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    Swiss Francs Bank UBS Credit Suisse

    Finance

    Switzerland will suffer the shadow cost of Credit Suisse/UBS arranged marriage

    by Salvatore Cantale Published 23 March 2023 in Finance • 4 min read

     

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    Iconoclast: n. A person who attacks or criticizes cherished beliefs or institutions. 

    This on-going column is intended to challenge the status quo. Not always giving answers, not always right, but smartly challenging our own assumptions, actions, organizations and institutions. 

    By ignoring the views of UBS shareholders, trashing the priority rule, and failing to protect Credit Suisse shareholders, regulators have tarnished the reputation of Swiss banking for years to come.

    The dust has not yet settled on the spiraling of events involving Credit Suisse and UBS. However, this tale of regulators, large banks, and a complex set of stakeholders will leave a red mark on the reputation of Switzerland as a leading global financial center.  

    Swiss regulators – the Swiss National Bank (SNB), Swiss Financial Market Supervisory Authority (FIMNA), and other authorities – have orchestrated a last-gasp merger between two of the most prestigious banks in Switzerland. A deal had to be done, but the details have stoked controversy and rattled investors. Crucially, the interests of investor stakeholders were not considered according to the same measure; the Swiss regulators favored some and penalized others. 

    Swiss banking is about stability and predictability, which the Swiss and the international financial community attach great value to. In Switzerland, for better or for worse, you live by the rule, you die by the rule: ownership is protected, and property rights are preserved.

    The events of the last days, however, deviate far from that convention. Three decisions will probably have long-lasting repercussions on the reputation of the Swiss financial center.

    UBS
    One of the most troubling features of the rescue deal is that the acquisition of Credit Suisse will not pass by UBS’ shareholders for approval.

    One of the most troubling features of this deal is that the acquisition of Credit Suisse will not pass by UBS’ shareholders for approval. To get this through, the Swiss authorities have to change Swiss law. This is a blatant attack on good corporate governance – and on the meaning of ownership.

    Considering the reaction in the press, it looks as if institutional shareholders and people on the street agree. If you are a UBS shareholder and you oppose the deal, it will be a bitter pill to swallow. If you are a UBS shareholder and you support the deal, your rights have still been ignored. Wherever you are on the spectrum, you have good reasons to feel aggrieved.

    Changing the law to bypass shareholders hardly constitutes good corporate governance and sets a dangerous precedent.

    Second, some bonds, called contingent convertible or CoCo bonds, were completely wiped out, and yet Credit Suisse shares were not (indeed, UBS will pay some CHF 3bn+ for the equity of the company). It is extraordinary that the Swiss regulators considered holders of Credit Suisse CoCo bonds as lower priority than Credit Suisse shareholders. Simply put: in bankruptcy, debtors (i.e., bondholders and debtholders) normally get priority, and shareholders must make do with what is left. There were conditions under which these bonds could be written down, instead of being converted to shares, but the priority rule has still been ignored.

    The decision to wipe CHF 17bn of debt from the Credit Suisse balance sheet had the clear objective of sweetening the deal for UBS but failed to respect the claims or reasonable expectations of bondholders.

    A man walks past the Swiss National Bank building in Zurich
    “The regulators’ decisions and actions have imposed a big cost on Switzerland and its international reputation”

    The implications were immediately felt. EU and UK authorities felt the need to step in to reassure the market that deviation from priority rules will not be applied on their turf. But investors might now be wise to demand higher returns on CoCo bonds in the future, especially Swiss CoCo bonds.

    This decision has rattled investor confidence and ignored the expectations of bondholders. To enable this rushed takeover, the Swiss regulator was apparently prepared to accept any market ramifications and the consequences for the commonly accepted rules of ownership. 

    Finally, despite being valued above CoCo bondholders, Credit Suisse shareholders could still be forgiven for feeling undervalued in the rescue deal. Credit Suisse entered last weekend at CHF 1.86/share and emerged on a deal that is worth about CHF 0.85/share. Yes, the share price could have deteriorated further over the weekend, but arguably this deal was one of the worst days for Credit Suisse shareholders since the crisis of 2008. It’s also worth remembering that UBS received a generous package from the government to make the deal more palatable (among other help, the SNB offered UBS a CHF 100 billion liquidity facility).

    This transaction did not deliver to Credit Suisse shareholders what the market believed the bank was worth, practically eroding their ownership rights.

    Swiss regulators were in a rush to close the deal. Once they decided to step in, an arranged marriage with UBS was perhaps the only solution available – and avoided the humiliation of nationalization. But the regulators’ decisions and actions have imposed a big cost on Switzerland and its international reputation.

    A timelier intervention and a more balanced approach would have served Swiss (and global) banking better. The repercussions will be felt for years to come.

    Authors

    Salvatore Cantale - IMD Professor

    Salvatore Cantale

    Professor of Finance at IMD

    Salvatore Cantale is Professor of Finance at IMD. His major research and consulting interests are in value creation, valuation, and the way in which corporations structure liabilities and choose financing options. Additionally, he is interested in the relation between finance and leadership, and in the leadership role of the finance function. He directs the Finance for Boards, Business Finance, and the Strategic Finance programs as well as the Driving Sustainability from the Boardroom program and the newly designed Bank Governance program.

     

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