The sub-prime quagmire: what in the world is happening to the big Swiss banks? At UBS and Credit Suisse, the past few months have been marked by red faces, huge writedowns and job losses. Swiss News takes a closer look

0 Comments | Swiss News, August, 2008 | by Faryal Mirza

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Switzerland's two largest banks, UBS and Credit Suisse, have both suffered heavily from the fallout of the sub-prime mortgage crisis in the United States. UBS came away with more than burnt fingers; it wrote off more than SFr 38 billion, announced thousands of job cuts worldwide and secured two injections of new investment capital.

It therefore has the unfortunate distinction of leading European banks in total losses from the U.S. sub-prime crisis, and is second in the world only to Citigroup, which lost more than SFr 43 billion. Credit Suisse is tenth among the world's 50 worst hit banks, with writedowns of more than SFr 9.5 billion, according to figures released by Bloomberg at the end of May. The writedowns also resulted in its first quarterly loss in five years.

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UBS, for its part, tried to explain why things had gone so badly wrong dabbling in American mortgages. In a shareholder report earlier this year, the bank blamed efforts to maximise revenues, an over-reliance on credit ratings and an imbalanced compensation system.

There was a failure to take into account at an early stage whether such investments were sound, leading to a "lack of comprehensive sub-prime risk assessment".

As a result, heads rolled in the executive ranks and chairman Marcel Ospel tendered his resignation.

Big risks, big bucks

So, why did banks across the globe take such a gamble on the American market? The answer seems to be old-fashioned greed, if the response of the Swiss National Bank (SNB) is anything to go by.

"International banks have been increasingly vulnerable over the last few years--vulnerable because of their thirst for profit and their underestimation of the ensuing risks," president Jean-Pierre Roth said in April.

Roth added that the risk-assessment systems at the banks had shown their inadequacy, with actual losses going over and beyond those projected by statistical models.

"It illustrates that no model can do complete justice to the complexity of financial instruments and the economic environment in which banks operate these days," Roth said.

James Nason of the Swiss Bank Association told Swiss News that the banks would learn much from the recent crisis:

"At the end of the day, this is going to prove a very salutary stress test that has everyone examining their risk management procedures. The financial sector will emerge stronger from this crisis," he said.

Tarnished reputation

That said, the reputation of Swiss banks in international circles seems to have taken quite a bashing.

Leading financial economist, Darrell Duffie of Stanford University, currently a visiting professor at the Swiss Finance Institute, told Swiss News that the image of Swiss banking has been tarnished by recent events. However, the ramifications are not black and white and not all negative.

"Switzerland's reputation as a banking centre is not helped by this, but the losses did not occur in the core area of Swiss banking's reputation in private wealth management," Professor Duffie said.

He added that few, if any, can match Switzerland's place in private wealth management.

A quick survey of passers-by outside a branch of UBS in the Swiss capital of Bern revealed dismay with the situation.

"I am shocked ... shocked that this could happen to Swiss banks," said one woman in her fifties.

Another passer-by, a man in his thirties, shrugged when asked what he thought of the losses clocked by UBS and Credit Suisse.

"This is what happens because of greed. These Swiss banks tried to do business the American way to make more and more money ..." he said.

Relativity

Nason of the Swiss Bankers Association emphasises that it's important to keep things In perspective.

"There are more than 300 banks in Switzerland and this financial crisis has affected those very few Swiss banks that are active in the international investment banking business, which boils down to UBS and Credit Suisse," he said.

Furthermore, "it's not a crisis in the Swiss financial system, it's a global crisis that's affecting all banking sectors around the world and many financial institutions too."

UBS is also, "aware that its image has been damaged and that it has some repairing to do", said Jurg Zeltner, its head of European wealth management.

"Negative perceptions cast shadows over our business. We have to live with it. It will affect growth," Zeltner told the Financial Times Deutschland in June.

"It will take time. I don't believe that it will take ten years but it will definitely require years and not months," he said, referring in particular to Switzerland.

He anticipated that the process would run its course more quickly in the United States, where a lot of banks were in the same boat.

As Swiss News went to press in June, the SNB announced it was to tighten the screws on big banks like UBS and Credit Suisse by imposing higher capital reserves.

"Their size and importance for the Swiss economy justifies especially prudent decision-making when determining the level of their capital base," it said in a report.