Banque Cantonale Vaudoise, Switzerland's fifth largest bank, this week said it expected to make a SFr390m loss for the year after writing off SFr1.7bn in non-performing loans. The bank said it would raise SFr600m in new capital in 2002, with the support of the Cantonal government, which owns more than 50% of its equity, in order to repair its balance sheet.

The bank blamed an inadequate provisioning technique for the problem, which stems from a period of economic difficulty in the early 1990s which affected many local companies. The Federal Banking Commission has demanded an explanation from the bank's auditors Ernst & Young as to why they had signed off on the bank's provisioning in previous years.

Although the bank has made forays into private banking in recent years, its primary role has been to support the local economy, and there must be worries that it has been unduly influenced by its political masters in making loans to support firms in trouble. 85% of its lending is concentrated in Vaud. Now the pigeons are coming home to roost.

Last year Ernst & Young was criticised for its auditing of the cantonal bank of Geneva, which had to be saved in similar circumstances by the cantonal government.