Who Would Bail Out Switzerland's Banks?

Richard Baldwin of VoxEU gives us a sneak preview of a new article by Jon Danielsson:

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.

This seems right to me. And also very scary, because of one country: Switzerland.

UBS has a $2 trillion balance sheet; Credit Suisse (CS) 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.

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.

Comments

[James Wilson:]

Would UBS failure put Phil Graham in jail ?

No U.S. Taxpayer money for UBS no way no how !!!!!!

2008 Nov 12 04:40 AM

[James Wilson:]

UBS AG - Is the company UBS want to use to get a bailout from the U.S. Government.

2008 Nov 12 04:44 AM

[Steven Hansen:]

ah, the tangled webs we weave. for those who do not understand, either europe, usa and japan pays to save the swiss banks, or they can pay significantly more by not saving them and watching the impact to your banking and financial systems. remember the unintended consequences caused by letting lehman fail - you ain't seen nothing yet.

2008 Nov 12 04:53 AM

[John Cordes:]

While appreciating the interconnectedness, to what rationality can the U.S. bail out giant, over levered Swiss banks over which we have no regulatory control and the opacity of which has been the governments bane for years?

2008 Nov 12 09:02 AM

[mbr:]

9/30/08
UBS total assets: 1.698 trillion (source S&P)
Credit suisse total assets: 1.185 trillion (source S&P)
Swiss 2007 GDP: 0.424 trillion (source CIA)

Does'nt this deflate a bit this scare monger's article?

Put your own crumbling houses (UK and USA) in order before criticizing a hard working and thrifty people who balance their budget, do not pretend to rule the world and avoid being used, like sheep, as proxies to do so.

2008 Nov 12 11:23 AM

[Smarty_Pants:]

Ain't fractional reserve banking just a GRAND idea?

Works really good, ... until it doesn't.

2008 Nov 12 11:54 AM

[Big Al45:]

Maybe we can strike a deal on the Swiss Bankruptcy Laws. Complete disclosure of all UBS depositor information in exchange for bailout money.
Treasury could confiscate the assets belonging to US tax cheats and use that money to offset bailout costs.

Plus, Paulson could use UBS deposit accounts to shore up Goldman Sachs.

2008 Nov 12 04:03 PM

[Urbane Gori...:]

The hard working, thrifty people of Switzerland are not the same as the banks. Factually, every person in the US that is being hurt by the recent economic problems is not a spendthrift. (I'll use myself as an example.. Humbly, of course...)

Switzerland's banks are exposed to issues with emerging markets. For example, the last I heard, they are on the hook for 90% of Hungary's debt. Hungary has problems that are beginning to look like Iceland's.

If the banks of Switzerland get hammered, does that mean that the populace are spendthrifts? Logic says not.

jegan ;-)

2008 Nov 12 04:54 PM