The Swiss National Bank deployed its COVID-19 refinancing facility today, effectively paying banks to lend to an economy in desperate need of cash.
The facility lets banks tap the SNB to provide federally guaranteed loans to companies idled by the country’s lockdown.
“Our society and the Swiss economy are confronted with enormous challenges,” SNB President Thomas Jordan said at a news conference Wednesday with FINMA CEO Mark Branson and Swiss Finance Minister Ueli Maurer.
“To combat this crisis, it is essential that companies have access to credit and the banking system has access to liquidity,” the SNB said.
There is no upper limit on the amounts available and drawdowns can be made at any time. The interest rate will be minus 0.75, same as the SNB policy rate, meaning the central bank will effectively pay banks to use the temporary facility.
Economists agree that Switzerland is headed for a recession this year, but forecasts vary widely as to how deep the downturn will be. UBS expects gross domestic product to shrink 3 percent for the whole year, the bank said yesterday.
The government has been overwhelmed with requests from companies to cover the wages of furloughed workers. As of Wednesday, the claims represented about 480,000 employees or about 9.5 percent of the Swiss labor force.
Capital buffer deactivated
The SNB is also asking the government to deactivate a capital buffer that protects banks against losses on mortgages in what was previously a booming real estate market. Economists expect the market to cool in coming months.
For its part, FINMA is changing the way banks calculate their so-called leverage ratio, a measure of their ability to meet their financial obligations. The move will free up around CHF 20 billion to support lending to the broader economy, the supervisor said.
The lack of a cash cushion in the 2008 crisis led to the bailout of many banks, including UBS. Since then, regulators have tightened capital rules for lenders, forcing them to abandon some riskier activities.
Branson said Swiss banks are in a better position today to absorb market and economic shocks, and their capital buffers can now be used to offset turbulence caused by the coronavirus. The pandemic has prompted investors to dump stocks and other assets in a global dash for cash.
FINMA is changing the way banks calculate their so-called leverage ratio, a measure of their ability to meet their financial obligations. The change will free up around CHF 20 billion to support lending to the broader economy, the supervisor said.
Buybacks suspended, dividends discouraged
FINMA has encouraged banks to suspend share buyback programs, which could leave them with reduced ability to deal with financial stress. Credit Suisse on Wednesday froze its plan to buy back as much as CHF 1.5 billion of shares this year due to economic uncertainty caused by the coronavirus.
The supervisor urged banks to “consider carefully the level of upcoming dividend distributions.”
“Strong institutions who act voluntarily now to restrict distributions will remain strong for longer, in the interests of all their clients,” the supervisor said. “Acting to preserve strength is not a sign of weakness.”