On Wednesday, the Swiss Financial Market Supervisory Authority said that Switzerland’s economy had narrowly avoided major economic problems through the takeover of troubled lender Credit Suisse by its larger rival UBS.
In a deal announced last month, FINMA and the Swiss National Bank brokered a historic takeover of Credit Suisse by UBS for 3 billion Swiss francs, ($3.3 billion). In an effort to bolster the bank’s capital reserves and help alleviate its liquidity issues, the regulator ordered the write-down of roughly 16 billion Swiss francs of Additional Tier-1 (AT1) bonds to zero. Although AT1 bonds are widely recognized as riskier investments, the write down still upset bond holders, and created additional perceptions of risk around investment in the banking sector.
In a statement, FINM CEO Urban Angehrn noted that although the regulator considered having Credit Suisse declare bankruptcy, any bankruptcy plan was “de-prioritized early on due to its high tangible and intangible costs,” among which would have been leaving the lender with a “damaged reputation.”
Meanwhile a governmental takeover would have exposed taxpayers to any risks of losses. However collapse of the bank was not an option either.
Angehrn stated, “The parent bank Credit Suisse AG would have gone under – a Swiss bank with total assets of over 350 billion Swiss francs ($387 billion) and ongoing business also running into many billions. It is not difficult to imagine the disastrous impact the bankruptcy of a bank and wealth manager as large as Credit Suisse AG would have had on Switzerland’s financial center and private banking industry. Many other Swiss banks would probably have faced a run on deposits, as Credit Suisse itself did in the fourth quarter of 2022.”
He went on to note, “the damage to the Swiss economy, financial center and Switzerland’s reputation would have been enormous, with unquantifiable effects on tax revenues and jobs.”
He concluded, the merger plan was believed to be the best option, since it would both stabilize Credit Suisse, and halt what could have become a potential domino effect on the entirely of the global banking sector.
Angehrn maintained, “The current fragile state of the financial markets due to the shift to monetary tightening in 2022, the uncertain economic outlook, the crisis at certain banks in the US and the whole geopolitical backdrop were also relevant to our decision. There was a high probability that the resolution of a global systemically important bank would have led to contagion effects and jeopardized financial stability in Switzerland and globally.”
In 2022, Credit Suisse reported a net loss of 7.3 billion francs ($8 billion), and that another “substantial” loss would occur in 2023, before it hoped to return to profitability in 2024.
