Category Investing

The collapse of Credit Suisse and its merger with UBS

Explore the scandal-ridden downfall of Credit Suisse, its merger with UBS, and the implications for banking regulation worldwide.
Berto Tordecilla

Berto Tordecilla

Jitters in the US banking system in March 2023 spilt over into Europe causing a buy-out of one of Switzerland’s leading banks by its rival, UBS.

The collapse of Credit Suisse represented a momentous challenge to the efficacy of post-global financial crisis banking reforms. This incident stood as a pivotal milestone, as it marked the initial failure of a substantial, interdependent financial institution that was deemed “too big to fail.” The ramifications of this event reverberated throughout the industry, prompting a critical reassessment of the effectiveness of regulatory measures implemented in response to the 2007-2009 global financial crisis.

The bank’s collapse was also a test of the Swiss authorities’ ability to manage such an event. Credit Suisse’s merger with UBS raised several questions about the robustness of the regulatory reforms and the structure of the Swiss banking sector going forward.

At its peak valuation in 2007, Credit Suisse was worth 100 billion Swiss francs (CHF). On 19 March, UBS agreed to buy it for just 3 billion CHF. This is a remarkable fall from grace for an institution that dates back to the 1850s and is seen as one of the foundations on which Switzerland’s economy was built.

Bank failures often arise from some miscalculation of risk. For example, there might be a huge exposure to an overvalued property market or, as in the case of Silicon Valley Bank, a massive exposure to US government bonds that lost value as interest rates rose rapidly.

Credit Suisse had no such exposure. Instead, this was a bank that has been weakened by a series of scandals over the last two decades.

What were the scandals?

While regulatory scrutiny is not uncommon for financial institutions, Credit Suisse and its staff have endured a remarkable surge of investigations, penalties, settlements, and even imprisonment in recent years. The focus of these actions has encompassed a broad spectrum of illicit activities, including money laundering, corruption, tax evasion, and, astonishingly, corporate espionage. These incidents have positioned Credit Suisse and its employees at the centre of a series of high-profile scandals that have reverberated throughout the industry.

Credit Suisse’s scandals have garnered international attention due to their wide-ranging nature. These incidents encompass a diverse array of illicit activities, including involvement in money laundering schemes connected to Japanese criminal organisations and Bulgarian drug traffickers, kickbacks in Mozambique, tax evasion cases within the United States, espionage against former employees in Switzerland, collaborations with African dictators, and engaging in questionable jobs-for-business arrangements with Chinese officials based in Hong Kong.

In early 2021, Credit Suisse found itself exposed to the collapses of US hedge fund Archegos Capital and UK finance firm Greensill Capital. Facing massive legal and reimbursement costs, Credit Suisse brought in former Lloyds Banking Group CEO Antonio Horta-Osorio to sort out its culture.

As the scandals continued to mount, investor faith in Credit Suisse’s ability to initiate meaningful change dissipated. In fact, Marlene Amstad, the esteemed chair of FINMA (the Swiss financial regulator), astutely observed that Credit Suisse was grappling with a deep-rooted cultural issue that manifested as a troubling absence of responsibility. Consequently, the share value of Credit Suisse had been on a gradual descent since the tumultuous days of the global financial crisis in 2008.

What pushed Credit Suisse over the brink?

The scandals made Credit Suisse look increasingly risky. In October 2022, a journalist tweeted that a major investment bank was ‘on the brink,’ leading investors to assume that the bank in question was Credit Suisse. Deposit withdrawals of over 100 billion CHF and a decline in share price followed.

Then on 14 March, Credit Suisse announced that it had found ‘material weaknesses’ in its financial reporting for 2021 and 2022. Another scandal looked to be on the cards.

When the chair of Saudi National Bank, Credit Suisse’s largest shareholder, subsequently ruled out further investment, deposits flowed out, and the share price collapsed.

What happened next?

On 15 March, the Swiss National Bank provided Credit Suisse with a 30 billion CHF loan to avert its collapse. But this only provided temporary relief.

The Swiss authorities faced three options. They could have resolved the bank – that is, dismantled it and sold its assets to other banks; they could have nationalised it – that is, taken it into state ownership; or they could have merged it with another bank.

The first option was rejected as being too risky. The second option was rejected due to the lack of a plan and the public backlash against bailouts. Therefore, the Swiss authorities chose the third option – merging Credit Suisse with UBS.

The merger was announced on 19 March. It was approved by shareholders and completed on 31 March. The combined bank will be called UBS, but its headquarters will be in Zurich. It is now the largest bank in Switzerland, with combined assets of around 1.5 trillion CHF.

What are the implications of the merger?

The merger of Credit Suisse and UBS creates a banking behemoth that may now be ‘too big to save’. This means that in the event of future financial distress, the Swiss authorities may find it difficult to provide the necessary support to prevent a collapse.

This poses serious risks to the Swiss economy, as the failure of such a large and interconnected bank can have ripple effects throughout the financial system. The Swiss authorities will need to closely monitor the merged bank’s activities and ensure that appropriate safeguards are in place to prevent a repeat of the Credit Suisse collapse.

The failure of Credit Suisse also calls for a reevaluation of regulatory frameworks and the need for larger capital buffers to protect against systemic risks. It highlights the limitations of post-financial crisis reforms and raises questions about the effectiveness of global financial regulation in preventing the failure of “too big to fail” banks.

Additionally, the bail-in of Credit Suisse’s bonds as part of the resolution process could raise funding costs for other banks, potentially impacting their lending capacity and the overall stability of the banking sector.

The aftermath of Credit Suisse’s collapse will have significant implications not only for Switzerland but also for global financial regulation. It serves as a stark reminder of the ongoing challenges in ensuring the stability and resilience of the banking system, and the need for continued efforts to strengthen regulatory frameworks and risk management practices.

The failure of Credit Suisse and its subsequent merger with UBS highlights the vulnerabilities in the banking sector and the importance of robust regulatory oversight. The Swiss authorities’ choice of a merger over other options raises questions about the effectiveness of post-financial crisis reforms and the risks associated with “too big to fail” banks. It calls for a reevaluation of regulatory frameworks, larger capital buffers, and enhanced risk management practices to safeguard the stability of the banking system and prevent future collapses. The aftermath of Credit Suisse’s collapse will undoubtedly shape the future trajectory of banking regulation in Switzerland and beyond.

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