Daily Management Review

Switzerland's Covert Bail Out Of Credit Suisse Impacts The Global Financial World


Switzerland's Covert Bail Out Of Credit Suisse Impacts The Global Financial World
Switzerland's political elite were covertly planning a move that would shock the world days before a hastily called press conference late on Sunday that would make headlines around the world.
Behind closed doors, a race to save the country's second-largest bank was underway even though Credit Suisse was publicly deemed sound by the central bank and financial regulator of the country.
A series of events culminated in the erasure of one of Switzerland's most recognizable brands, a merger supported by 260 billion Swiss francs ($280 billion) in state funds, and a decision that would completely alter the world of finance by favoring the bank's shareholders at the expense of bond investors.
One of the most important lessons learned from the 2008 financial crisis is directly contradicted by the events that occurred in the landlocked country, which has long been a bastion of political neutrality and a favorite safe haven for wealthy elites. Even greater risks are concentrated in one banking behemoth, UBS Group AG, as a result of the rescue.
In addition, forcing lenders to raise their borrowing costs and endangering global economic growth by forcing bondholders to cushion the blow to stock investors from the UBS-Credit Suisse merger.
There were no comments on the issue from the Swiss National Bank and the finance ministry.
Credit Suisse had been battling an internal crisis of confidence for months after being battered by years of scandals and losses. Its demise was predetermined within a few days.
The spotlight was on Credit Suisse and how it would maintain depositor confidence after the March 12 news that the United States would intervene to guarantee all the deposits of two mid-sized lenders struggling to keep up with cash demand broke.
In the final three months of 2022, customers had already withdrew $110 billion from the Zurich-based bank, outflows that it was attempting to stop.
Under the request for anonymity, a rainmaker who orchestrated a number of European bank rescues during the financial crisis told Reuters that there was little doubt UBS would be required to support Credit Suisse in light of the U.S. banking collapses.
On March 13, the banker called UBS and warned the largest wealth manager in the world to get ready for a call from Swiss authorities.
Two days later, on Wednesday, Credit Suisse had become embroiled in a serious crisis. Credit Suisse shares plunged after remarks made by Ammar Al Khudairy, the chair of the Saudi National Bank, in which he stated that he could no longer invest in the Swiss bank.
It made little difference that Credit Suisse's largest investor reiterated his support for the lender. They are "monitored on a daily basis" because they are a globally significant bank, he told Reuters. "There aren't any surprises like you might find in a mid-sized US bank. Its ecosystem is entirely different."
Following, there were sizeable deposit outflows, but the source who would later advise UBS on the merger told Reuters without offering an estimate.
Pressure was mounting in the capital of the Alpine state, Bern, and banking hub Zurich. However, as negotiations to save Credit Suisse began, Swiss regulators FINMA and the Swiss National Bank stated that "the problems of certain banks in the USA do not pose a direct risk of contagion for the Swiss financial markets," while also announcing that they would provide the bank with unrestricted funding.
Credit Suisse also exuded stability. In spite of the global banking crisis, the bank said in a statement to Reuters on Thursday that its average liquidity coverage ratio—a crucial indicator of the amount of cash-like assets the bank has—did not change between March 8 and March 14.
After only a few months on the job, Swiss Finance Minister Karin Keller-Sutter, a former teacher and translator, said during the Sunday press conference that additional support for Credit Suisse had been agreed upon but kept a secret out of concern for alarming the public with a series of emergency announcements.
She claimed to be in constant contact with Jeremy Hunt, the British finance minister, and Janet Yellen, the secretary of the US Treasury. Numerous large Credit Suisse subsidiaries in both nations have thousands of employees.
One person with knowledge of the situation claimed that communication with the European Central Bank in Frankfurt was significantly less. The branches of Credit Suisse in Germany, Spain, and Luxembourg were much smaller.
The Swiss took the radical step of imposing losses on bondholders as the costs of a rescue spiraled out of control for taxpayers, which particularly alarmed European regulators.
"They did this on their own," said the person, asking not to be named, describing the outcome as a "big surprise".
A FINMA spokesperson claimed that while it focused on the United Kingdom and the United States due to the size of Credit Suisse's operations in those nations, it had also informed European authorities.
But not everybody was kept in the dark.
Another person with knowledge of the situation claimed that Saudi investors, who own roughly 10% of the bank, put pressure on the Swiss and threatened legal action if they did not get some of their misplaced investment back.
There were comments in this aspect from Saudi National Bank.
"The money had to come from somewhere," said one of the officials involved in the negotiations.
According to the source, the Credit Suisse board supported them and contended for a payout to shareholders out of an interest in maintaining some unity in an increasingly fractious environment.
Regulators also wanted to avoid a wipeout for shareholders because that would have led to the bank being shut down, potentially causing more problems for the country, and costing them face hours after supporting Credit Suisse.
In the end, the Swiss decided to agree, deciding to cancel 16 billion francs worth of bonds and compensate shareholders with 3 billion francs, thus upending a fundamental tenet of bank funding that states that shareholders, not bondholders, bear the brunt of a bank failure.
It represents a disgraceful end for an organization established by Alfred Escher, a Swiss businessman who was jokingly referred to as King Alfred I and who helped construct the nation's railways. Many Swiss businesses and people, including the finance minister Keller-Sutter, are bankrolled by Credit Suisse.
They were unrepentant as a group of Swiss executives and officials announced the deal on Sunday.
"This is no bailout," Keller-Sutter told journalists. Thomas Jordan, the central bank chief, defended the package, as necessary to counter any wider shock.
"The taxpayer in this scenario has less risk," said Keller-Sutter. "The bankruptcy would have been the highest risk because the cost to the Swiss economy would have been huge."
Markets are still in shock over the unexpected turn of events.
"When you are a bank for billionaires, deposits can fly away very quickly," said one of the people involved. "You can die in three days."