Swiss banking: a damaged brand

The CS tragedy pointedly questions the role of Swiss banking for the nation’s financial sector and economy. Financial markets, as well as Swiss citizens, dislike ambiguity. At a minimum, the country ought to signal that it is cognizant of the fact and committed to confront the question head-on. 

The need to deal with crisis in an authoritative way  

Switzerland risks now paying significantly for the failure of banking authorities and supervisors to effectively manage its preparedness and intervene earlier. Recent events heightened its vulnerabilities, despite the importance of the Swiss banking model to its domestic financial and economic sectors, as well as to the global financial system. The CS crisis thus questions the viability of the Swiss economic model.   

Two of the main principles of crisis management are the overarching importance of correctly framing any crisis and its roots, and the need to act rather than react. In crisis, inaction is worse than reaction; it is imprudent. Slowness often leads to a worsening of the crisis. What may be initially presented and perceived as prudence and strength often turns into inaction and hesitation, and ultimately becomes weakness. The common saying “manage the crisis, otherwise the crisis manages you” captures this chain of events well.  

Blame is one sign of such a state of affairs. Swiss Financial Market Authorities (FINMA) came out in 2021 with a report indicating that the capitalization of Postfinance – one of the four remaining big Swiss banks with Raiffeisen, Zürcher Kantonalbank (ZKB), and UBS – was insufficient to face current risk levels.  Postfinance was quick to point out that Finma data was outdated. The Federal Administrative Court recently sided with Finma.  As a result of the CS downfall, Finma is now being sued by international investors and borrowers.  Finma itself has just come out saying that it needs additional means for sanctioning banks and their errant managers.  Interestingly, boards of directors, who are legally responsible for their organizations, seem to still not be in the front of the firing line.  Yet, legislators are now discussing a cap on bankers’ bonuses, underlining the distrust of authorities in banking boards. 

The Chairman of the Saudi National Bank (SNB), CS’s biggest shareholder, happily joined the list of those being blamed, when he said that the “SNB would absolutely not invest further money into CS, for many reasons outside the simplest reasons, which are regulatory and statutory.”  Instead of being proactive and engaging with its shareholders, and particularly the SNB, ahead of these events regarding their views, CS was surprised by such non-committal comments, and eventually blamed SNB CS for triggering the demise of the bank. The SNB Chairman has since stepped down, but the damage was done. 

The Swiss authorities waited too long. They had decided not to do for CS what they had done for UBS during the GFC. No rationale for the final solution was given, only that a “commercial” solution was sought, and that no other solution existed.  Yet, Black Rock was interested in repeating an earlier transformational move, when it bought BGI, Barclays’s investment arm, in 2009.  The Swiss Government did not welcome the Black Rock offer, even when this option would have maintained the two big bank system, allowing the Government to take control of the Swiss operations of CS – even if temporarily through a “bridge bank” so as to ultimately offer a healthy and competitive bank to the market.  The solution could have stemmed a precipitated exit of another CHF35 billions of CS deposits, a further slide of the CS share price, and a further exit of CS talent out of the bank.