The Collapse of the Savings & Loan Bank Thun in the Year of its 125th Anniversary (1991)


Research Paper (postgraduate), 2021

28 Pages, Grade: 1.0


Excerpt

TABLE OF CONTENT

0. Introduction

1. The regional bank crisis
Characteristics of the Swiss banking sector in 1991
Structural changes in the banking sector
Macroeconomic developments
Comparison to other crises
Savings & Loan bank Thun (SLT) in the narrative of the regional bank crisis

2. The case of the Savings & Loan bank Thun (SLT)
Chronology of the Savings & Loan bank Thun's anniversary year 1991
Savings & Loan bank Thun's credit activity
Supervision problems/ auditors' failures

3. Why was the Savings & Loan bank Thun (SLT) not bailed out?

4. Conclusion

5. Bibliography

0. Introduction

The Savings & Loan bank Thun (SLT) was declared insolvent in October 1991, the first year of the regional bank crisis in Switzerland. Pictures of the bank run went around the world and scratched on the extraordinary reputation of Swiss banks. In contrast to other banks who were bailed out by cantons or acquired by bigger banks, the SLT got liquidated in an expensive process that came to an end after 14 years in 2005. The liquidation capital finally amounted only to roughly 60% of the liabilities and that is why the event remains as a trauma in the minds of the region's people.

The collapse of the SLT was the motivation to revise the Swiss banking legislation dating back to the 1930s1. It constituted the other comprehensive revision of banking legislation in the last 90 years in Switzerland next to the revision of the too big to fail legislation in the aftermath of the subprime crises and the related UBS bail-out in 2008.

According to Professor Dr. Suzanne Ziegler2, who is to my knowledge the main expert of the regional bank crisis in Switzerland3, other Swiss banks faced similar problems as the SLT, but the latter had bad luck to be the first who got into trouble.4 This statement will be challenged and instead it will be arguedthat the SLT was the first regional bank because it had more severe and not similar problems as other regional banks. Though data for a detailed comparison is not available, this paper will show that real estate prices on a national level faced heavy declines only after 1991. Hence, either the region of Thun experienced higher price declines already in 1991, which cannot be tested, since regional data is not available, or what will be argued, the SLT was mismanaged and thus more vulnerable tothe massive interest rate hike by the SNB in 1989 than other (regional) banks.

1. The regional bank crisis

Literature on the Swiss regional bank crisis is scarce as well as uncomprehensive and on the case of the SLT to my knowledge basically inexistent. This might be due to a lack of data (e.g. regional data) or access to data (bank statements of non-stock-exchange listed regional banks not public, SLT documents in the state archive of the canton of Berne not publicly accessible for 30 years). In the few literature, such as Bank for International Settlements (2004), Swiss National Bank (2007) or Mauchle (2014), the case of the SLT is not investigated separately, but included in the general narrative of the regional bank crisis. This narrative is a combination of structural problems with lack of competitiveness and the macroeconomic developments on a global and national level. The interaction and causalities, as usual in the complex system of the economy, were reciprocal. For the sake of overview, the two are nevertheless separated in short, with a focus on the macroeconomic developments. But before, the characteristics of the Swiss banking industry will be outlayed.

Characteristics of the Swiss banking sector in 1991

A key feature of the Swiss banking system is its segmentation.5 There were 480 banks operating in Switzerland as of end 1991, of which 130 were foreign controlled6. The banks operating in Switzerland can be classified into five highly heterogeneous segments7:

- Big banks, 4 at the time, that later merged (two each) to United Bank of Switzerland (UBS) and Credit Suisse (CS): these were already large and complex universal financial institutions that operated globally and offered a wide range of products. At the end of 1991, 49% of the balance sheet sum as well as employees among Swiss banks could be attributed to these four.8
- Cantonal banks: 28 banks that were in part or in full owned by the cantons. They differed massively in their size. While the big cantonal banks had a lot in common with the big banks, the middle-sized and smaller institutes were rather comparable to regional banks. Even though their focus was still the saving and mortgage business, the cantonal banks were mostly universal banks and accounted for about 20% of Swiss banks' balance sheet sum.9 10 Some of the larger cantonal banks were and are also active globally (e.g. Zurcher Kantonalbank ZKB).
- Regional and savings banks: 189 were counted in 1991. This group over time also had followed the trend to universal banks with a wider range of activities. That is why they had become similar to cantonal banks, though with differences in the legal form and in the usually geographically narrower area of activity. They were widely represented in the larger and regionally diversified cantons Berne and Aargau and accounted for 8.3% of Swiss banks' balance sheet sum.10
- Raiffeisen group and Federation Vaudoise des Caisses de Credit Mutuel: these 2 credit cooperatives with more subsidiaries than any of the other mentioned groups but compared modest balance sheet sum in 1991 focused on mortgage lending in rural areas. They nevertheless have been expanding into the cities in the last decades.
- Private, brokerage and foreign banks: these banks were/are engaged primarily in portfolio management.11

Structural changes in the banking sector

Till the late 1980s, “banks had restricted competition in the Swiss market for years through cartel agreements under the aegis of the Swiss Bankers Association”12, till such agreements were removed “partly voluntarily and partly in response to pressure from the Competition Commission”13. Less profitable banks such as regional banks that had managed to survive as a result of these agreements thus found themselves facing difficulties, at the latest when economic conditions worsened, as will be described in the next section. The Swiss Federal Banking Commission (SFBC) stated in its annual report 1991 that “the network of banks is measured on the current and future demands too dense. [...] A structural adjustment and redimensioning is inevitable [...]”.14 It resulted in a consolidation of the banking sector through mergers and acquisitions, where “between 1991 and 1996, more than half of Switzerland's 180 or so regional banks disappeared”15.

Macroeconomic developments

The years 1983 - 1990 constituted a boom phase for the Swiss economy, enhanced by for the time relativelylow official discount rates of 4% at the end of the years 1883-1886.16 In 1987, after the stock exchange crash in the USA, the discount rate was lowered to extraordinary low 2.5% and raised by 1 percentage point to 3.5% at the end of 198817. During the year 1989, it was raised to 6%, where it remained in 1990, and during 1991 it was raised even higher to 7% due to inflation levels above 5% in 1990 and 199118.

The overheating of the economy in the second half of the 1980s and the low interest rates had resulted in spiralling property prices. “The property boom was at once the cause and the result of rapid expansion in bank lending. On the one hand, higher prices enabled borrowers to borrow larger amounts; on the other, the additional loans fuelled demand for real estate and pushed up prices”19 The mortgage volume grew massively from 1981 to 1991, as illustrated in the following graph, first because interest rates were favourable until 1989 and secondly, because real estate was perceived as a save investment alternative after the stock exchange crash of 1987.

Abbildung in dieser Leseprobe nicht enthalten

Data source: Swiss National Bank (SNB), Swiss banks report 1991

There is no composite real estate market price index for Switzerland, but there are sub­indices, notably the single home and owner-occupied flat prices indices.20 They peaked end 1989 (Q4), beginning 1990 (Q2) respectively, and remained high until 1991 (small peak in Q3), before they continuously fell until 1999, more than 20% till the end of the regional bank crisis in 199621.

Abbildung in dieser Leseprobe nicht enthalten

Data source: SNB data portal

Many borrowers faced rising interest rates just as revenues were contracting following the cyclical downturn (1991-1993 were recession years). As a consequence, the proportion of non-performing loans on the banks' books increased, since the falling real estate prices and high lending limits implied that the collateral no longer covered the total amount of mortgages. When the real estate (collaterals) were sold, oversupply and lower demand due to high interest rates enhanced the decrease in real estate prices.

The regional banks were especially vulnerable to these developments due to structural challenges, geographical and sectoral undiversified assets as well as income streams and the high exposition to the real estate market. Unlike the big banks and larger cantonal banks, they had hardly any revenues from other operations that could be used to offset losses on their mortgage and property financing business.22

Comparison to other crises

Yves Mauchle (2014) in his description of the regional bank crisis draws mainly on the Bank of International Settlements Working Paper (2004), (co-)authored by Prof. Dr. Suzanne Ziegler. What is new is that he compares the regional bank crisis to the Japanese bank and the US subprime crises. He identifies the following five commonalities23:

1. raising real estate prices in a low interest period;
2. generous bank lending during an economic and real estate boom;
3. decreasing real estate prices after an interest rate increase by the central bank;
4. high amortization in the banking system due to credit defaults;
5. instability of the financial system.

As a difference, Mauchle mentiones the implications of the crises. While the Swiss and Japanese bank crises in the 1990s mainly remained national crises, the US subprime crisis affected the global financial system and economy. When it comes to the length of the crisis, the Japanese was the longest with about a decade24.

Savings & Loan bank Thun (SLT) in the narrative of the regional bank crisis

The SLT in the mentioned literature is referred to as the beginning and highlight of the regional bank crisis, whose main cause is argued to be the turn in the real estate market, which is underlined with some evidence provided. The problem with the inclusion of the SLT in this narrative is that the real estate prices in Switzerland according to the available two indices, covering the most important real estate (see section economic developments), exhibit a maximum price differential of 5% for single homes and 3.8% for appartments (owner- occupied flats) between 1989 and 1991, but even no price decline between quarter 1 1889 and quarter 4 1991. The heavy price declines happened only from 1992 on and were not relevant for SLT's struggle to survive in 1991.

Unfortunately, regional data is not available to investigate cantonal or even more specific regional price movements. Since in 1990, 74% of loans of the SLT were outstanding in the canton of Berne, and 49% in the region Oberland (region Thun + Alps area in the canton of Berne)25, such data would bring more light to unanswered questions, which in the existing literature are not even addressed.

Bank statements of non-stock-exchange listed regional banks are not public and consequently a direct comparison not possible. Whether Prof. Dr. Suzanne Ziegler had insight into confidential data at the SNB or not, we do not know. Fact is she did not provide any data to support her statement that the SLT faced the same problems as other regional banks and was only unlucky to be the first who got into trouble. The consolidated data (e.g. profits) for regional banks in the SNB Swiss banks report 199126 which I investigated, do not allow any conclusions or comparisons with the SLT. This is unsatisfying, because the pieces of the puzzle provided in this research do not go far beyond existing literature and are not able to answer all the questions. But with regard to the limited scope of a course paper, every piece that contributes to a more complete picture constitutes a small success. The separate analysis of the SLT will provide such pieces beyond the narrative of the real estate and regional bank crises.

[...]


1 Among others: Federal Finance Department, press release, March, 31, 2004, Federal Finance Department, press release, March, 31, 2004, retrieved April, 10, 2021, from > EFD: Regeln zur Sanierung und Liquidation von Banken und zum verstarkten Schutz der ... | Presseportal

2 Member of ZHAW board; Head of Banking, Finance, Insurance Department of the School of Management and Law; SNB (1989-2002), Ressort Financial stability, specialisation: scientific research in the banking sector (a.o.), www.zhaw.ch/de/ueber-uns/person/zisu/

3 She (co-) authored the “Swiss case” (pp 43-48) in the BIS working paper No. 13 “Bank Failures in Mature Economies”, which is constantly cited by Mauchle (2014) and on p. 394 of “The Swiss National Bank, 1907­2007” (SNB, 2007); her NZZ article (see note 5) I also found often referred to

4 Neue Zurcher Zeitung, November, 6, 2001, „Ruckblick auf die Regionalbankenkrise", Author: Prof. Dr. Ziegler, Susanne, SNB economist, retrieved April,10, 2021, from Ruckblick auf die Regionalbankenkrise | NZZ

5 Bank for International Settlements (BIS), 2004, "Bank Failures in Mature Economies”, Basel Committee on Banking Supervision, Working Paper No. 13, p. 44

6 Swiss National Bank (SNB), Swiss banks report 1991, p.21-23

7 Bank for International Settlements (BIS), 2004, "Bank Failures in Mature Economies”, Basel Committee on Banking Supervision, Working Paper No. 13, p. 44

8 Bank for International Settlements (BIS), 2004, “Bank Failures in Mature Economies”, Basel Committee on Banking Supervision, Working Paper No. 13, p. 44

9 Swiss National Bank (SNB), Swiss banks report 1991, p.21-23

10 Swiss National Bank (SNB), Swiss banks report 1991, p.21-23, 34

11 Bank for International Settlements (BIS), 2004, “Bank Failures in Mature Economies”, Basel Committee on Banking Supervision, Working Paper No. 13, p. 44

12 Swiss National Bank (SNB), 2007, “The Swiss National Bank, 1907-2007”, p.394

13 Swiss National Bank (SNB), Swiss banks report 1991, p.21-23

14 Swiss Federal Banking Commission (SFBC), annual report 1991, p.16

15 Swiss National Bank (SNB), Swiss banks report 1991, p.21-23

16 Swiss National Bank (SNB), Swiss banks report 1991, p.31

17 Swiss National Bank (SNB), Swiss banks report 1991, p.31

18 Swiss National Bank (SNB), Swiss banks report 1991, p.21-23

19 Swiss National Bank (SNB), 2007, "The Swiss National Bank, 1907-2007”, p.394

20 Bank for International Settlements (BIS), 2004, "Bank Failures in Mature Economies”, Basel Committee on Banking Supervision, Working Paper No. 13, p. 44

21 Swiss National Bank (SNB), real estate price indices, retrieved March, 23, 2021, from https://data.snb.ch/de/topics/uvo#!/cube/plimoinchq

22 Swiss National Bank (SNB), 2007, “The Swiss National Bank, 1907-2007”, p.395

23 Mauchle, Yves, 2014, „Systemrisiko aus dem Hypothekargeschaft", in Schweizer Schriften zum Finanzmarktrecht, Band 112, p.309, Schulthess Verlag

24 Mauchle, Yves, 2014, „Systemrisiko aus dem Hypothekargeschaft", in Schweizer Schriften zum Finanzmarktrecht, Band 112, p.309, Schulthess Verlag

25 Der Bund, Band 142, Nummer 239, October, 12, 1991, „30000 Franken pro Sparheft und Konto sind garantiert" retrieved March 07, 2021, from Der Bund 12. Oktober 1991 — e-newspaperarchives.ch (e- newspaperarchives.ch)

26 Swiss National Bank (SNB), Swiss banks report 1991, see for example p. 215

Excerpt out of 28 pages

Details

Title
The Collapse of the Savings & Loan Bank Thun in the Year of its 125th Anniversary (1991)
College
University of Geneva  (Paul Bairoch Institute of Economic History)
Grade
1.0
Author
Year
2021
Pages
28
Catalog Number
V1044762
ISBN (eBook)
9783346469755
ISBN (Book)
9783346469762
Language
English
Tags
Spar- und Leihkasse Thun, Regionalbankenkrise, Immobilienkrise, bank run, Liquidation, Immobilienpreise, Kreditvergabe, Eidgenössische Bankenkommission
Quote paper
Jan Gygax (Author), 2021, The Collapse of the Savings & Loan Bank Thun in the Year of its 125th Anniversary (1991), Munich, GRIN Verlag, https://www.grin.com/document/1044762

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