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How safe is your cash in your Swiss bank?

With markets in turmoil, finance in crisis, and banks in breakdown mode, just how safe is your money when you leave it in your Swiss bank?

When you deposit cash in a bank, any bank, Swiss or not, they can then use it (as well as shareholder capital) to lend to customers. That’s how Building Societies originated, using savers’ capital to lend out to borrowers. The more banks lend, the higher their profits. International agreements on banking allow banks to leverage their capital, ie lend it out many times over so that the amount of lending can exceed by some margin the bank’s capital.

Banks have been hard hit

Many banks have been hard hit

When banks make a loss, or write off debts or securities as worth less than they thought they were such as UBS did when it had to write off almost Fr. 40 billion in losses from the sub-prime scandal, this reduces their capital base which reduces the amount of money they can lend, hence the credit crunch. If the losses a bank makes are too high, they may wipe out the capital of the bank totally and that means using depositors’ money to pay off the banks debts. That’s the simple explanation.

Bank failure
So what happens if your Swiss bank goes bankrupt? Not long ago such a thought would be unthinkable, but with so many banks outside of Switzerland having already gone bankrupt or been forcibly taken over due to the credit crunch the question has to be looked at. Many people are now wondering about just how safe their cash is – and you may not like the answer.

First of all, invested monies are not at risk in the same way because these are treated as your assets, and not those of the bank. This means they do not appear on the bank’s balance sheet and are protected through other means.

While your investments should be safe from bank collapse (unless of course they are the bank’s own shares), any cash held in the account used to pay the bank’s fees will come under the deposit protection rules. So, if you hold Fr. 1,000,000 in a so called Depotkonto or investment account with 5% in cash, that Fr. 50,000 is held on deposit and is subject to the rules of deposit protection.

In 2004, the current Swiss Banking Law governing deposit protection was introduced. This says that “the government can leave it to the Swiss Banks (governed and supervised by the Swiss Banking Commission) to set up a so called self-regulatory scheme in order to deal with bank failures – specifically, bankruptcies.

The law requires that this scheme meets the following minimum requirements:

  • Must cover at least Fr. 4 billion of deposits;
  • Must enable the banks to pay out the protected deposit of up to Fr. 30,000 within 90 days;
  • People with less than Fr 5,000 in their accounts must get their money immediately.

If the self-regulatory scheme does not meet these guarantees, the government must then pass a new law. In this case it would be the seven member Bundesrat, and not the Parliament, that would have to pass the law – meaning it would be more quickly implemented (there would be 7 people from four political parties horsetrading over the details rather than over 200!).

This guarantees deposits up to Fr. 30,000 per person per bank. People with joint accounts are treated as if each of them is a separate person, but each of them holds just half the account so the Fr. 30,000 guarantee is split between them. That doesn’t sound too bad, does it? A nice, satisfying guarantee.

But there’s a catch: there’s that overall limit on how much money can be paid out – and this is set by law at Fr. 4 billion, of which only Fr. 2 billion must be held as guaranteed liquidity available at any time. That means the guarantee can only cover the first 133,333 accounts with Fr. 30,000 in – but there are over 7 million people living in Switzerland. Let’s look at how it works.

The 2004 law empowered the Einlagensicherung der Schweizer Banken und Effektenhaendler (ESBE) to act as broker for rescue monies should any member become involved in bankruptcy proceedings. All banks and securities traders operating with a Swiss branch must be members of this association in order to be licensed to trade in Switzerland, and must hold in guaranteed liquid assets its share of the rescue fund.

Each year, every member must report to the Federal Banking Commission the total value of all the “privileged accounts” they are responsible for. A privileged account is merely one that contains cash deposits, and the value adds up the total per client up to a maximum of Fr. 30,000.- so that a client with Fr. 40,000 on deposit would be counted as having Fr. 30,000.- and another client with two accounts with Fr. 5,000 and Fr. 20,000 in respectively would be classed as having Fr. 25,000. Third pillar pensions and Vested Benefits accounts are included in the calculations. This is important, as I’ll explain later.

Once all returns are made, the total amount of deposits are added up and each member is told how much of the total rescue fund they are responsible for on a pro rata basis proportional to the amount of privileged deposits they hold. A bank with 50% of all deposits in Switzerland would therefore have to keep Fr. 1 billion in guaranteed liquidity for immediate use in any rescue, with a liability to pay a further Fr. 1 billion within 90 days of the beginning of the rescue process.

Setting up the rescue fund is important, but claiming on it is probably of more interest to you right now. Let’s say you have a deposit account with Fr. 15,000 in it, a third pillar account with Fr. 7,000 in and Fr. 50,000 in a Vested benefits account (which holds your old employers pension post employment and pre-retirement, or while you are in between jobs). How much would be guaranteed?

The deposit account gets preferential treatment here, so it is covered in full, leaving Fr. 15,000 “headroom”. Your other two accounts share this amount between them on a pro rata basis, so that the third pillar account receives 7/57 x Fr. 15,000 = Fr. 1,842 and the Vested Benefits account receives 50/57ths of the Fr. 15,000 which would be Fr. 13,158.

If you had a little more on deposit as many expats do, the situation could be even worse. Let’s say you had Fr. 65,000 on deposit but the same amount in a third pillar and in a vested benefits account on deposit as in the previous example.

Again, the deposit account gets preferential treatment, but the guarantee limit of Fr. 30,000 applies. This means that you could lose Fr. 35,000 from your deposit account, and everything in your third pillar and vested benefits schemes. Out of a total of Fr. 122,000 in retirement and ready access savings you would only have Fr. 30,000 left.

The worst case scenario occurs when the bank is so large that the total amount of privileged accounts exceeds Fr. 4 billion. This could occur if there were more than 133,333 privileged accounts holding at least Fr. 30,000 each or 800,000 such accounts holding just Fr. 5,000 each.

Imagine a case where a large bank holds 2 million privileged accounts, with a total of Fr. 60 billion on deposit. Actually it is likely the sum would be less than this because not all accounts have Fr. 30,000 or more in them and accounts with more than Fr. 30,000 in them cannot offset those with less in. Let’s lower the total to allow for this lower figure, to say Fr. 40 billion, an average of Fr. 20,000 per account.

Remember, the guarantee is limited to Fr. 4 billion, or a pro rata amount applies. This means that the amount actually covered in this scenario would be just 10% of the guaranteed sum ie Fr. 4 billion divided by Fr. 40 billion meaning your Fr. 30,000 guarantee would only be worth Fr. 3,000.

What happens if the Fr. 4 billion fund has just been used to bail out one bank, and there is no money left in the pot for a second, or third bank bankruptcy? After all, those of you with long memories may remember the US Savings and Loan crisis that occurred under President Reagan, but did you know that there was a similar scandal in 1991 in which the Spar- und Leihkasse Thun went bankrupt? A lot of people lost a lot of money back then.

The existing legislation says that the rescue fund must first be topped up with the receipts of bankruptcy proceedings from the bank that went bust. But if it went bust because it had no assets, this might be limited or incapable of filling up the Fr. 4 billion pot completely. The current law says nothing about this situation, other than to say “the Government would have to pass a new law” which does not mean one actually would be passed to save everything depositors had, it can only be hoped that a law would be passed to save at least some depositor money.

100% Capital Guarantees
So, is there no 100% guarantee of your cash available in Switzerland? Yes, there is. The State owned Post Finance carries a 100% guarantee underwritten by the Federal Government, and many of the state-owned Kantonalbanks offer such a deal, in which your money on deposit with the bank is fully protected by the Canton whose name it carries. Both the Basler Kantonalbank (BKB) and the Basellandschaftliche Kantonalbank (BLKB) carry full guarantees. The Berner Kantonalbank offers a limited guarantee of up to Fr. 100,000, while the Banque Cantonale Vaudoise offers no guarantees beyond the standard one offered by ESBE.

The attraction of the Kantonalbanks for Swiss depositors in the current crisis is well illustrated by the massive amounts of new cash they have taken in this year. Since the beginning of this year, the Basler Kantonalbank has taken in Fr. 1.2 billion and the Baselland Kantonalbank has taken in Fr. 600 million.

If you’re looking for an alternative place for your cash, caution should be exercised when looking at any of the so called “guaranteed” investments which may at first seem attractive as an alternative to cash. If the bank issuing the guarantee itself goes bust, then the guarantee is worthless, as has been shown with the recent scandal involving Lehman Brothers guaranteed products sold by Credit Suisse, despite Credit Suisse literature saying they were capital guaranteed. They were only guaranteed so long as Lehman Brothers existed, and when that bank went up in a puff of smoke, so did any guarantees they had given.

Co-ordinated Action
The good thing is that there has been so much bad news the politicians are moving faster than normal to fix things. The US passed a $700 billion rescue package for banks last week (increasing depositor protection from $100,000 to $250,000) and this week the UK (with depositor protection of £50,000, up from £35,000) set up a £500 billion rescue package of loans, liquidity, and most importantly new capital not through take-over but more sensibly through non-voting Preference Shares which should allow the banks to rebuild their shattered balance sheets and thereby get lending – and the economy – going again.

In addition, Central Banks in the US, the EU, the UK, Switzerland, Sweden and even China all reduced interest rates in a co-ordinated move to reduce the cost of borrowing. Even the Swiss Government is talking about doing something about deposit protection, but don’t expect any overnight miracles – the Swiss system is notoriously slow to make big changes.

Acting Finance Minister Eveline Widmer-Schlumpf (SVP) has said, however, that the Federal Banking Commission had taken supervisory measures and the Swiss National Bank was providing sufficient liquidity to money markets. She was also reported on Swissinfo as saying “The cabinet will, if it is necessary, take further measures for the stabilisation of the finance system.”

The oil price has fallen 40% from its highs earlier this year, and this should reduce food prices as transport costs fall. This will also reduce inflation, helping to reduce the effects of the strictures that the world’s economies are currently suffering.

It won’t be a walk in the park though. Hank Paulson, US Treasury Secretary and ex-Goldman Sachs banker, has said he still thinks there will be more bank failures, and others have said they expect some problems to crop up in the Hedge Fund industry. So we’re not out of the woods yet – but maybe we can see the edge of the road out of the forest?

Edit

On 15th October 2008 the Swiss government decided on a range of temporary measures to increase the security of bank accounts. These measures were put into force on 20th December 2008 and should be replaced by a permanent change of law by 31st December 2010:

– bank accounts are protected up to an amount of CHF 100,000 per bank and client

– 2nd and 3rd pillar accounts are treated separately and are also protected up to CHF 100,000 per bank and client

– the total pot guaranteed by all banks is increased from 4 to 6 billion francs

Comments

Comment from V
Time 12th October, 2008 at 9:16 pm

Thank you very much for this brilliant and informative article.

Comment from Hays
Time 12th October, 2008 at 10:31 pm

Scary. Clearly a worst case scenario. I don’t think this is cause for panic.

From a bank’s view, a customer deposit is considered a liability, not an asset. The loans made from deposits are assets.

Deposit insurance is meant to be a safety net. In many countries, Australia among them, there is no insurance. In others it’s set at a level to protect a majority of savers, but not all.

There are also people who argue that having generous deposit insurance encourages banks to poorer risks, by knowing they will be bailed out.

Note also, that deposit insurance in the UK (35’000 GBP at the time, now 50’000) and the US (100’000 USD) did not stop fearful customers of Northern Rock and Washington Mutual from lining up to demand their money back.

Those seeking a broader understanding of this topic should consider The Economist (www.economist.com). There is also a fairly good overview at Wikipedia, which compares deposit insurance schemes in various countries.

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