A “Swiss finish” was traditionally the description given to the extra layer of financial safeguards demanded by Switzerland’s bank regulators — reflective of the high quality the country has traditionally been famed for, from its watches to its banking sector. The demise of Credit Suisse has lent the term an unfortunate new meaning.
But the fateful irony may not end there. The way CS failed, the mechanics of its shotgun rescue by arch rival UBS and the hangover implications for “Finanzplatz Schweiz” — the Swiss financial centre as a whole — are profound.
Much of the blame for Credit Suisse’s problems must clearly be levelled at the bank itself — its aggressive culture, poor risk management and fudged decision-making. But the very regulatory system that was supposed to give the banks a halo of virtuous strength was, it turns out, another part of the problem.
In 2019. a trio of academics from Yale School of Management and the Deutsche Bundesbank questioned the unusually important role in the country of so-called contingent capital instruments, which suffer writedowns in value or convert to equity in times of stress to absorb losses. The academics said the extent of the use of AT1 bonds, one form of contingent capital, in the banks’ regulatory capital structure “may call into question the extent to which the Swiss Finish to [global rules] represents a meaningful enhancement to the [global] framework”.
Finma, the prudential regulator, has been criticised for failing to police Credit Suisse’s financial strength adequately. And Finma, along with the Swiss government, is now in the crosshairs of US investors, who have accused Switzerland of acting like a “banana republic” over the decision to upend the usual investor hierarchy and wipe out AT1 bondholders, while preserving some equity value. The whole point of contingent capital — to help stabilise a failing institution in a predictable way — has been thrown into doubt.
This all matters because Switzerland’s banking system is vast. Its total assets are equivalent to 520 per cent of the country’s GDP, a far higher proportion than any other developed country.
The past 15 years have been tough for Swiss banking. UBS, today the rescuer of CS, was itself on its knees back in the 2008 financial crisis. Soon afterwards US tax authorities went after Swiss banks for facilitating the evasion of taxes by US citizens and by 2018 the country’s long-standing bank secrecy rules had been stripped away. Though some Swiss bankers are pleased, saying it clears away a whiff of potential criminal association, it has also removed a draw for some clients.
Then began the drip-drip of scandal at CS, culminating in this month’s collapse. At least half a dozen further injuries will be inflicted on the Swiss financial centre as a result. At the most obvious level, the episode has profoundly damaged Switzerland’s reputation in investment banking, wealth management and regulation.
The way in which the authorities used an emergency ordinance to write down the value of AT1 bonds to zero without even a parliamentary vote as yet undermined Switzerland’s long-standing reputation for a solid and predictable rule of law.
The specifics of the treatment of CS’s AT1 bondholders, now the subject of legal challenge, has hurt the reputation of the Swiss authorities as well as the country’s banks. Further issuance will be extremely difficult for some time and key investors, particularly wealthy Asians, many of them Swiss bank clients, have lost a lot of money — and faith in their banks.
Shareholders too have been all but wiped out, damaging another wealth management client group, this time in the Middle East, where shareholders from Qatar and Saudi Arabia have lost billions of Swiss francs.
The net result is that UBS alone will now account for two and half times the GDP of Switzerland, an even more challenging “too-big-to-fail” risk for the country. Domestically there is the related risk for retail banking thanks to a competition waiver on the deal. JPMorgan estimates the combined bank will have around 30 per cent of the market.
Switzerland, of course, remains an appealing place, with a highly skilled workforce, deeply embedded democracy and a sophisticated financial system. . And New York and London bounced back from their banking failures. The country also might end up having a stronger national champion in the bulked up UBS. But it is clear Switzerland should have recognised the scale of problems of Credit Suisse earlier and tackled them harder. If complacency was a factor, that is a lesson that not just for the country but elsewhere in the finance world. The Credit Suisse shock is a reminder of fragility of confidence in banking – even after post crisis-reforms. If Credit Suisse can fall, others can too.
patrick.jenkins@ft.com