Pandemic tests stability of Swiss banking system

SNB vice-chairman Fritz Zurbrügg believes "the outlook is fraught with high uncertainty". Keystone / Anthony Anex

Swiss banks have weathered the financial impact of the Covid-19 pandemic relatively well so far, but may face difficult conditions in the coming months, the Swiss National Bank (SNB) has warned.

Releasing its annual Financial Stability Report on Thursday, the SNB pointed to three major threats still facing banks: financial market volatility, the heightened risk of loan defaults and continued negative interest rates.

“The outlook is critically dependent on the evolution of the pandemic and on how authorities, companies, households and the banking sector respond to it,” stated the Financial Stability Report.

The central bank believes the most likely outcome of the pandemic is a partial economic recovery in the second half of this year. But Swiss economic growth is expected to fall by 6% this year and is unlikely to recover to 2019 levels until 2022.

“At this stage of the crisis, uncertainty about the economic and financial outlook is unusually high, and significantly worse outcomes must also be taken into consideration,” the report warns.

The SNB said that Switzerland’s 237 banks had been able to weather the storm so far thanks to a tightening of regulations over the last 10 years that have obliged them to set aside more liquid assets to cope with crises. Switzerland has named five banks – UBS, Credit Suisse, the Raiffeisen group, PostFinance and the Zurich Cantonal Bank – as “too big to fail”.

Uncertainty

The biggest unknown is how many companies and households will default on loans in future. “The outlook is fraught with high uncertainty,” said SNB vice-chairman Fritz Zurbrügg at a media conference on Thursday.

Many banks have issued far more credit than normal to bail out struggling businesses. Since mid-March some 130,000 bridging loans have been issued, amounting to more than CHF15 billion ($15.8 billion). The SNB has guaranteed some CHF10 billion of these loans.

Mortgage loans may also come under pressure if people lose their jobs or companies run into financial difficulty as a result of the pandemic. The SNB believes that the money set aside by banks to cover defaults is still “adequate overall”, but Zurbrügg warned that some banks “are expected to incur losses”.

The SNB is keeping interest rates in negative territory to prevent the Swiss franc from appreciating too much and too fast against other currencies. On Thursday, the central bank again said it would keep its monetary policy of minus 0.75% interest rates unchanged.

The bank has been forced to intervene in the currency markets as investors rushed to safe haven assets such as the franc. The situation was particularly volatile in March, the SNB says, but the pressure on the franc has relaxed somewhat since mid-May.