Is the Swiss banking system still as stable and reliable today after the Credit Suisse case? – The risks after the takeover by UBS and comparisons with the 2008 crisis
The latest rapid developments with the collapse and takeover of Credit Suisse have called into question a “stable” that seemed indisputable. After all, does the Swiss banking system remain as stable and reliable today after the Credit Suisse affair?
In its article, Politico talks about the most “dramatic” case of banking collapse since the financial crisis of 2008, while raising the question of whether and to what extent the collapse of Credit Suisse can create “dominoes” conditions.< /p>
On Sunday, 3/19, UBS – once a rival bank – is acquiring Credit Suisse for 3 billion Swiss francs in shares, with the aim of protecting investors and deposits, which – as Politico notes – achieved, at least temporarily.
“But the devil is in the details,” comments Politico, expressing concern that the way the bailout was structured may “make things worse.”
Why Credit Suisse case raises fears of dominoes?
Since the 2008 financial crisis broke out, regulators have tried to pursue strategies to prevent the “contagion” of banking institutions by other banks that were already at risk.< /p>
But in the case of Credit Suisse, the Swiss authorities overturned this rule by charging bondholders first, which has caused financial panic throughout the system.
This very development “gives rise” to the anxiety of many actors in the banking system about the possible “spread” of the “contamination”. In summary, the main fear is the risk that investors will see bonds that are now “risky” and sell them on “sell-off” terms, driving prices down and calling into question confidence in the banking system as a whole.< /p>
Following the Credit Suisse sell-off, European regulators issued a statement assuring investors that in the event of a bank failure, shareholders would be the first to suffer.
Despite assurances and the reassuring atmosphere of the first days, the collapse of Credit Suisse puts into focus a series of questions and doubts about the degree of stability of the system.
The first issue raised by Politico is related to the fact that Credit Suisse was a well-capitalized bank and had a lot of assets, parameters that may indicate a deficiency in the rules put in place in the banking system in the wake of the great crisis of 2008. It is noted that Swiss authorities confirmed that the bank was not exposed to higher interest rates, unlike SVB.
That all came to naught last week, when assurances to hold back the share price were falsified and Saudi National Bank, one of Credit Suisse's investors, decided to withdraw its money.
The “sinful” past of Credit Suisse
The problems for Credit Suisse, however, started much earlier. With pressure to increase the bank's profitability intensifying, Credit Suisse hired Tijan Thiam as chief executive in 2015 with a mission to strengthen the institution.
Only Thiam introduced an extensive restructuring program, which focused on cutting thousands of jobs, but also cutting costs in the investment department.
These efforts soon encountered serious obstacles, culminating in the bank's involvement in a series of damaging scandals, among them the collapse of the hedge fund Archegos, which “burdened” the bank with a loss of 5.5 billion dollars. The employee surveillance case was another blow, forcing the bank executive to leave.
Credit Suisse's board tried to continue the restructuring efforts that Thiam had started, but the next CEO, Thomas Gottstein, admitted that more reforms were needed to overcome structural problems.
In 2021, the bank received another blow with its involvement in the collapse of Greensil Capital. The cuts and restructuring plans continued under subsequent administrations to no avail, while the Russian invasion of Ukraine was to be yet another “blow” to the banking institution, until we finally reached the collapse a few days ago.
Given the banking institution's “tumultuous” history, Credit Suisse's collapse seemed “just a matter of time.” What remains to be seen is its effect, in the short and medium term, on future banking developments.