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Credit Suisse crisis

Finance

Credit Suisse: how the mighty fell

Published 21 March 2023 in Finance • 8 min read

What was behind the shocking demise of a treasured institution – and how will the proposed rescue package play out?

When they hear the name “Credit Suisse”, my grandchildren will likely have to google (or whichever search engine exists then) these two words. For most of my contemporaries here in Switzerland, Credit Suisse is an inherent part of Swiss history and culture. The past weekend has been historical in many dimensions for Switzerland. The country used to be praised as a successful financial center due to its stability and lack of political uncertainty, but instead recent developments have prompted a combination of curiosity and panic. A too-big-to-fail institution has indeed failed, some of its bonds written off, and its remaining assets purchased by its neighbor and competitor UBS.

Why has this happened? Certainly Credit Suisse’s problems did not start last week. Its fate results from a combination of poor strategic decisions, a rotting culture, and bad luck. The power of its brand had kept the bank afloat despite corporate governance scandals, the choice of wrong partners, and a sequence of CEOs and top executives that were unable to restore confidence and lead a turnaround. And when there was turbulence in financial markets because of the default of Silicon Valley Bank (SVB), the weakest banks sunk first.

While the SVB collapse demonstrates the gaps in US banking regulation, the response of the Swiss National Bank (SNB), FINMA, the Swiss financial regulator, and the Swiss Confederation should be praised as adequate and speedy. SVB’s shareholders and depositors were the victims of a regulatory framework that allows non-systemic banks in the United States to account for fixed income securities as “held to maturity securities”— that is, accounted at cost of acquisition instead of at fair value or market value. When SVB showed financial weakness, depositors started to withdraw their money. Being forced to liquidate such fixed-income securities at depressed values, SVB became undercapitalized and technically bankrupt.

As financial panic spread throughout the world, it reached Switzerland, and Credit Suisse wealth management clients, depositors and shareholders became concerned about the going-concern value of the bank. We heard last night in a historical press conference that survival alternatives for Credit Suisse had been considered from last Wednesday, including splitting the business into parts, nationalization, and an outright sale to UBS. The latter is what ultimately happened after a frantic weekend.

“While the SVB collapse demonstrates the gaps in US banking regulation, the response of the Swiss National Bank (SNB), FINMA the Swiss financial regulator, and the Swiss Confederation should be praised as adequate and speedy”

Together with a group of EMBA students* (we are now in Estonia on a Discovery Expedition) we watched the news conference last night aware of the relevance of such historical event. Switzerland will never be the same.

My early reaction after a sleepless night can be summarized as follows:

Zurich largest city in Switzerland
Switzerland is now in a situation with a single, large retail bank, and a plethora of locally confined cantonal banks which paints a very weird banking market. How will the government foster competition in a key sector for the Swiss economy?

As I write these lines, I worry about how this will all play out. There is further damage to be inflicted to Credit Suisse’s reputation when UBS disposes of its Investment Banking arm. The popular response in Switzerland, and the subsequent reaction by the Swiss Legislative (let’s not forget that the Federal Assembly has to confirm the bailout within the next six months) are both uncertain. As shown by the initial reaction of stock markets to the news, a global banking crisis does not appear to have been averted, so we need to remain cautious. Finally – and thinking domestically – Switzerland is now in a situation with a single, large retail bank, and a plethora of locally confined cantonal banks which paints a very weird banking market. How will the government foster competition in a key sector for the Swiss economy?

First the pandemic, then the war in Ukraine, and here we have a third unthinkable, unforeseen event. We are moving from an era of uncertainty to an era of total unpredictability.

*This article has been written with contributions by and inspiration from Davide Serrago, and Hanh Nguyen

Authors

Arturo Bris - IMD Professor

Arturo Bris

Professor of Finance at IMD

Arturo Bris is Professor of Finance at IMD. Since January 2014, he has led the world-renowned IMD World Competitiveness Center. At IMD, Bris directs the Strategic Finance and Navigating Fintech Innovation and Disruption programs. He also previously directed the flagship Advanced Strategic Management program between 2009 and 2013.

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