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European Bank Run Watch: Swiss Edition

  • Written by Syndicated Publisher No Comments Comments
    August 29, 2012

    On July 23, 2011 I penned ‘The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs’! which detailed for my readers and subscribers the mechanics of the modern day bank run, particular as I see (saw) it occurring in Europe.


    Those that follow me know that I have been warning on Europe and its banking system years before the sell side and mainstream financial media (reference the Pan-European Sovereign Debt Crisis series).

    A reader has convinced me to consult with him on a specific situation, regarding overseas monies and the (lack of) safety of those funds, which prompted me to dig up the Sovereign Contagion Modelthat we developed n 2010. In a nutshell, the Swiss banking industry was built upon impenetrable bank privacy for high net worth clients. Once the US decided it needed to boost its tax revenues during hard times, it literally collapse the Swiss hegemony in secret banking and left that banking industry to compete in actual banking versus asset concealment. This left Swiss banks naked, for they don’t appear to me to truly be able to compete aggressively and successfully in other areas.

    Add to this mix potential contagion issues for the Swiss banking industry due to the fact that Switzerland has a veritable cornucopia of exposure all over the soon (if not already) serial recession ridden world, and well…

    The first chart is raw contagion exposure as a % of GDP. The 2nd chart is the same exposure ran through our “reality” model. Food for thought.

    The BoomBustBlog Sovereign Contagion Model

    Nearly every MSM analysts roundup attempts to speculate on who may be next in the contagion. We believe we can provide the road map, and to date we have been quite accurate. Most analysis looks at gross claims between countries, which of course can be very illuminating, but also tends to leave out many salient points and important risks/exposures.

    Description: foreign claims of PIIGS

    Description: foreign claims of PIIGSforeign claims of PIIGSforeign claims of PIIGS

    In order to derive more meaningful conclusions about the risk emanating from the cross border exposures, it is essential to closely scrutinize the geographical break down of the total exposure as well as the level of risk surrounding each component. We have therefore developed a Sovereign Contagion model which aims to quantify the amount of risk weighted foreign claims and contingent exposure for major developed countries including major European countries, the US, Japan and Asia major.

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    I.          Summary of the Methodology

    ·         We have followed a bottom-up approach wherein we have first identified the countries/regions with high financial risk either owing to rising sovereign risk (ballooning government debt and fiscal deficit) or structural issues including remnants from the asset bubble collapse, declining GDP, rising unemployment, current account deficits, etc. For the purpose of our analysis, we have selected PIIGS, CEE, Middle East (UAE and Kuwait), China and closely related countries (Korea and Malaysia), the US and UK as the trigger points of the financial risk dissemination across the analysed developed countries.

    ·         In order to quantify the financial risk emanating in the selected regions (trigger points), we looked into the probability of the risk event happening due to three factors – a) government default b) private sector default c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors.

    ·         Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure. The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison.

    ·         The risk event probability of the trigger point countries was multiplied by the respective exposure of the developed countries to arrive at the total risk weighted exposure of each developed country.

    ·         Description: File Icon Sovereign Contagion Model – Retail – contains introduction, methodology summary, and findings

    ·         Description: File Icon Sovereign Contagion Model – Pro & Institutional – contains all of the above as well as a very detailed methodology map that explains what went into the model across dozens of countries.

    The bank run in other European nations:

    Related Pan-European Sovereign Risk Non-bank Subscription Research Archives

    ·         Ireland public finances projections_040710

    ·         Spain public finances projections_033010

    ·         UK Public Finances March 2010

    ·         Italy public finances projection

    ·         Greece Public Finances Projections

    Images: Flickr (licence/attribution)

    About The Author

    Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts to uncover truths, seldom if, ever published in the mainstream media or Wall Street analysts reports. Since the inception of his BoomBustBlog, he has established an outstanding track record