The situation with Credit Suisse is problematic in many ways. First of all, it is a big European bank that can infect other banks. Second, in terms of size, bailing out such a large bank represents a great challenge for a country as small as Switzerland. Third, the creation of a mega-bank (the takeover by UBS) considerably raises the systemic risk for a country so dependent on the banking and financial sector. What is the problem? There aren’t many options. What must be done must be done. Doing nothing is much worse.
Unfortunately, this crisis has seriously damaged Switzerland’s reputation. The intervention of the authorities was certainly necessary. But many “sacred” laws were broken in the process. On the one hand, the government stripped the bank’s shareholders of their voting rights to get the UBS deal done as quickly as possible. It was necessary. However, it sets a very damaging precedent for the reputation of the Swiss banking system. What’s more, Swiss authorities also recklessly removed some bondholders before shareholders, thus upending the traditional hierarchy of losses in a bank failure and dealing another blow to the country’s reputation among investors. Fatal.
The banking business is a trust business. Can I trust Swiss banks? The investor asks himself this question before placing his money there. And that is very relevant for Switzerland, because the Swiss economy depends, to a large extent, on its reputation. Why have the Swiss always inspired so much confidence? Due to Swiss institutions. Law and order. The good regulation.
The Credit Suisse collapse casts doubt. And doubt can be deadly. Because every catastrophe begins with a doubt. A doubt can predispose the investor. And, in times of crisis, fear and pessimism can destroy everything. What went wrong? Why didn’t regulators act in time? Why did they violate “sacred” laws? What’s to stop them from doing it again?
What happened? After the bank shared its weakness found in its 2021 and 2022 reporting process (which includes the lack of effective risk assessment to identify errors in its financial reports), The Saudi National Bank, Credit Suisse’s biggest backer, said it would not buy any more shares in the Swiss bank.
This worried investors a lot for several reasons. Why did management allow such a mistake? Is it dishonest actors? Or are they just incompetent? Why were the regulators unaware of the situation? Why didn’t they do something about it? Can the bank survive without its biggest backer? Doubts and more doubts. And this is never good for a bank.
The truth is that the Silicon Valley and Signature Bank collapses are not very connected to the Credit Suisse collapse per se. Of course, one crisis puts the other in the public light. However, Credit Suisse has been involved in multiple scandals in recent years. In fact, the bank ended fiscal 2022 with a loss of nearly $8 billion, its biggest loss since the 2008 global financial crisis. I mean, things have been bad for a while.
Credit Suisse, for example, was convicted in June of last year for failing to prevent money laundering by a Bulgarian cocaine-trafficking ring. Swiss authorities say these criminals laundered millions of dollars through the bank and fined the institution $2.1 million for it. Which is nothing for a bank the size of Credit Suisse. However, this all adds up. In the investor’s mind, so many scandals in one place carry weight. Above all, in the presence of losses. It’s much harder to be lenient with a bank with red books.
In March 2022, a Bermuda court ruled that the bank owed former Georgian Prime Minister Bidzina Ivanishvili and her family about $500 million in damages from local Credit Suisse life insurance company. It was established that Pascale Lescaudron, a former adviser to Credit Suisse, committed fraud against the family for a long time. The case will cost around $600 million. Another blow to the bank’s reputation.
Tidjane Thiamel, the chief executive of Credit Suisse, was forced to resign, in 2020, after it was discovered that the bank hired private detectives to spy on its former head of wealth management after he left to join a rival bank. Scandal after scandal.
The banking business is based on trust. If your customers lose their trust in the bank, they take their money and take it elsewhere. And this run creates a mismatch between liabilities and assets. In other words, what occurs afterwards is a liquidity crisis. ANDhe collapse of the banks in the United States served as a coup de grace for Credit Suisse. Because now everyone is paying attention. What are the weakest links in the chain?
Most regrettable is what this collapse means for Switzerland. The risk is rising significantly. Suddenly, Switzerland no longer seems as safe a haven as it used to be. It didn’t surprise me that many people start moving their money to larger lenders of last resort. Big banks in bigger economies could be the beneficiaries.
What will be the next bank to fail? Deutsche Bank? I’d love to think that these crashes are actually independent cases. However, it was very worrying that lately a new surprise emerges every week. This one is turning ant-colored. TOApparently, each fire has been contained in time due to the rapid and forceful response of the authorities. However, that 2023 is starting to look a lot like 2007-8. Hopefully it doesn’t go that far. Fingers crossed.
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