Now Switzerland Is Helping Its Banks

Even the Swiss, long known for their financial prudence, were forced into bank bailouts, with an Oct. 16 rescue plan for UBS and Credit Suisse

By Sean Farrell

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 (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 (CS), 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 writedowns 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 writedowns and losses of $4.4bn on top of $42bn of writedowns 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 recapitalised their banks and made them the best capitalised banks in the world."