For decades, Switzerland was considered a “paradise” of legal certainty for bond and stock investors
The collapse of Credit Suisse revealed some “bitter” truths.
For decades, Switzerland was considered a “paradise” of legal certainty for bond and stock investors. The collapse of Credit Suisse revealed some “bitter” truths.
In the race to rescue Credit Suisse, the Swiss government has underlined the need for stability as well as passing an emergency decree that would bypass two key aspects of the open market: competition law and shareholder rights. Subsequently, bondholders discovered a $17.3 billion write-off in the value of their AT1 bonds.
Beyond the shame caused by the collapse of the bank, legal circles argue that the above three unexpected moves raise some fundamental questions about the supremacy of Swiss banking law and sow the seeds of doubt about the placement of capital in the country by foreign investors.
“Foreign investors may doubt whether Switzerland is the right country when the letter of the law is not enforced,” says Peter V. Kunz, professor of economic law at the University of Bern. The country may not be in danger, but there is a risk of legal action following the intervention of the regulatory authorities.
Kern Alexander, Professor of Legal Law and Finance at the University of Zurich, agreed that the management of the crisis was accompanied by a “panicked” way of undermining the laws and with it Switzerland itself.
In announcing the deal, the Swiss government invoked an article in its Constitution that allows it to issue temporary decrees to overcome an imminent threat of serious disturbances to public order or security. In this case, it bypassed the law on shareholder rights in cases of mergers.
Finma president Marlene Amstad was then asked during a press conference on Sunday night whether the Swiss government had ignored competition concerns by pushing through such a merger. The official responded that financial stability made it necessary to sidestep competition concerns.
“The regulatory framework allows us to sidestep competition in the name of financial stability,” she explained.
p>Together, Credit Suisse and UBS will control 333 billion francs ($360 billion) in deposits, 115 billion francs more than rival Raiffeisen, according to UBS.
However, the biggest hit to investors was the regulator's decision to write off $17.3 billion in AT1 bonds issued by Credit Suisse.
AT1 bonds were introduced after the 2008 financial crisis to ensure that investors would bear part of the cost, not taxpayers. This means they act as a capital cushion in times of stress. The paradox is that this debt in other banks in Europe and Britain is more protected.
Even if the risks of these bonds were made clear to investors at the time they took this risk, the difference with other banks in Europe means a departure from the general rule that bondholders are compensated first before shareholders.
“Many lawsuits will follow, which reflects the arrogant and wrong-headed behavior of the Swiss authorities,” reports Jacob Kirkegaard. , a PhD holder at the Peterson Institute for International Economics.
The Ethos Foundation, whose 246 member pension funds manage CHF 370 billion in assets, has threatened legal action.
moneyreview.gr with information from Bloomberg