What state guarantee will fall next?

Three cantonal banks no longer have a state guarantee and a fourth will be added soon. And the other institutes? According to an analysis of finews.ch more could follow soon.

The cantons of Bern and Geneva have abolished them, Vaud never knew one, and the canton of Glarus will soon join the minority of cantons who do not want to be responsible for their cantonal bank in the event of bankruptcy.

In Glarus, the canton’s responsibility has to believe in it for the same reasons, among other things, why Bern and Geneva abolished their state guarantee: a solid crisis.

Billions of copies

In these two cantons it was the real estate crisis of the 1990s that led to the abolition of the state guarantee. Both cantonal banks had speculated enormously and had to be bailed out by the canton for a lot of money (the cantonal bank in Bern had to write off 3 billion Swiss francs, the one in Geneva about 500 million Swiss francs).

Glarner Kantonalbank (GLKB) had to make almost 100 million in commercial customer loans due to the failed expansion strategy in 2008. That made the canton think.

OECD complains

How finews.ch Already reported in June, the Glarus Governing Council calculated that the canton would have to pay between 300 and 350 million francs in the event of a total bankruptcy of the GLKB, which would put the canton in financial difficulties.

The state guarantee is an old braid, they say when you ask at the financial center. The Organization for Economic Cooperation and Development (OECD) complains over and over again that the community develops the economic and social policies of its 30 member countries, distorts the market, creates injustices and therefore must be abolished.

13 swollen benches

And it can also pose a threat to the respective canton, as Bern, Geneva and Glarus show. That’s why finews.ch Glanced up (Graphic below, click to enlarge)which 21 remaining banks with a state guarantee (two cantons, namely Solothurn and Appenzell Ausserrhoden, no longer have cantonal banks) could have the following idea to get rid of their liability^one.

As a method, the total assets of the respective cantonal banks from their annual reports were compared with the gross domestic product (GDP) of the respective cantons. Even if the 2019 balance sheets are compared with the 2017 GDP, because the Federal Statistical Office does not yet have more recent figures, the result is a comparison, certainly quite approximate, that says the following: if a cantonal bank sinks , Canton happens a hole that is greater than the total economic production of the canton in one year.

The result is particularly impressive at the Appenzeller Kantonalbank (APPKB). Its total assets are 3.5 times higher than the GDP of the Canton of Appenzell Innerrhoden. The canton of Glarus was now too hot with its balance sheet 2.3 times larger, and that of Obwaldner, Schwyzer and Graubündner Kantonalbank is more than double the economic output of the respective canton.

The situation has notably worsened over the last decade. For example, APPKB’s total assets have grown 57 percent since 2010, while GDP has only grown 12 percent. The Glarner Kantonalbank’s balance sheet grew 93 percent over the same period, almost doubling, while GDP only grew about 10 percent.

Mortgage business driver

From this it can be deduced that cantonal banks have grown massively in recent years, but have long outpaced the economic development of the respective cantons. This can be explained by the property boom: the total volume of mortgages in Switzerland has grown from 760 billion Swiss francs to more than 1.1 billion Swiss francs in the same period. In the same way, the risk that the canton can no longer pay the bank’s debts increases every year, of course.

In some cantons, discussions about whether or not to maintain the state guarantee are more current than in others. At the beginning of the year, for example, a majority was formed in a commission of the Grand Council of the Canton of Aargau to abolish the state guarantee of the Aargauische Kantonalbank. The government and later the parliament itself clearly rejected the proposal, but the issue is likely to come up again.

How long more?

The same is the case with Basler Kantonalbank (BKB), where the question has long been in the room whether, with the incorporation of Bank Cler by BKB, the state guarantee will also apply to the subsidiary operating domestically. Under the constitution, the state guarantee would not apply. Here, too, critical voices demanded that cantonal responsibility be abolished completely to finally answer the question.^two.

Therefore, the state guarantee of cantonal banks will be challenged again and again in the future. It is unclear which canton will abolish next and how long it will take for cantons to become a thing of the past.

^oneAt least formally, because as the example of the canton of Vaud shows, which injected 1,250 million francs to the Cantonal Bank of Vaudois (BCV) after the turn of the millennium and after a crisis, even without a state guarantee, the canton has to give one step one way or another if it is by the Canton systemically important state institute in front of a pile of broken glass.

^twoPrecisely on Wednesday (today) the Basel governing council decided to review the BKB law. The formation and management of a group must now be explicitly regulated in this law. The bank also has to pay an additional 1.4 million francs to pay off the state guarantee because the balance has grown significantly in recent years.