive this downturn in much better shape - countries with low exposure to the MBS and CDS markets had relatively small financial/credit crises and emerged much better from the ashes. But that wasn't the Swiss case - rather, the article seems to argue that stricter regulation now somehow softened the impact of the crisis. I'm skeptical; capital inflows probably have more to do with the strengthening franc than anything else.

  5. #5
    Quote Originally Posted by Dreadnaught View Post
    Indeed. And I struggle to believe that it was all aggressive regulatory action -- there are very specific reasons Swiss banks are such a large part of the economy. You have solid banking laws and protection that people have always trusted. Almost as importantly, you have low budget deficits and you don't have many other major economic sectors that could suck up resources.
    The budget deficit has been restricted in 2003. This definitely has a big impact on trust. But the federal budget is relative small compared to the size of the banks.

    The financial sector is about 12% of the GDP (Despite what Loki is trying to make you believe). This is not the problem, the problem is are the huge amount of assets they hold.
    The generally high interest rates also help in my opinion. Though I realize it's scary to be so dependent on one sector of the economy. What do you think of some of the initiatives in the CH to spur consumer spending?
    Interest rates in Switzerland have been close to zero for years. The same can be said about inflation though.
    Quote Originally Posted by wiggin View Post
    Lower risk => lower returns. Putting extraordinarily stringent regulations and capital requirements on banks may calm markets for a brief period (though I'm skeptical is alone can solve a banking crisis) but in the long run it will really hurt those banks compared to their non-Swiss neighbors.
    We never had high interest rates. The Swiss banks had been known for low risk/safe invests. They try to get this piece of the market again.
    Furthermore, a large part of the recovery has to do with stimulatory measures that other countries did to fix their credit markets. Because of the disproportionate size and international scope of the Swiss banking industry, they benefited a lot by the actions of the Fed, Treasury, and other central banks on stabilizing these markets.
    True. But this effect was partially made up by the whole tax affair. Just remember that the Swiss bank secret is de facto history even it still exists on paper.
    Don't get me wrong - carefully regulated banking systems did survive this downturn in much better shape - countries with low exposure to the MBS and CDS markets had relatively small financial/credit crises and emerged much better from the ashes. But that wasn't the Swiss case - rather, the article seems to argue that stricter regulation now somehow softened the impact of the crisis. I'm skeptical; capital inflows probably have more to do with the strengthening franc than anything else.
    Well we have a chicken and the egg problem here. On of the main reasons for the strengthening franc are the capital inflows.
    "Wer Visionen hat, sollte zum Arzt gehen." - Helmut Schmidt

  6. #6
    Wait, what? My impression is that interest rates have been relatively high. I could be misinformed, but what's your definition of close to zero?

  7. #7
    Quote Originally Posted by wiggin View Post
    Lower risk => lower returns.
    In the long run, that may not be the case (in general, at least). . . a few years ago, I tested several decades of public stock data which showed the opposite (for the same asset class--stocks) happening in the long run.

  8. #8
    Quote Originally Posted by Dreadnaught View Post
    Wait, what? My impression is that interest rates have been relatively high. I could be misinformed, but what's your definition of close to zero?
    I just checked my rates they dropped again. Interest rate had been once ~1% on a debit card account ~2% for a saving account. Now it's 0.125% on my debit card and 1.25% for my savings.

    Mortgages are around 1.5% - 3%
    "Wer Visionen hat, sollte zum Arzt gehen." - Helmut Schmidt

  9. #9
    US mortgage rates have shot up in the past month tremendously to 4-5%+ (depending on terms), and have never been 1.5% ever, at least in this country.

    Interest rates from banks are terrible here. 0.25% on hefty savings accounts, though about 1.25% with only like one (usually only internet-based...) company -- Capital One.

    The disjoint between mortgage/loan rates FROM banks and savings rates (TO banks) is really insane...

  10. #10
    Quote Originally Posted by agamemnus
    In the long run, that may not be the case (in general, at least). . . a few years ago, I tested several decades of public stock data which showed the opposite (for the same asset class--stocks) happening in the long run.
    I was referring to the banks' returns, not the depositors. If banks have a very high CAR by law, they can invest less and presumably receive a lower return on their total assets. I'm not looking at risk-adjusted returns of the bank or the depositors, but lower risk for the depositors (or bank as a whole, since a higher CAR makes it more solvent) results in lower returns for the bank. Having a too-high CAR can be a very very bad thing; the only trick is knowing what's too much and what is too little.

    Quote Originally Posted by agamemnus View Post
    US mortgage rates have shot up in the past month tremendously to 4-5%+ (depending on terms), and have never been 1.5% ever, at least in this country.
    US mortgages are fixed (sorta); virtually no other mortgages are. Thus, their rates will be lower in the current environment.

  11. #11
    Quote Originally Posted by wiggin View Post
    I was referring to the banks' returns, not the depositors. If banks have a very high CAR by law, they can invest less and presumably receive a lower return on their total assets. I'm not looking at risk-adjusted returns of the bank or the depositors, but lower risk for the depositors (or bank as a whole, since a higher CAR makes it more solvent) results in lower returns for the bank. Having a too-high CAR can be a very very bad thing; the only trick is knowing what's too much and what is too little.
    Wait, what's CAR again? I think I see your point but I'm not sure...

    US mortgages are fixed (sorta); virtually no other mortgages are. Thus, their rates will be lower in the current environment.
    Hmm, not sure about that. Anyway, didn't Earthjoker say that (edit) Switzerland mortgage rates are 1.5-3%?
    Last edited by agamemnus; 12-29-2010 at 08:10 PM.

  12. #12
    Quote Originally Posted by agamemnus View Post
    Wait, what's CAR again? I think I see your point but I'm not sure...
    Capital adequacy ratio. Essentially, how much reserves the bank has to hold.

    Hmm, not sure about that. Anyway, didn't Earthjoker say that Germany mortgage rates are 1.5-3%?
    Yes, variable mortgages have lower rates than fixed mortgages, especially when rates are so low - the fixed mortgage market assumes rates will be rising, so banks add more of a cushion rather than take a hit when rates rise.

    It's actually worse, since the US mortgage market isn't actually fixed, but just has an upper bound (because mortgages can be refinanced at will), so banks have even less incentive to offer lower rates.

  13. #13
    Quote Originally Posted by agamemnus View Post
    Hmm, not sure about that. Anyway, didn't Earthjoker say that Germany mortgage rates are 1.5-3%?
    Switzerland. And the reason for the range is exactingly caused by the length of the mortgage.
    "Wer Visionen hat, sollte zum Arzt gehen." - Helmut Schmidt

  14. #14
    Oh, right. Ok, Switzerland. *facepalm*

    That's still very low. The difference in rates between 15 year mortgages and 30 year mortgages is only about half a percent here... 4.81 versus 4.15 according to that site I linked earlier. Does Switzerland have even lower inflation than the US, or is our mortgage market just messed up?

  15. #15

    [y=%, x=month]
    Well there is not much room to 0% here.
    "Wer Visionen hat, sollte zum Arzt gehen." - Helmut Schmidt

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