Cantonal banks crippled by bad debts

Several cantonal banks have suffered as a result of non-performing loans swissinfo.ch

The cantonal bank of Vaud is the latest to need a state bailout after being brought to its knees by a string of bad debts.

The crisis at Vaud cantonal bank (BCV) stems from its rescue of other struggling local banks in 1990s, and shows how vulnerable these cherished establishments are to non-performing loans.

Following a new audit, the Lausanne-based BCV, the fourth biggest bank in Switzerland, announced it had debts of SFr2.3 billion.

It said was increasing its credit risk provisions to SFr1.7 billion ($1.03 billion). This will involve a recapitalisation of SFr600 million, half of which will be met by the cantonal government, which is the majority shareholder.

The difficulties at the BCV follow a major scandal involving Geneva’s Cantonal Bank (BCGe). That bank is in far worse shape than its Vaud counterpart, having accumulated bad debts worth more than SFr5 billion and forcing the cantonal government to step in and introduce a raft of rehabilitation measures.

Other cantonal banks – in Jura, Valais, Bern, Solothurn and Appenzell Outer Rhodes – have also encountered problems in recent years. Bern’s cantonal bank was forced to “dispose of” SFr6.5 billion in non-performing loans, while those in Solothurn and Appenzell were taken over by UBS.

While each case is distinct, the common thread is bad debt.

Problem of transition

“The cantonal banks have traditionally tapped into the local savings market and redistributed the money in the form of loans, granted at preferential rates and not always according to market criteria,” says Jean-Christian Lambelet, of Lausanne University’s Créa Institute of Applied Macroeconomics.

“Times have changed. Capital markets are integrated and such institutions are no longer competitive, and the problem is one of transition,” he told swissinfo, pointing out that some cantonal banks, such as the one in Lucerne, have managed this transition well.

There are 24 cantonal banks in Switzerland, wholly or partly owned by their cantonal governments. They have always enjoyed the reputation of being benevolent institutions with close ties to their client base.

But their mission to support the local economy – often stepping in when one of the big banks refuses a loan – leaves them particularly exposed during economic downturns. The BCV has 70 per cent of the local small and medium-sized enterprise market in its canton, as well as 45 per cent of mortgage loans.

Enforced takeovers

The cantonal banks were also badly hit in the 1990s as a result of their over-exposure in the property market and of bad debts inherited through mergers.

That is true of the BCV. Its current predicament can be traced back to 1993, when the cantonal government forced it to rescue the failing Vaud Credit Bank. Two years later it swallowed up all the other cantonal financial institutions – and SFr3 billion in non-performing credits to boot.

Before these enforced takeovers, the BCV was well on its way to becoming a “normal bank”, Lambelet says. “If it wasn’t for the merger in 1993, the BCV would be considered a sound bank,” he adds.

In a referendum three months ago, the people of Vaud rejected a proposal to make the BCV completely private. That decision is a double-edged sword:

“People still think of the cantonal bank as a neighbourly, benevolent institution. If they had accepted the notion of a private bank, then the canton would not have had to help increase its capital. In the last analysis, it’s the taxpayers who will have to contribute,” Lambelet says.

by Roy Probert