Switzerland’s secretive Credit Suisse rescue rocks global finance

Switzerland's secretive Credit Suisse rescue

ZURICH: Switzerland’s political elite were covertly planning a move that would shock the world days before a hastily called press conference late on Sunday that would make headlines around the world.
Behind closed doors, a scramble to save the country’s second-largest bank was underway even though Credit Suisse was publicly deemed sound by the central bank and financial regulator of the country.
A series of events culminated in the erasure of one of Switzerland’s most recognisable brands, a merger supported by 260 billion Swiss francs ($280 billion) in state funds, and a decision that would completely alter the world of finance by favouring the bank’s shareholders at the expense of bond investors.
The actions that took place in the landlocked country, which has long been a bastion of political neutrality and a favourite safe haven of wealthy elites, go against one of the most important lessons learned from the 2008 financial crisis. Even more risks are concentrated in one financial behemoth, UBS Group AG, as a result of the rescue.

In addition, forcing bankers to raise their borrowing costs and endangering global economic growth by forcing bondholders to cushion the impact to stock investors from the UBS-Credit Suisse merger.

The finance ministry did not respond to a request for comment, and the Swiss National Bank declined to comment.

Credit Suisse had been facing an internal crisis of trust for months after being battered by years of scandals and losses. Its downfall was predetermined within a few days.

The attention was on Credit Suisse and how it would sustain depositor confidence after the March 12 news that the United States will intervene to guarantee all the deposits of two mid-sized lenders failing to keep up with cash demand broke.

In the final three months of 2022, customers had already withdrew $110 billion from the Zurich-based bank, withdrawals that it was attempting to stop.

Under the condition of anonymity, a rainmaker who orchestrated a number of European bank rescues during the financial crisis told Reuters that there was little doubt UBS will be required to support Credit Suisse in light of the U.S. banking catastrophes.

On March 13, the banker called UBS and warned the largest wealth manager in the world to get ready for a call from Swiss authorities.

Two days later, on Wednesday, Credit Suisse had become embroiled in a serious issue. Credit Suisse shares plunged after remarks made by Ammar Al Khudairy, the chair of the Saudi National Bank, in which he stated that he could no longer invest in the Swiss bank.

It made little difference that Credit Suisse’s largest investor restated his support for the lender. They are “monitored on a daily basis” since they are a globally significant bank, he told Reuters. “There aren’t any surprises like you could find in a mid-sized US bank. Its environment is entirely different.”

Afterwards, there were large deposit outflows, but the source who would later advise UBS on the merger told Reuters without offering an estimate.

Pressure was mounting in the capital of the Alpine state, Bern, and banking hub Zurich. However, as negotiations to save Credit Suisse began, Swiss regulators FINMA and the Swiss National Bank stated that “the problems of certain banks in the USA do not pose a direct risk of contagion for the Swiss financial markets,” while also announcing that they would provide the bank with unrestricted funding.

Credit Suisse also exuded solidity. In spite of the global banking crisis, the bank said in a statement to Reuters on Thursday that its average liquidity coverage ratio—a crucial indicator of the amount of cash-like assets the bank has—did not change between March 8 and March 14.

After only a few months on the job, Swiss Finance Minister Karin Keller-Sutter, a former teacher and translator, said during the Sunday press conference that additional support for Credit Suisse had been agreed upon but kept a secret out of concern for alarming the public with a series of emergency announcements.

She claimed to be in constant contact with Jeremy Hunt, the British finance minister, and Janet Yellen, the secretary of the US Treasury. Many significant Credit Suisse companies in both nations have thousands of employees.

One person with knowledge of the situation claimed that communication with the European Central Bank in Frankfurt was significantly less. The branches of Credit Suisse in Germany, Spain, and Luxembourg were much smaller.

The Swiss took the extreme step of imposing losses on bondholders as the expenses of a rescue spiralled out of control for taxpayers, which particularly alarmed European regulators.

The person, who wished to remain unnamed, claimed that the action was taken independently and that the result was a “huge surprise”.

A FINMA spokeswoman claimed that while it focused on the United Kingdom and the United States because to the size of Credit Suisse’s operations in those nations, it had also alerted European authorities.

Yet not everybody was kept in the dark.

Another individual with knowledge of the situation claimed that Saudi investors, who own around 10% of the bank, exerted pressure on the Swiss and threatened legal action if they did not get some of their misplaced investment back.

Requests for comments were not immediately answered by Saudi National Bank.

One of the representatives involved in the negotiations noted, “The money has to come from somewhere.

According to the individual, the Credit Suisse board supported them and lobbied for a distribution to shareholders out of a concern in maintaining some unity in an increasingly acrimonious environment.
Authorities also wanted to avoid a wipeout for shareholders because that would have led to the bank being shut down, potentially causing more problems for the country, and costing them face hours after supporting Credit Suisse.

In the end, the Swiss decided to agree, deciding to cancel 16 billion francs worth of bonds and compensate shareholders with 3 billion francs, thus upending a fundamental tenet of bank funding that states that shareholders, not bondholders, bear the brunt of a bank collapse.

It is a disgraceful conclusion for an organisation established by Alfred Escher, a Swiss businessman who was jokingly referred to as King Alfred I and who helped construct the nation’s railways. Many Swiss businesses and people, including the finance minister Keller-Sutter, are bankrolled by Credit Suisse.

They were unrepentant when a group of Swiss executives and authorities revealed the transaction on Sunday.

According to Keller-Sutter, this is not a bailout. The head of the central bank, Thomas Jordan, defended the package, saying it was important to ward against any bigger shock.

In this case, the taxpayer is at a lower risk, according to Keller-Sutter. Because of the enormous cost to the Swiss economy, bankruptcy would have posed the greatest risk.

Markets are still in shock over the unexpected change of events.

Deposits can disappear swiftly when you’re a bank for billionaires, according to one of the parties involved. “You have three days to live.”

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