As Switzerland digested the news of Credit Suisse’s takeover by rival UBS, the headlines were unequivocally bleak. The deal is a “historic scandal,” wrote the daily Tages-Anzeiger. It marks the “end of an era,” according to Switzerland’s public broadcaster SRF. The country’s leading daily, Neue Zürcher Zeitung, found even stronger words: “A zombie is gone, but a monster has been created.” read one headline.
It is of course quite literally the end of an era when a 167-year-old banking institution that has been near-synonymous with Swiss finance ceases to exist as an independent entity. And there are important, as-of-yet unanswered questions about the deal brokered by the Swiss government, and its implications.
But Credit Suisse’s demise has been years in the making — a slow, painful unraveling marked by disastrous decisions, multibillion-dollar bets gone awry, and a revolving door in the c-suite, all of which steadily eroded confidence in the firm. Its CHF 100 billion market capitalization in 2007 had withered to a paltry CHF 7 billion by last week.
After UBS, ushered in by regulators, offered to buy the company, NZZ commentator Christoph Eisenring summed up the overwhelming sentiment, declaring March 19 a “dark day for Switzerland’s place in global finance.”
But if anything, the swift, decisive action over the weekend by a diverse set of public and private stakeholders shows that Switzerland remains trustworthy as a place to bank.
The alternative to a Credit Suisse acquisition by UBS
Let’s imagine what Monday, March 20, 2023, could have looked like. Overnight, Credit Suisse’s share price likely would have been under further pressure on Asian markets, leading to a sharp drop as soon as Zurich trading opened that morning.
Spooked by a freefalling share price, depositors would have further accelerated withdrawals, quickly topping the previous week’s CHF 10 billion in outflows. Several Credit Suisse counterparties had already curbed any new dealings with the bank; a number of them could have moved to unwind their positions. With earlier Swiss National Bank lifelines clearly not calming markets, and counterparty risk taking center stage, investor fears could have spread to other European banks and financial institutions, in turn putting pressure on their share prices and liquidity.
Combined with the ripple effects of Silicon Valley Bank’s collapse in the US a few days earlier, a worsening picture for Credit Suisse might have triggered the kind of contagion dynamics that engulfed global financial markets in 2008.
Of course, none of this happened because the trinity of the Swiss National Bank, the Swiss finance ministry, and the finance regulator Finma organized a shotgun wedding, cheered on by America’s Federal Reserve and Treasury Department as well as regulators in Brussels and London. To pull this off, they were willing to set aside basic standards of good corporate governance; impose a significant haircut on Credit Suisse shareholders, including powerful investors from Saudi Arabia and Qatar; wipe out CHF 16 billion of Additional Tier 1 (AT1) capital bonds; expose taxpayers to unknown future liabilities; accept significant job losses in Switzerland; and create a near-monopolist in domestic national banking.
A time for decisive action
Let me be clear: As a liberal, I am not thrilled about what transpired. I sympathize with those who argue that capitalism means that sometimes firms go bankrupt, that we need more competition and not less, and that the whole notion of “too big to fail” is a perpetual moral hazard that invites excessive risk-taking.
And yet, we live in a world in which governments, if necessary, must be prepared to take decisive action. Whether it is responding to covid, mobilizing to support Ukraine, keeping the lights on amidst gas shortages, reducing dependence on Taiwanese semiconductors, or facing down French unions over pension reforms, assertive governments are back.
Why should anybody be reassured by the fact that the Swiss government was willing to run roughshod over principles, powerful interests, and even the law? “You make fun of dictatorships and then you can change the law over the weekend. What’s the difference between Saudi Arabia and Switzerland now?,” the Financial Times quoted a person close to Credit Suisse’s three largest Middle Eastern shareholders.
The Swiss government’s actions are reassuring precisely because they are costly (both financially and perhaps reputationally) and because they represent such a decisive departure from established protocols and prior expectations.
In 2012, Mario Draghi saved the euro with three powerful words, telling investors the ECB was willing to do “whatever it takes” to preserve the common currency. The fact that politicians in Bern were able to work with UBS and Credit Suisse to put together a deal of this magnitude over a weekend, in concert with American and European counterparts, sends an unmistakable signal: that the Swiss government will do “whatever it takes” to preserve and protect financial stability.
Ultimately, in a world of chaos and turbulence, that is good news for those concerned about Switzerland’s place in global finance.