Switzerland: Financial Sector Stability Assessment; imf country Report 14/143; April 16, 2014

25 
Sovereign-financial interlinkages 
42. Contagion from banks to sovereigns has decreased significantly in recent years. It 
reached its peak towards the beginning of 2009, reflecting the simultaneous deterioration of 
banking and economic fundamentals and increased risk aversion (Figure 11). Recently, contagion 
from banks to sovereigns has decreased, owing to the strengthening of capital buffers, the 
outright monetary transactions (OMT) facility, and lower risk aversion. 
 
Figure 11. Switzerland
: 
Swiss Financial-Sovereign
 
Contagion
 
The systemic risk analysis was complemented by an analysis of financial sovereign contagion. This was characterized by 
the PD of the Swiss sovereign, conditional on distress of its largest domestic financial institutions falling in distress, shown 
in the figure below. IMF staff used a panel model on quarterly data between 2005:Q1 and 2012:Q4 to assess the relevance 
of underlying structural characteristics in explaining financial-sovereign contagion (a positive bar contributing positively to 
the conditional probability, while a negative bar causes a reduction). 
Switzerland: Contribution to Financial-Sovereign Contagion 
 
 
The analysis shows that during the GFC the increase in the financial-sovereign contagion was mainly associated with 
increased market price of risk, a deterioration of the price to book value of Swiss banks, and deterioration of the growth 
forecast. Exposure to credit risk seems to be a significant factor; however, the relative contribution of this factor has not 
varied significantly. More recently, in the aftermath of the European sovereign debt crisis, Swiss financial-sovereign 
contagion has decreased significantly, and the factors explaining it have changed, with the most significant, on the 
negative side, being the European sovereign crisis. On the positive side, banks’ capital seems to have a significant impact, 
while decreased risk aversion together with the introduction of OMT was an important downward driver during the 
second half of 2012. 
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Prob
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y
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Price to Book Value for Banks
Growth forecast
Bank loans/GDP
Govt bonds held by dom. banks/Assets
Banks capital/Assets
Govt short-term debt/GDP
Global risk aversion
European program effect
OMT effect
Median conditional prob. of default

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SWITZERLAND