The fallout from last week’s surge in the value of the Swiss franc against the euro could range between moderate to severe in terms of how badly Switzerland’s financial market sector is affected, according to Aite Group, a research firm.

The fallout from last week’s surge in the value of the Swiss franc against the euro could range between moderate to severe in terms of how badly Switzerland’s financial market sector is affected, according to Aite Group, a research firm.

At least 10 per cent of Credit Suisse and UBS’s pre-tax income could be lost as a result of the Swiss National Bank’s abandonment of its old Swiss franc/euro cap rate at SFr1.20, the firm, citing views from investment houses such as Goldman Sachs and Morgan Stanley, said.

“The full impact of the SNB decision to the FX marketplace is months away from being known, but it is closer to a nuclear explosion than a 1,000 kg conventional bomb,” Javier Paz, senior analyst in wealth management at Aite Group, said in a note about the forex turmoil.

“What makes this SNB decision so consequential is not so much the de-pegging of the Swiss franc from the euro, but rather that it was such as massive move – one for which many key players in the market were not well prepared – and the aftermath is like a black hole that can suck massive amounts of credit from currency trading as we have known it,” Paz continued.

Already, reports say that Citigroup, Barclays and Deutsche Bank have sustained up to $400 million of losses while a hedge fund run by Everest Capital has been wiped out by the franc’s surge, which at one point last Thursday was as extreme as 40 per cent. This week, EFG International said there would, depending on forex rate developments, be some negative impact, while Julius Baer, Switzerland’s third-largest bank, said it had sustained no negative impact. FXCM, the largest brokerage of its type, has become one of the hardest-hit by the forex drama; it was rescued by Leucadia National Corp after a dramatic share price drop.

Brokerage firms using an agency model – those sending all their trades to the interbank market – have been particularly exposed to the evaporating liquidity and major losses in the aftermath of the SNB announcement, Paz said.

Brokers have had three-and-a-half years to prepare for when the Swiss franc/euro peg would be removed. “We saw prudent brokers pre-emptively increasing their margin requirements to 5 per cent (20:1 leverage) for SFr pairs and crosses, while the not-so-wise ones kept them as low as 0.25 per cent (400:1 leverage),” Paz wrote.

Paz pointed out that UBS and Credit Suisse “apparently” have “substantial exposure” to Swiss franc-denominated mortgage loans to close to 700,000 borrowers in Poland and an undisclosed number in Croatia.

“Beyond these two obvious major players with Swiss currency exposure, we suspect that interdealer broker Tradition could also have substantial exposure due to its large FX swap business in the local currency. Trading losses due to exposure to the Swiss franc and retail forex [market] could also be noticeable (5 per cent to 10 per cent revenue reduction for the year) for many of the remaining banks in the top 10 Euromoney FX poll," he said.