The steep slippery slope of banking: where to next?

Bern, Switzerland (GenevaLunch) - The Swiss government, with the Swiss National Bank and the Federal Banking Commission, announced measures before the Swiss stock market opened Thursday to “further stabilize ” and “to sustainably strengthen confidence” in the Swiss banking system as a precaution against more meltdowns in global banking. At the same time UBS and Credit Suisse announced preliminary third quarter results, with UBS showing a profit of CHF296 million but net withdrawals during the quarter of CHF50 billion, while Credit Suisse announced an expected loss of CHF1.3 billion.

Trading early Thursday saw the share prices of both banks down, UBS by 6.4% and Credit Suisse by 9%. Markets in Europe and Asia saw heavy selling off following the worst market drop since 1987 in New York, with gloomy reports coming in about the economy.

Key elements of the Swiss bank package:

• UBS, “particularly affected” by the banking crisis, will be able to sell up to CHF60 billion in “illiquid assets” to an ad hoc company “for orderly liquidation”
• to help reinforce the bank’s capital base the government is taking out a CHF6 billion loan in mandatory convertible notes, which gives  the government about 9% of the bank’s capital stock after the loan is converted
• the Swiss Federal Banking Commission is adding  a third “pillar” to the two existing requirements for capital minimum requirements for banks, “an additional capital buffer, which should better cover the systemic risks of the big banks” and the new capital increase announced by Credit Suisse as well as the UBS capital increase thanks to the federal loan “mark a significant step” towards this
• Bank deposits guarantees, currently capped at CHF30,000 per person, will see a “moderate increase” during Parliament’s winter session, but a thorough review of the deposit guarantee scheme is being undertaken and the Federal Council expects a proposal by March 2009 to improve the system.

The Federal Council notes in its announcement that it “does not regard the participation as a long-term commitment on the part of the Confederation. Taking into account market conditions, it will sell
this on to private investors as soon as possible.” The loan will not give rise to a lasting debt but will be covered by budget surpluses.

In a coordinated move, Credit Suisse announced a capital increase of CHF10 billion, with Qatar Holding as the largest investor.

Swiss Federal Council press release

Related stories, Bloomberg, with analysts’ reactions and the Financial Times

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