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Is there life after death for Swiss banking?

Whether you are a luxury watch enthusiast, a frequent visitor of its amazing skiing resorts, or maybe a fan of Federer’s magic touch, there is no shying away from the fact that Switzerland is synonymous with quality, class, and wealth. These attributes, coupled with the principles of reliability, stability, and discretion, have enabled this small landlocked country in the heart of the Alps to become the world’s largest financial center for wealth management. However, recent months have seen the sector unravel after the near-bankruptcy of one of its key players, Credit Suisse.

The 167-year-old institution, after a decade of mismanagement, faulty investments, and scandals was not able to overcome the growing pessimism among shareholders, with the Swiss government forcing a not-so-competitive takeover by long-time rival UBS. The collapse of the country's oldest financial institution, which bankrolled Swiss economic growth during the last century, could substantially impact Switzerland's reputation as a strong and stable banking center. Despite recent events, the Swiss banking crisis has been a slow-burner rooted in tradition as well as modernization. With growing financial centers such as Singapore and Hong Kong ready to take advantage of the situation, the question of whether Switzerland can keep up with its banking sector is one of global interest.

How did Credit Suisse fail?

Looking back at the state of Switzerland after the global financial crisis of 2008, it’s interesting to see how the roles of the two most prominent banks have reversed. UBS, after being saved from bankruptcy thanks to more than 60 billion USD in loans from the Swiss government and Central Bank, diverted its business from expansion in the US market of investment banking towards more traditional bank practices. Contrarily, a rather unscathed Credit Suisse dove into the riskier world of shadow banking and, often in their case pseudo-legal, asset management. In the last half-decade, Credit Suisse and some of its employees have been under the spotlight for varying scandals, in many instances leading to fines, settlements, and even imprisonments. Some of the most renowned include money laundering for Bulgarian drug traffickers, bribes in the form of aid for the government of Mozambique, and corporate espionage on the former head of wealth management who had left for rival UBS. Below you can see a timeline of Credit Suisse's scandals alongside the evoloving share price.

However, what most hurt Credit Suisse were many failed investments that significantly slimmed down the bank capital. In just one month, in March 2021, the Swiss bank lost around 10 billion USD that had been invested in British financial firm Greensill Capital, and more than 5.5 billion USD invested in a highly leveraged technology stock portfolio when Archegos Capital Management defaulted. Strikingly, both misfortunes were highly criticized by the financial sector. FINMA, the Swiss financial regulator, stated that the bank “seriously breached supervisory regulations”, and law firm Paul Weiss highlighted “a fundamental failure of management and controls”. Even more strikingly, despite stricter reporting and safeguarding being ordered by FINMA, no other major change in risk culture and management was required or did occur.

In October 2022, a business journalist David Taylor tweeted that a “credible source tells me a major international investment bank is on the brink”, with the public and financial market identifying Credit Suisse as the mystery bank. The result was shares plummeting to a record low as stocks lost more than 10 percent of their value over a weekend. Ironically, FINMA assessed this as a great success noting that the enhanced capital requirements enabled Credit Suisse to withstand the October 2022 bank run.

To calm the waters, in response to the social media-generated chaos, the newly formed leadership decided to return to Credit Suisse’s roots, planning to raise fresh capital and eventually carve out investment banking operations. This shift was mainly financed by the Saudi National Bank (SNB), which bought a 9.9 percent stake in the Suisse organization for about 1.4 billion CHF, 3.86 CHF per share, becoming its biggest shareholder.

The winds of change were not long-lasting though. An increase in U.S. interest toppled the financial sector’s rising star Silicon Valley Bank as its asset side was heavy on the long-term T-bills that significantly lost value. In an ever-so-uncertain financial sector since 2008 and with the experience and knowledge of past mismanagement, major shareholders, including the Saudi National Bank (that decided that ruining European football was a better investment), announced they would no longer finance new investments.

The above was the only thing investors needed to hear: with no confidence left in Credit Suisse, a run on the bank’s deposits began as the history of the Suisse giant was coming to an end. The crisis was only slighted attenuated as the Swiss National Bank (SNB) aided Credit Suisse with a 50 billion CHF liquidity backstop that the bank could use against collateral if reserves were drained. This reassurance measure, however, did not succeed. With speculation growing, the Swiss authorities, the SNB, and the government ordered an acquisition by long-time rival UBS, which ended up paying only 0.76 CHF.

As a dramatic position swap took place for the two banks between 2008 and 2023, regulators hope that Credit Suisse’s assets in the hands of a safe and healthy risk culture under UBS will again have the opportunity to prosper.

In what position does this leave Switzerland in?

As the news of the collapse of the oldest and most famous banking institution in Switzerland travelled across the globe, it left investors, but mostly the small alpine country, in shock. While it is true that the Swiss take great pride in their banking sector, it is also true that the failure of Credit Suisse was the second time a big Swiss bank failed in the last 15 years. The public sentiment of bailing these institutions out with taxpayers’ money has been one of bitterness and disappointment.

Indeed, many in Switzerland do not forget that UBS, the nowadays celebrated saviour that stepped in to reconcile an escalating banking crisis, was itself the subject of a spectacular failure during the global financial crisis, with the Suisse government at the rescue with an emergency law ailing the bank with 6 billion CHF and with SNB issuing a guarantee for bad securities of up to 62 billion CHF. Moreover, the decision to wipe out the holdings of Credit Suisse’s bondholders only increased public resentment, as holders of AT1 bonds will get nothing from the acquisition. In contrast, shareholders, who are traditionally the residual claimants and ranking below bondholders, will receive 3.23 billion USD. For now, it is unclear how this manoeuvre will impact Switzerland’s status as a financial market, however, this “sleight of hand” by Swiss banking will undoubtedly affect its credibility as a stable, predictable, and reliant banking country.

The change in risk culture that occurred within UBS in the last decade should bring optimism into the picture when considering the merger between the two banks; given its newly acquired size, it could be difficult to cover UBS’s future spillages in the event of a new crisis as now holds 200% of Swiss GDP in assets. Further, the absence of other big banks in Switzerland in the case UBS fails, eliminates acquisition as an escape route, leaving only resolution as the main answer. Because authorities believed that the resolution of Credit Suisse would bring down the economy, the impact of a UBS resolution would be even worse nowadays.

How has European Banking changed since the financial crisis?

The wake-up to the global financial crisis for many banks was dramatic, with more than 400 failing between 2007 and 2010. Since then, countries, regulators, and banks themselves have tried to create a safer and healthier system with stricter regulatory standards to avoid such financial calamities happening again in the future.

The most renowned shift in bank practices can be seen in the Basel III Framework, a set of rules to improve capital adequacy and risk management in the financial sector. Basel II which implementation implemented in 2007 urged banks to hold higher levels of capital (8 percent of total assets) to cover credit, market, and operational risks. Basel III, now in use for most high-income countries, is considered the last piece of the puzzle. To do so, it aims to guarantee banks measure risks on their balance sheets homogenously, limiting the exploitation of internal models and vehicles to lower reserves.

Another relevant change has been the establishment of ‘systematically important financial institutions’ (SIFIs), a measure to isolate the economy from the failure of large and interconnected banks by forcing them to face stricter capital and liquidity requirements, alongside the development of meticulous plans to resolve future crises more smoothly.

Despite all the optimism in the reforms, however, many still believe that the actual structure of banking has not changed significantly and that difficult times may well still be ahead. A study by Greek economists Lazarides and Pitoska analyzing the changes in banks’ financial and ownership structures concluded that reforms so far have not done enough. Overall, there was little evidence to conclude that the banking sector in Europe is different than what it was one and a half decades ago. The collapse of Credit Suisse extensively confirms this argument as, ironically, the institution both followed Basel III and was one of thirty banks considered a SIFI. Why couldn’t these new regulations stop the unfolding of the crisis then? To analyze the three main areas of banking reforms since the global financial crisis: capital requirements, risk management, and increased supervision.

Firstly, banks in Europe have indeed significantly improved their capital adequacy positions in light of Basel II and Basel III, however, increasingly, they have been shifting problems off their balance sheets, exposing banks to harsh liquidity crunches and highly leveraged positions. This was the case for Credit Suisse, which grew increasingly accustomed to dealing with non-transparent and complicated business practices.

Secondly, in regards to risk, despite European banks in the last decade drastically reducing their exposure to high-risk assets and complex financial products, hopefully, from the previous description of Credit Suisse’s downfall, it is clear that its approach was very different, and rather started betting on high-risk-high-return assets.

Lastly, in spite of pompous names, acronyms, and functions, the regulatory and supervisory framework has struggled to keep up with an ever-evolving and digitalizing financial sector. Indeed, in many instances, FINMA looked clueless and powerless on what to do with the escalating Credit Suisse situation. As soon as the acquisition took place, the FINMA chair explained how the bank “had a cultural problem that translated into a lack of accountability” for the longest of times. It is hard not to argue against this, as a regulator’s role is to pick up on such deficiencies, regulate them, and possibly change the ownership and organizational structure to solve them. It must be said that the trend of banks becoming bigger due to a lower number of them is making it increasingly harder for regulators to fully comprehend the structure and the state of them. The difference in resources when a bank such as UBS is now twice the size of the GDP of its home country leaves regulators at a massive disadvantage.

It is important to note that not all banks behave the same way, and the article has been a study and discussion on the collapse of Credit Suisse. However, it is rather striking how poor management and decision-making, coupled with complicated supervision, can still bring such a bank on the brink, despite what was thought as sound and sensible reforms.

Concluding Reflections

The March turbulence in the world of banking, with first SVB and then Credit Suisse failing, has shown that while regulation since the Global Financial Crisis has made banking safer, it is not completely shielded from failures, macroeconomic shocks, and bank panics. Particularly, the question of how to deal with increasingly large and interconnected banks remains. The Credit Suisse failure, occurring 15 years after UBS's bailout, highlights the ongoing challenges in effectively regulating banks and maintaining financial and economic stability. It serves as a reminder and should prompt both politicians and regulators to reconsider the responsibilities of supervisory bodies and more stringent requirements for capital and risk management, especially in terms of transparency.

The role of Switzerland in this future banking revolution remains unclear, as its reputation as the best of the best for banking was served a huge blow when Credit Suisse, the leading financial actor in its history, crumbled due to its mismanagement. With growing banking sectors ready and eager to pick up their baton, it is difficult to say whether the future of wealth management will still be in the Alps in a couple of years.

This commentary attempted to outline the banking crisis that occurred in Switzerland in March; by doing so it touched upon plenty of interesting points that, in all fairness, deserve articles of their own. In the future, I will try to keep readers updated on the evolving situation, as well as on some interesting political and economic intermezzos that outline the crisis. As of today only one thing is sure, one big bank, UBS, remains in Switzerland, and with no other bank close to its size and with assets more than double the national GDP, it seems like authorities did not only create an institution that is “too big to fail” but at the same time also “too big to save”.


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