The coronavirus crisis is primarily causing an economic crisis. But it also has the potential to damage the global financial system. Many experts believe that the current economic crisis could be far more serious than the financial crisis of 2008.
Bank stocks have been hit hard
Major banks have seen their stocks fall at disproportionately high rates. UBS stock fell by more than 44% in the 4 weeks leading up to March 16, 2020. Credit Suisse saw its stock fall by 51% over the same period. To put that in perspective, the SMI fell by a much lower 26%. Other Swiss banks to see major drops in their stock prices include SPI-listed Julius Baer (-47%), Cembra Money Bank (-34%), Valiant (-30%) and the St. Galler Kantonalbank (-28%).
Bank stocks which fell at disproportionately low rates include the SPI-listed Basler Kantonalbank (-19%), Luzerner Kantonalbank (-19%), Thurgauer Kantonalbank (-18%), Banque Cantonale du Valais (-15%), Berner Kantonalbank (-15%), Banque Cantonale Vaudoise (-15%), Glarner Kantonalbank (-13%), Graubündner Kantonalbank (-13%), Banque Cantonale de Genève (-11%), Basellandschaftliche Kantonalbank (-8%), Hypothekarbank Lenzburg (-8%) und Bank Linth (-6%).
Could the coronavirus scare lead to bank failures?
“If the crisis leads to defaults on business loans and mortgage repayments, it could put banks at risk,” states moneyland.ch CEO Benjamin Manz. Banks in many countries are potentially at risk.
But how serious is the risk of bankruptcy for Swiss banks? “There is no reason to panic,” believes moneyland.ch CEO Benjamin Manz. Rules governing cash reserves were tightened after the last financial crisis in 2008. Swiss banks are rightly believed to provide above-average financial security.
Switzerland’s five too-big-to-fail banks – Credit Suisse, Raiffeisen, PostFinance, UBS and the Zürcher Kantonalbank – are subject to tighter regulatory requirements. These requirements have made the too-big-too-fail banks more secure than they were prior to the last financial crisis.
However, there is no sure guarantee against bank failure. Depending on how the coronavirus crisis plays out, it could under the right circumstance bankrupt a Swiss bank. In its February 2020 briefing, Swiss financial supervisory authority FINMA criticized the contingency plans of PostFinance, Raiffeisen and the Zürcher Kantonalbank, saying they were not yet practically applicable.
Good credit ratings for Swiss banks
Swiss banks are relatively secure by international standards. This is reflected in the good to excellent credit ratings given to some Swiss banks by major rating agencies Standard & Poor’s, Moody’s and Fitch. You can find a list of Swiss bank credit ratings here.
The Zürcher Kantonalbank has received the highest ratings, largely because it is backed by a state depositor protection guarantee from the Canton of Zurich. It is rated as one of the most secure banks in the world.
But as the last financial crisis showed, these ratings must be viewed with caution. Additionally, most Swiss banks have not been audited by these expensive rating agencies.
What happens when a bank goes bankrupt?
Depositors are partially protected against the risk of Swiss bank failures. This security is made up of three protective mechanisms. The first mechanism is payment of secured deposits. The second is the depositor protection guarantee and the third is bankruptcy privilege. The balances of private accounts (checking accounts), savings accounts and business accounts are examples of deposits which are both secured and guaranteed. Pillar 3a balances and vested benefits qualify as secure deposits but are not guaranteed.
When assets are categorized as secured deposits, the failed bank must repay up to 100,000 francs per customer and bank from its cash reserves as quickly as possible.
If the bank does not have enough cash reserves to repay up to 100,000 francs per customer, the depositor protection guarantee from Esisuisse comes into play. This scheme guarantees repayment of up to 100,000 francs per customer and bank. A major limitation of this guarantee is that compensation is limited to a total of 6 billion francs for all Swiss bank customers combined. In the event of a major bank failing or multiple smaller banks going bankrupt simultaneously, the 6 billion francs of coverage would only cover a fraction of bank balances.
Balances which are not repaid by the bank or the depositor protection scheme fall under the bankruptcy privilege. Secured deposits of up to 100,000 francs per customer and bank fall into the second creditor class of bankruptcy privilege. These debt claims have a higher priority than other debt claims against the bank, but there is no guarantee of repayment. You can find more information on bank failure procedures here.
Banks with state depositor protection guarantees
The state guarantees which back many cantonal banks is far more comprehensive than the Esisuisse depositor protection scheme. When an eligible cantonal bank fails, the cantonal government backing it accepts responsibility to repay depositors in full. 21 cantonal banks are backed by unlimited state depositor protection guarantees by their corresponding cantons. The cantonal banks of Bern, Geneva and Vaud are no longer backed by state guarantees. The same applies to PostFinance, which was previously guaranteed by the federal government.
But even banks which do not hold state guarantees can apply for financial assistance in the event of bankruptcy. This happened during the financial crisis of 2008, when the Swiss federal government saved UBS from bankruptcy with a multi-billion-franc rescue package.
Precautionary measures to minimize risk of loss
“If you want to minimize risk, dividing your money between multiple banks provides a simple way to do this,” recommend Benjamin Manz. This is especially true for depositors with high bank balances of several thousand francs or more because guarantees are limited to 100,000 francs per customer and bank. Holding part of your wealth in cantonal banks which have state guarantees is another way to minimize risk.
Diversifying your investments is another way to minimize risk. That means not putting all of your eggs in one basket. Holding assets in precious metals, stocks, passive exchange traded funds (ETFs) and other investments in addition to savings account and pillar 3a account balances can make sense from a risk perspective. Unlike bank account balances, shares in stocks and funds are not debt claims but personal property. In the event of a bank failure, these must be returned to their legal owners.
Particularly cautious bank customers can consider holding part of their assets in bank safe deposit boxes precious metal bullion, cash, or other physical valuables. Even the most affordable bank safe deposit boxes can normally hold several million francs in one-thousand-franc banknotes, as moneyland.ch calculations reveal. Unlike account balances, which are debt claims, the contents of safe deposit boxes are the personal property of their legal owners.
More on this topic:
Bank bankruptcies: What happens to your money?
Comparisons: Bank accounts and cards
Comparisons: Investing and retirement
Comparisons: Mortgages and loans
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