We’ve said for some time that European banks are (believe it or not) in even worse shape on average than their US peers, although the public at large is far more aware of the problems here by virtue of our financial system having hit the wall so spectacularly. While US firms waded into risky waters with reckless abandon, so too did their EU cohort. And while the American firms may have gotten in deeper, the Euro banks have much smaller equity bases relative to the size of their balance sheets, and thus vastly less tolerance for error.

Two stories in the last two days give more detail. The first is from Der Spiegel, on the Swiss banks (hat tip reader Saboor) and the second, from Ambrose Evans-Pritchard in the Telegraph, gives more general comments.

First, from Der Spiegel:

The Swiss economy is dwarfed by the size of its leading banks, and there are growing worries about their health. The government says everything is fine, but some disagree….

“First and foremost it is the financial center of Switzerland that will bleed,” prophecies Beat Bernet, bank expert at the University of St. Gallen. By now people are even contemplating the unthinkable: the collapse of Europe’s leading bank, the largest money manager in the world, UBS.

The Swiss have been forced once already to wave goodbye to a national icon. Swissair, whose solidity earned it the moniker “the flying bank,” shut down in 2001. It was a traumatic crash-landing for the whole country, and Swissair’s collapse cost the state over 2 billion Swiss francs (€1.3 billion). The big banks also bore guilt for the failure. As later became public, UBS had refused to extend funding to Swissair for emergency operations. This is how the bank earned its nasty nickname among the populace, “United Bandits of Switzerland.”

Now, UBS is once again in the hotseat. Since the financial crisis began, the firm has experienced heavy losses and has seen writedowns of 45 billion Swiss francs (€29 billion). The investment bankers on Wall Street allowed themselves to run riot, above all with the meagre savings of small deposit-holders…. As the Neue Zürcher Zeitung recently put it — with refreshing openness — “the nicest thing you can say about the American bankers — and about their imitators as UBS — is that they were unscrupulous.”

Many are fearful of the consequences should UBS capsize. Switzerland’s gross domestic product totals 512 billion Swiss francs (€332.1 billion). UBS’s balance sheet adds up to 2 trillion Swiss francs (€1.3 trillion) — four times as much. Even Switzerland’s second biggest bank, Credit Suisse, oversees assets totalling 1.2 trillion Swiss francs (€778.4 billion). Together UBS and Credit Suisse have over 640 billion Swiss francs (€415.1 billion) in outstanding loans.

“We owe this crisis an uncomfortable revelation: UBS and Credit Suisse are too big for Switzerland,” wrote the ex-editor-in-chief of the German weekly Die Zeit, Roger de Weck, last week in the Swiss periodical Das Magazin. “If they went bankrupt, a flourishing country would be ruined.”

From the Telegraph (note that the article also has pointed observations about US banks):