Switzerland’s famous for chocolate, cheese, knives, neutrality and banking. It’s the latter that could be problematic.
From VoxEU:
In this crisis, the strength of a bank’s balance sheet is of little consequence. What matters is the explicit or implicit guarantee provided by the state to the banks to back up their assets and provide liquidity. Therefore, the size of the state relative to the size of the banks becomes the crucial factor. If the banks become too big to save, their failure becomes a self-fulfilling prophecy.
That has some commentators worries, most notably, Felix Salmon at Portfolio.com:
This seems right to me. And also very scary, because of one country: Switzerland.
UBS has a $2 trillion balance sheet; Credit Suisse has another trillion on top of that. Call it $3 trillion between the two of them, which is about ten times Switzerland’s GDP of $300 billion or so. Now that’s what I call too big to save. Oh, and did I mention? At the end of 2007, Credit Suisse was levered by more than 40 times; UBS was levered by more than 64 times. A 16% fall in UBS’s assets would wipe out not only all of its equity but 100% of Swiss GDP on top.
To which we reprise this chart from Citi, at left, with Credit Suisse and UBS highlighted in vivid (scrawled) red circles — the colour of blood, and also the same shade as used on Switzerland’s national flag. It shows European bank assets relative to their country’s GDP and it is, as you can see, scary stuff.
UBS has the second - highest proportion of assets relative to GDP next to Kaupthing — one of the Icelandic bank that err, brought down Iceland’s banking system. In Iceland’s case the IMF and some of the island’s Nordic neighbours jumped in with a rescue. But whereas Iceland’s banking sector liabilities stood at 850 per cent of GDP, according to Deutsche Bank, Switzerland’s, as noted above and at left, could be much higher.
Who then, will save Switzerland should the banks fail? From Salmon, again:
This could be the first make-or-break economic issue to face Barack Obama: if it came to it, would Treasury bail out UBS? I’m sure it would try to get European governments to pitch in too, and the Swiss, of course, to the extent that they can. But I’m sure I’m not the only person praying that UBS never comes close enough to the edge that we have to find out.
Related links
I was a Swiss banker - Youtube
Are European banks too big to fail? - FT
Who would save Switzerland’s banks - Felix Salmon
How bad could things get? Lessons from Iceland - VoxEU
The next Iceland cometh - The Economist.com
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