Days before a hastily called press conference on Sunday that was to make headlines around the world, Switzerland’s political elite was secretly plotting a move that would rock the world.
With the country’s central bank and financial regulator publicly declaring that Credit Suisse was sound, behind closed doors the race was on to save the country’s second-largest bank.
The chain of events led to the obliteration of one of Switzerland’s flagships, a merger backed by 260 billion Swiss francs ($280 billion) in public funds, and a decision that would shake up global finance: favor the bank’s shareholders to the detriment of bond investors.
Events in the landlocked country – long a bastion of political neutrality that has clinched status as a preferred safe haven for wealthy elites – run counter to one of the main lessons of the 2008 financial crisis. bailout concentrates even greater risks in a banking juggernaut, UBS Group AG.
Additionally, bondholders cushioning the shock to equity investors from UBS’s combination with Credit Suisse has rattled creditors, driving up the cost of their borrowing and threatening global economic growth. .
The Swiss National Bank declined to comment, while the finance ministry did not respond to a request for comment.
Tested by years of scandals and losses, Credit Suisse had been struggling for months in a crisis of confidence that it had itself caused. Within days, his disappearance was sealed.
Shortly after the March 12 announcement of US intervention to guarantee all deposits of two medium-sized creditors struggling to meet liquidity demands, the spotlight fell on Credit Suisse and the how it would manage to maintain the trust of depositors.
Customers have already withdrawn $110 billion from the Zurich bank in the last three months of 2022, outflows which it is working to reverse.
A middleman who brokered a number of European bank bailouts during the financial crisis, speaking on condition of anonymity, told Archyde.com that after watching U.S. banks collapse he was doing little doubt that UBS would be called upon to support Credit Suisse.
On March 13, the banker called UBS to warn the world’s largest wealth manager that he should prepare for a call from Swiss authorities.
Two days later, on Wednesday, Credit Suisse was plunged into a real crisis. Comments by Saudi National Bank President Ammar Al Khudairy, who said he could no longer invest in the Swiss bank, sent Credit Suisse shares falling.
The fact that Credit Suisse’s largest investor also reiterated its confidence in the creditor hardly mattered. “This is a global systemically important bank that is monitored daily,” he told Archyde.com. “There are no surprises like in the case of a medium-sized bank in the United States. It’s a completely different ecosystem.
Large deposit outflows followed, the source who would advise UBS on the merger told Archyde.com, declining to quantify them.
In the banking center of Zurich and in Bern, the capital of the Alpine state, the pressure was mounting. Yet as talks to save Credit Suisse began, Swiss regulators FINMA and the Swiss National Bank said that “the problems of certain banks in the United States do not pose a direct risk of contagion for Swiss financial markets”, conceding however that they would fund the bank with unlimited access to funding.
Credit Suisse has also expressed its stability. The bank told Archyde.com on Thursday that its average liquidity coverage ratio, a key measure of how much cash-like assets the bank has, had not changed between March 8 and March 14, despite the crisis. global banking.
Swiss Finance Minister Karin Keller-Sutter, a former translator and teacher on the job for only a few months, told Sunday’s press conference that further aid to Credit Suisse had been decided upon, but had been kept secret for fear of panicking the population with a succession of emergency announcements.
She said she was in close contact with US Treasury Secretary Janet Yellen and UK Finance Minister Jeremy Hunt. Both countries have large Credit Suisse subsidiaries that employ thousands of people.
Communication with the European Central Bank in Frankfurt has been much less, a person familiar with the matter said. Credit Suisse subsidiaries in Luxembourg, Spain and Germany were much smaller.
European regulators were particularly concerned that the Swiss would impose losses on bondholders – a drastic step they took as the costs of a bailout soared for taxpayers.
“They did it on their own,” said the person, who asked not to be named and called the result a “big surprise.”
A FINMA spokesperson said that while the focus was on Britain and the United States due to the scale of Credit Suisse’s business in those countries, FINMA had also informed European authorities.
However, not everyone was kept in the dark.
Saudi investors, who own about 10% of the bank’s shares, have pressured the Swiss, warning them they could take legal action if they don’t get back some of their ill-fated investment, another said. person with knowledge of the case.
Saudi National Bank did not immediately respond to a request for comment.
“The money had to come from somewhere,” said one of the officials involved in the negotiations.
The Credit Suisse board, keen to preserve some unity in an increasingly divisive environment, backed them and argued for a payout to shareholders, the person said.
Regulators, too, wanted to prevent shareholders from being wiped out, which would have resulted in the bank’s liquidation, a potentially bigger headache for the nation and loss of face just hours after backing Credit Suisse.
Eventually the Swiss agreed, choosing to write off 16 billion francs worth of bonds, compensate shareholders to the tune of 3 billion francs, and overturn a key principle of bank financing, namely that it is the shareholders and not the bondholders who are the first to be affected by a bank failure.
It’s an ignominious end for an institution founded by Alfred Escher, a Swiss magnate affectionately known as King Alfred I, who helped build the country’s railways. Credit Suisse is the banker for many Swiss companies and citizens, including the Minister of Finance, Ms. Keller-Sutter.
On Sunday, when the deal was announced by a group of Swiss officials and leaders, they were unrepentant.
“This is not a rescue,” Keller-Sutter told reporters. Central bank chief Thomas Jordan defended the package, saying it was necessary to counter any larger shocks.
“In this scenario, the taxpayer is at less risk,” Ms. Keller-Sutter said. “Bankruptcy would have been the highest risk, as the cost to the Swiss economy would have been enormous.
Nevertheless, the markets are reeling from the extraordinary turn of events.
“When you’re a bank for billionaires, deposits can skyrocket very quickly,” said one of those affected. “You can die in three days.
(1 dollar = 0.9287 Swiss franc)