MAIN FACTS AND CAUSES
The Credit Suisse case has been reported and commented by the majority of Economics Journals as one of the most interesting and complex in the last decade. The crisis of Credit Suisse was mainly due to a lack of confidence and an inappropriate risk management.
Founded in 1853 Credit Suisse is one of the most important financial institutions in Switzerland and Europe. It is internally divided into four main divisions: wealth management, investment bank, swiss bank and asset management. Even though Credit Swiss is based in Switzerland it is spread all over the world and the global divisions are distinguished into: Switzerland, EMEA, APAC, and the Americas.
Through the years Credit Suisse has survived many crisis- according to experts even better than competitors. However, it has been involved in many scandals, the most recent of which led to the merger agreement with UBS last March.
After a report of a full-year net loss of 7.3 billion Swiss francs for 2022, predicting a similar loss for 2023, many investors developed liquidity concerns. On the back of its annual results in early February there was another sharp share price fall, so that Credit Suisse entered March 2023 trading 2.85 CH per share.
Things got worse on the 9th of March, when the SEC questioned the consolidate cash flow statements of 2019 and 2020. Similarly, the financial reporting processes for 2021 and 2022 were found to lack of consistency and clarity. As a reaction the Saudi Nation Bank – one of the most important investors for Credit Suisse- said it would not be able to provide more funds to Credit Suisse. The market reaction was prompt and catastrophic. Between the end of 2022 and the first months of 2023, Credit Suisse share price went from CH2.70 (1st of December 2022) to 0.82 (20th of March 2023), registering more than 200% loss in its share price.
After that and the consequent shrinkage of its capital, the Swiss central bank was forced to intervene in an emergency operation. However, this first move, which provided Credit Suisse with $54 bn was not sufficient to stop the decline on the market. Indeed, the price fell to record lows while an array of wealth management clients closed their positions.
Hence, an intervention to save Credit Suisse was inevitable.
It was on Friday the 17th of March that Swiss regulators came up with the idea of a merger with UBS to avoid the collapse of investors’ confidence and therefore the default of Credit Suisse. They also discussed different options from a full takeover to the risk of such a deal. UBS and Credit Suisse were two of the most important European banks and the merger of the two would have created one of the biggest systemically important financial institutions in Europe. Considering that and the current situation of the market, the weekend was dedicated to setting up a feasible deal to be implemented on the following Monday, at the market opening.
UBS hastily agreed to buy rival Credit Suisse for $3.25bn on Sunday, avoiding what could have caused turmoil throughout the world. The consequences of such declarations came instantly; the rating agency Standard & Poor’s downgraded the bank’s debt ratings the same night. The market reaction was imminent as well. On Monday the 20th of March, UBS share price was down by 13% to CH14.79.
REACTIONS TO THE SCANDAL
Regulators were pretty confident about the current regulation system until the recent events. Indeed, after the financial global crisis in 2008 new protocols have been implemented. However, they were not enough to avoid tensions in the banking sector. Indeed, in less than a couple of months, three banks in the USA have collapsed causing n overall distress in the banking sector. Finally, the merger between UBS and Credit Suisse has shacked the European environment. Such events have brought regulators to review their approach and have unveiled the need for further regulation or at least stricter controls. With respect to that, the governor of the Bank of England, Andrew Bailey declared last month that the UK’s deposit insurance scheme, which guarantees £85,000 of a customer’s money, may need reforming.
The first question is whether the BoE should raise the insurance amount to £100,000. Secondly, the BoE is considering how the deposit guarantee interplays with rules, such as the liquidity coverage ratio, which dictates the level of liquid funding a bank must maintain.
However, the key feature of the entire banking system is confidence. It was a lack of confidence which caused a massive withdrawal of Silicon Valley Bank’s deposit- the majority of which were not covered by any guarantee. Thus, the prompt intervention of the FED. Similarly, also Credit Suisse has experienced a bank run. After Saudi Bank head’s declaration that Credit Suisse had lost 40% of its asset value, the majority of Saudi investors withdrew their fundings- a significant component of Credit Suisse wealth management sector. That worsened the situation.
It goes without saying the merger in question was forced by the circumstances.
The reaction was a general disapproval. Firstly, some parliamentarians have questioned the use of emergency powers by the government. The finance minister answered that it was the only choice to avoid the unacceptable financial risks taxpayers would have otherwise incurred into.
Not only have political parties expressed their opposition, but also citizens. According to polls, more than three-quarters of Swiss citizens are against the takeover. Therefore, the majority ask the government to split up the two banks or even cut bonuses to the senior managers who are held responsible for that. As it wasn’t enough, Switzerland’s federal prosecutor has opened an investigation into the matter. The aim is s to find out whether any fraud was committed during the procedure.
Some findings have already come up and it seems some sensitive information about the negotiations might now have been properly disclosed. However, the prosecution is still open and will continue. Some of those investors of wiped-out Credit Suisse bonds have filed a lawsuit against Switzerland’s banking regulator, Finma. The complaint is about Finma allowing Credit Swiss to cancel the $17bn of convertible “AT1” bonds. Those are high risk bonds since under certain circumstances- i.e., when the bank’s own funds are not sufficient according to regulation – they might be converted into equity, thus they will not be paid back.
However, the above-mentioned procedure is technically permitted when a bank is facing a crisis, according to the AT1 regulation. Moreover, the Swiss government had issued an emergency order to explicitly expand Finma’s powers Still, the bondholders maintain their position. Their anger further increased as subordinate Credit Suisse shareholders will see $3.25bn worth of UBS shares given to them.
According to lawyers, it will be a multi-year process, one of the biggest disputes between bondholders and a sovereign country. Therefore, the law firm working with bondholders advised them to just ask for compensation, avoiding the long trial. Still, they are quite confident a huge amount of information has been withheld by the government, using official secrecy law. Beyond Swiss investors, also foreign bondholders coming from countries which have signed bilateral investment treaties with Bern – such as Singapore- may seek redress through arbitration mechanisms.
Sam Jones- Financial Times – 21 April 2023 https://www.ft.com/content/c2006389-58e9-4c50-ac18-85abced34991
Sam Jones – Financial Times – 2 April 2023 https://www.ft.com/content/7c87b958-139c-49dc-9740-4c11c88b737a
Patrick Jenkins- Financial Times – 17 April 2023 https://www.ft.com/content/d02957dc-1d78-4da1-8a9b-acec91ab2de5
Sam Jones in Basel- Financial Times – 6 April 2023 https://www.ft.com/content/e2c33477-96ee-4774-b3ad-f45744105515
Elliot Smith- CNBC- Friday 17 March 2023- https://www.cnbc.com/2023/03/17/credit-suisse-timeline-how-years-of-turbulence-came-to-a-head.html