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17 April 2020

There’s a simple reason that Switzerland’s business loans are working better than the UK’s

It isn't about different banking cultures - but different incentives.

By Stephen Bush

Rishi Sunak’s economic package isn’t working. Or at least, a big and crucial part of it isn’t: the government-backed loans to help businesses through lockdown-induced collapse in demand and legally enforced closures. A little over 6000 loans have been issued – less than a tenth of those given out in Switzerland.

But Sunak is far from alone. Switzerland is a world leader as far as its loan system is concerned.

To understand the problem, see it from the perspective of the banks. You’re being asked to issue loans – in which 20 per cent of the risk falls on you – when there is no clear timeline to an exit from the lockdown, and an even muddier one for repayment. While there is a live debate within the government as well as outside it about how to pay for the extraordinary financial measures, you have to consider the minimum 50/50 chance that the fiscal response to the crisis will be tax rises, spending cuts or both.

Let’s take your favourite local pub or restaurant. It’s pleasantly full most evenings, and all things being equal would return to being so once the crisis is over. However, even a transition to Taiwan-style measures means that on a full evening it would be trading at perhaps a third of its previous capacity. Even were there to be a sudden scientific leap forward and a vaccine became available very quickly, this pub or restaurant cannot make up the months of no trade. Those three months of economic activity remain lost. It can continue to trade, and it’s in all our shared interests that it does so – but it is from far certain that it will make enough money to service debts accrued during lockdown.

Imagine that the backdrop is one in which the government is either raising taxes or cutting spending, and the outlook for this business looks considerably tougher. You have to ask yourself: if you were a bank, would you be willing to make a loan to this pub or that restaurant? Of course you wouldn’t.

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Contrary to many of the takes, including the idea that the difference between the British and Swiss response is down to cultural difference between Swiss and British banks, the truth is simple. In Switzerland, the risk of a coronavirus loan falls entirely on the state. If a Swiss business can’t keep up its repayments, the loan is underwritten in full by the government: unlike in the UK and almost everywhere else, where liability for a decent-sized chunk of the loan falls on the banks themselves.

The reality, if you want Swiss levels of bank lending during this crisis, you need Swiss levels of government exposure to bad loans. If you don’t want that, you either need to end the lockdown or to be willing to accept a large and painful number of bankrupt businesses, both large and small.