Financial Risks Due to COVID-19 to Last Months or Years, Says FINMA

Financial Risks Due to COVID-19 to Last Months or Years, Says FINMA

13 November 2020

According to Swiss financial watchdog risks related to the coronavirus pandemic can linger for months over financial markets, or even years. Especially heightened is risk on corporate loans.

Risks Are Here to Stay

                Financial regulator for Switzerland, FINMA, has warned that financial risks resulting from the coronavirus pandemic might last for months or years to come. Especially high is the default risk of corporate loans. “Thanks to the cushion of liquidity and capital they have built up over the years and their operational readiness, Swiss financial institutions have been able to withstand the initial repercussions of the crisis well.  However, the effects of the corona pandemic will continue to impact the financial markets for months, if not years” FINMA said in its second annual financial risk monitor. Experts claim turmoil caused by COVID-19 and lockdown on capital markets, defaults on corporate loans and money market bottlenecks have put a strain on financial system of the country.

Pandemic and Banking Sector

                The higher risks of debtor bankruptcies and write-downs on loans to corporate clients outside Switzerland is observed for all banks, but especially two big ones, UBS and Credit Suisse. As Switzerland had experienced a less pronounced downturn than other countries, the risk for loans is bigger for clients from abroad. Additionally, the pandemic had caused damage to commodities trading which made Swiss banks write down a half of billion Swiss franc in assets related to commodities trading in September, as FINMA informed. Apart from banks, exposed to risks triggered by the pandemic are insurers. Risks for them lies in corporate insurance and sharp price corrections on corporate bonds. As FINMA noted, 19% of insurers’ investments are put on corporate bonds, with almost half of them with bad rating like BBB+ or even lower. It is worth to notice that the pandemic is also putting pressure on CHF exchange rate that is appreciating quickly as investors are eager to buy Swiss francs in difficult times.

The New Sweden?

                As the pandemic is causing risks for financial sector, the Swiss government took a different approach to restrictions with second wave of cases than it did with the first one, in Spring. Back then country was put in lockdown and Switzerland was placed as exemplary for fight with COVID-19. Now Switzerland follows the suit of Sweden, by refusing to close anything, with bars, restaurants being opened, sports activities not banned and even events up to 300 people allowed in some regions. Meanwhile, France, Germany, Italy or Austria are putting harsh restrictions with lockdown of most of economy and even limited ability to leave houses for citizens.

Urging for Rethinking the Strategy

                The approach is questioned by many, including some 60 prominent Swiss economists that have called in an open letter to government to rethink the strategy and impose a national lockdown as situation is getting out of control. But Bern canton stated repeatedly it won’t pose stricter regulations, even though the wealth alpine state is having greater infections than US, UK and second only to the Czech Republic in continental Europe, with 1,148 cases per 100,000 residents over last two weeks.