Switzerland has a problem: its banking system is 4.5 times its GDP

swiss deflation2

Scope Rating | The unprecedented and last-minute deal, to be completed in the coming weeks, should help contain the financial cost of stabilising the hard-pressed Credit Suisse for the Swiss Confederation and also contain potential spillovers to the wider Swiss economy.

The developments highlight the long-standing risks to the economy stemming from the banking system, given its large size relative to the Swiss economy and annual budget. Total assets of the Swiss banking system amounted to CHF 3.5 trillion at the end of 2022, or about 448% of GDP (figure 1). UBS accounted for 132% of GDP at the end of 2022, while Credit Suisse’s much smaller balance sheet accounted for 69%. Thus, the combined balance sheet of UBS and Credit Suisse amounted to about CHF 1.55 trillion, i.e. about 200% of GDP. The merger thus results in a higher concentration of risks for Switzerland.

Beyond balance sheet metrics, the Swiss banking system also contributes significantly to the national economy through its contribution to gross value added (GVA, 5.9% of total on average 2017-2022) and employment (3.6% in 2022 according to BAK Basel).

The Swiss government has used its financial power to help find a solution to the Credit Suisse crisis, providing a CHF 9 billion guarantee (around 1.2% of GDP) to UBS to cover potential losses in excess of CHF 5 billion arising from the liquidation of some Credit Suisse positions. In addition, the government has granted a guarantee of CHF 100 billion (13% of GDP) to the Swiss National Bank (SNB) to provide additional liquidity through a newly created public liquidity backstop (PLB) that does not require collateral.

The liquidity provided by the SNB through the PLB enjoys preferred creditor status, which helps to mitigate sovereign risk. The same applies to Credit Suisse’s large capitalisation and the redemption of the bank’s CHF 16 billion AT1 securities, which increases core equity. Should the SNB incur uncovered losses on any of its exposures, this would affect the Swiss Confederation and the Swiss cantons through the SNB’s annual profit allocations, as was the case when the SNB’s 2022 losses of CHF 133 billion prevented any profit allocation.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.