Switzerland: Schweizerische Volksbank Capital Injection, 1933

On September 28, 1931, after Great Britain abandoned the gold standard, Volksbank faced a deposit run in Zurich that lasted for a few days as depositors withdrew their savings in response to a rumor that a large Swiss bank was having payment difficulties, following the failure of a different small private bank; depositor pressure increased further when the bank’s Zurich branches restricted withdrawals to CHF 800 per depositor. Volksbank denied these rumors and issued a survey showing that 121% of its savings bank deposits were covered by first-class securities, after which customer withdrawals declined (Baumann 2007).

On November 1, 1931, Volksbank’s management calculated that the bank’s balance sheet had shrunk by CHF 300 million, as it responded to deposit runs and repayment requests from banks and bond holders. The bank’s management also calculated that of the remaining CHF 1.4 billion, CHF 300 million in assets were abroad. The bank’s management estimated that the total expected credit losses were around CHF 75 million, while it had CHF 46 million in reserves, so it needed to write down about CHF 30 million in share capital to cover all expected losses. Volksbank had 600,000 savings accounts in November 1931 and was too important to the Swiss national economy to allow its failure, as former Finance Minister Jean-Marie Musy explained to the Swiss Federal Council (Swiss Federal Council 1931a). The Swiss government provided liquidity aid to Volksbank following the depositor runs, ensuring its survival for the next two years.

In September 1933, Volksbank general director Alfred Hirs calculated that Volksbank’s unrealized losses had grown to CHF 100 million, two-thirds of which stemmed from foreign assets. Hirs’s report shows that Volksbank needed financial support urgently, and given the size of aid it required, funding could not come from the mostly retail members of the cooperative or from other banks. During a speech to Volksbank’s assembly of delegates on December 2, 1933, Hirs indicated that a simultaneous reduction in assets and liabilities was not viable since Volksbank needed a fresh means of payment and new capital urgently (Baumann 2007). Volksbank’s management submitted a formal request for state aid to the Federal Council on October 17, 1933. The request for state aid laid out the bank’s plan to reduce its cooperative capital by half, from CHF 186 million to CHF 93 million, and use this reduction to cover realized losses of CHF 56 million of the CHF 100 million in total expected losses. The bank also proposed that the federal government provide CHF 100 million in fresh capital, of which CHF 30 million would be paid in immediately and CHF 70 million would serve as a guarantee fund (Volksbank 1933).

Three experts had written reports that largely agreed with Volksbank’s internal calculation; however, one report stated that Volksbank’s foreign risks were significantly higher than stated by bank management.

The Federal Council’s meeting minutes from October 18, 1933, indicate that almost all members of the council agreed that Volksbank was too important to the Swiss economy and should be provided with aid; however, the exact nature of the aid was not clear. The Council’s members relied on the expert reports and justified the capital injection by saying that it protected Volksbank’s 350,000 depositors, 100,000 cooperative members, and 55,000 debtors. Volksbank’s branch network was particularly dense nationwide, and it provided primarily small and medium-sized loans and accepted savings deposits from small savers. At the end of October 1933, Volksbank had total assets of CHF 1.2 billion. Given that there were few families in Switzerland who did not have any relationship with Volksbank, its failure would have had catastrophic consequences (Baumann 2007; Swiss Federal Council 1933d). The final restructuring plan Volksbank submitted in exchange for the CHF 100 million capital injection is shown in Figure 2.

Volksbank had a unique structure because it was the only large bank in Switzerland that was structured as a cooperative bank; it grew to be the second-largest bank in Switzerland by the end of 1930. Although aid from other banks was not viable given Volksbank’s structure and size, then–Finance Minister Musy asked representatives from the Swiss Bank Corporation and Schweizerische Kreditanstalt to support Volksbank, so that the Federal Council could tell the Federal Assembly they did everything possible to reduce the Confederation’s participation in the aid (Swiss Federal Council 1933b). Finance Minister Musy’s comments indicate Swiss Bank Corporation and Schweizerische Kreditanstalt were unable to participate in the rescue of Volksbank (Baumann 2007).

Following deposit runs in September 1931, Volksbank asked the federal government and the SNB for aid. The Swiss government gave Volksbank a CHF 50 million loan in November 1931 and an additional CHF 10 million deposit in December 1931^FThe terms of these transactions are unclear. However, it appears that the CHF 50 million loan in November 1931 was against collateral of mortgage assets and the CHF 10 million deposit carried interest of 4% for a period of six months, with the option to extend for two years (Ehrsam 1985; Swiss Federal Council 1931b). (Swiss Federal Council 1931a; Swiss Federal Council 1931b). The following month, Volksbank announced that withdrawals had slowed down significantly.

Although Volksbank still faced significant unrealized losses, the bank management, Swiss Finance Department, and the SNB Governing Board agreed to postpone the restructuring of the bank to preserve public confidence in the fragile Swiss banking system. Realizing those losses would force losses on Volksbank’s cooperative shareholders, who had purchased their shares at par and did not expect to experience losses. Volksbank undertook several measures to return to its core noncommercial domestic business and implemented measures to reduce costs in October 1932, such as reducing salaries and giving older employees early retirement. At the end of 1932, Volksbank’s internal calculations suggested that unrealized losses were CHF 73.7 million (Baumann 2007).

Following the bank’s request for a capital injection in October 1933, the Council decided on October 18, 1933, that Volksbank should receive a loan of CHF 10 million and a federal deposit of CHF 30 million as provisional support until the exact details of the capital injection were agreed on. The CHF 10 million loan was granted against promissory notes. The deposit of CHF 30 million was awarded against collateral of Swiss promissory notes to industrial companies, after Volksbank submitted a detailed recovery and reorganization plan. The CHF 30 million deposit was given at an interest of 4% for a period of one year with the option to repay early (Swiss Federal Council 1933a).

News of Volksbank’s difficulties and bailout leaked on November 17, 1933, a day before the Council announced the capital injection, and Volksbank’s liquidity drained in the following days as worried depositors withdrew their savings (Swiss Federal Council 1933c). The federal loan office, Darlehenskasse der Schweizerischen Eidgenossenschaft (EDK), and the SNB provided emergency loans to bridge payment difficulties until the government’s capital injection was completed. In accordance with the federal decree of April 13, 1933, the EDK granted a loan of CHF 30 million against domestic mortgage assets and promised a further CHF 70 million. The Governing Board of the SNB also declared its willingness to grant an extraordinary Lombard advance of CHF 20 million to CHF 30 million to help Volksbank manage its liquidity as Volksbank faced an outflow of CHF 4 million to CHF 5 million every day for 10 days after the announcement of the federal intervention. The SNB granted this loan under extraordinary circumstances against the deposit of bills of exchange that did not otherwise meet its legal requirements (Baumann 2007).

The EDK and SNB were therefore willing to provide up to CHF 130 million in liquidity aid to Volksbank. As of December 1933, Volksbank received CHF 71 million in loans from the EDK and SNB, against collateral of domestic mortgages and deposit of bills of exchange. Volksbank repaid all of these funds, according to its 1934 financial results.

The Federal Assembly of the Swiss Confederation unanimously authorized the capital injection through a decree issued on December 8, 1933 (Swiss Government 1933, 1).

Volksbank applied for state aid by submitting a request to the Federal Council, and the Council decided on all matters regarding aid given to Volksbank (Swiss Federal Council 1933a). The Federal Council presented a message to the Federal Assembly that included a justification for the intervention and a draft of the decree authorizing the capital injection. The Council also considered reports written by Volksbank’s general director, Alfred Hirs; Nestlé’s former president, Louis Dapples; Schweizerische Kreditanstalt bank’s director, Hermann Kurz; and Cantonal Bank of Bern’s director, Alfred Scherz (Swiss Federal Council 1933d). The Federal Council also consulted with the SNB regarding the state intervention (Baumann 2007).

Article 7 of the federal decree issued to authorize the capital injection stated that the Federal Council would be responsible for the program’s implementation (Swiss Government 1933).

The decree authorizing the capital injection required the Federal Council to report to the Federal Assembly on measures taken to examine the previous bank management’s criminal and civil liability, and on measures taken to reorganize the bank’s administration (Swiss Government 1933, 976).

On November 17, 1933, the news about the government’s intention to intervene in the bank leaked, and the NZZ published an article discussing the impending restructuring of Volksbank (Swiss Federal Council 1933c). The next day, the Federal Council held a special session to decide on Volksbank’s restructuring plan and published a press release outlining that plan.

The government’s representatives on Volksbank’s board and general management also gave various speeches to Volksbank’s assembly of delegates regarding the federal intervention (Baumann 2007).

Article 3(1) of the decree that authorized the capital injection stated that the nominal value of the cooperative capital of the existing shareholders would be reduced by 50%, from CHF 1,000 to CHF 500. Article 3(3) of the decree also revoked shareholders’ right to take advance payments from the bank by pledging the capital shares.

Volksbank’s articles of association allowed shareholders—who were all members of the cooperative—to redeem their shares by submitting a notice of termination that took effect at the end of the following year; the bank usually repaid their capital at the end of the fourth financial year following the membership termination. Volksbank’s board of directors could postpone the repayment date by an additional two years during a crisis, under the articles of association (Swiss Federal Council 1933d). However, Article 3(2) of the decree revoked the right of cooperative members to redeem their shares with retroactive effect and replaced it with a right to transfer shares among cooperative members (Swiss Government 1933).

There were no legally mandated prohibitions on dividend distributions, and the bank’s management paid a dividend of 2% for the 1934 financial year (Baumann 2007).

The federal government received 200,000 ordinary shares of cooperative capital in Volksbank in exchange for the CHF 100 million capital injection (Swiss Government 1933, art. 1). The SNB initially recommended that the Federal Council should insist on receiving preferred shares, ranking above the existing cooperative shareholders. However, the Federal Council was convinced by the expert reports that it should not create two types of capital that would have different responsibilities; they believed such a policy would create further public mistrust, especially after the existing shareholders were already losing half the value of their investment.

Although the bank retained its cooperative structure, Article 3(2) of the act authorizing the capital injection introduced the right of transferability among shareholders. This right of transferability gave the cooperative capital some characteristics of regular shares since the existing shareholders could trade these shares at values different than the par value (Swiss Federal Council 1937).

Although the government was eligible to receive the same dividend paid to other members of the cooperative, it waived part of the dividend it would have received for the 1934 financial year. The government accepted a 1.2% dividend for the 1934 financial year on its CHF 100 million of equity instead of the 2% dividend distributed to all other shareholders to ensure other members of the cooperative could receive a more generous dividend and the bank could retain some earnings to continue restructuring (Baumann 2007).

The Federal Assembly authorized the government to inject CHF 100 million into Volksbank, and it injected the entire amount in the following three tranches: (Baumann 2007; Swiss Government 1933, art. 1).

• December 19, 1933: CHF 30 million (60,000 shares)
• February 1, 1934: CHF 20 million (40,000 shares)
• February 23, 1934: CHF 50 million (100,000 shares)

This capital injection represented approximately 25% of the Swiss federal budget for 1933 (Baumann 2007; Swiss Government 1933, 975).

Volksbank endured losses of more than CHF 50 million on loans made to domestic commercial customers in the early 1920s, and the bank expanded its foreign business to compensate for these losses (Schweizerisches Bundesarchiv n.d.). This strategy worked until 1928; however, the bank faced greater losses from rising nonperforming assets beginning in 1929. The bank requested liquidity aid in November 1931 after facing a bank run, as it calculated that its reserves could not cover all expected losses and it would need to write down share capital by CHF 30 million to cover the expected losses (Swiss Federal Council 1931a). Volksbank postponed its restructuring by managing its liquidity until 1933, with the help of the government, after which the bank could no longer postpone its restructuring.

On October 17, 1933, Volksbank formally requested the government’s participation in its share capital, and the decree authorizing the capital injection was issued on December 8, 1933 (Volksbank 1933; Swiss Government 1933, 1). The government injected the first tranche of capital 11 days after it received authorization.

Volksbank’s shareholders were bailed in as part of the capital injection and lost 50% of the value of their shareholding (Swiss Government 1933).

A condition to the government’s capital injection was that the previous management of the bank should be examined and if necessary civil and criminal charges should be pursued against them (Swiss Government 1933, art. 2). Civil or criminal lawsuits were filed against five former general managers of Volksbank, and the bank filed civil lawsuits against six former board directors who were members of the management committee. In 1941, Volksbank reported to the Federal Council that it had recovered CHF 845,000 from settlements in these lawsuits (Baumann 2007).

The government also received representation in the delegates’ meetings of the bank and a majority representation on the bank’s board of directors. The Federal Council appointed a former federal councilor, Robert Haab, as the president of Volksbank’s board of directors on December 11, 1933. The Federal Council also appointed 10 additional members to represent the federal government in the 21-member board of directors of the bank after the capital injection was authorized. The representatives of the government were chosen while keeping a balanced representation of all economic groups, regional areas, and political parties. The federal government also appointed the new president of the general management of Volksbank, J. Alfred Meyer, a former director of the Swiss Bank Corporation.

The Federal Council’s message to the Federal Assembly notes that Volksbank had to take various measures to improve its income, by reducing all expenses, closing unnecessary branches, and reducing salaries where possible (Swiss Federal Council 1933d).

Our findings did not reveal that regulatory relief was granted to facilitate the injection.

Although the federal government intended to reduce or eliminate its holding in Volksbank, it did not have a predetermined end date to its participation. Article 4 of the decree authorizing the capital injection stated that the bank would replace the government’s capital if it was in a position to do so and if doing so was advisable.

In January 1937, the bank was forced to conduct a second restructuring due to currency losses stemming from its foreign assets. It reduced the nominal value of the cooperative capital by 50% again (Swiss Federal Council 1937). The Federal Council agreed to this second reduction in the nominal value of the share capital to safeguard the interests of all creditors, and the nominal value of the government’s investment was now reduced to CHF 50 million (Ehrsam 1985).

In January 1947, the Federal Council decided, at the request of the Volksbank, that CHF 10 million of the federal participation would be purchased by the bank for CHF 10.6 million and existing retail shareholders would have the right to purchase these shares at their nominal value of CHF 10 million, with the bank making up the difference from its reserves. The Federal Council and the bank also decided that share certificates for the remaining CHF 40 million in nominal value would be purchased for CHF 40.8 million and Volksbank would gradually place these on the market at par. Therefore, Volksbank repurchased the government’s shares for CHF 51.4 million between 1947 and 1948, and gradually placed these shares on the market at par. The program cost the government CHF 48.6 million, excluding dividends received (Swiss Federal Council 1948). Information regarding how much the government received in dividends over the 15-year holding period is unclear. Records indicate that the government received CHF 1.2 million and CHF 2 million in dividends in 1934 and 1936, respectively (Swiss Federal Council 1937).