Switzerland's secretive Credit Suisse rescue rocks global finance
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[March 21, 2023] By
John O'Donnell and Andres Gonzalez
ZURICH (Reuters) - Days before a hastily convened press conference late
on Sunday that would make the world's front pages, Switzerland's
political elite were secretly preparing a move that would jolt the
globe.
While the nation's central bank and financial regulator publicly
declared that Credit Suisse was sound, behind closed doors the race was
on to rescue the nation's second-biggest bank.
The chain of events, led to the erasure of one of Switzerland's
flagships, a merger backed by 260 billion Swiss francs ($280 billion) of
state funds and a move that would upend global finance: favoring the
bank's shareholders to the detriment of bond investors.
The events that unfolded in the landlocked nation -- long a bastion of
political neutrality that has secured its standing as a safe-haven
favourite for wealthy elites -- go against one of the key lessons of the
2008 financial crisis. The rescue concentrates even greater risks into
one banking behemoth, UBS Group AG.
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What is more, making bondholders cushion the blow to stock investors
from the UBS-Credit Suisse tie-up rattled lenders, pushing up their
borrowing costs in a threat to world economic growth.
The Swiss National Bank declined to comment while the finance ministry
did not respond to a request for comment.
Battered by years of scandals and losses, Credit Suisse for months had
been battling a crisis of confidence of its own making. In a matter of
days its demise was sealed.
Soon after news broke on March 12 that the United States would step in
to guarantee all the deposits of two mid-sized lenders struggling to
keep up with demands for cash, the spotlight was on Credit Suisse and
how it would maintain depositor confidence.
Customers had already pulled $110 billion from the Zurich-based bank in
the last three months of 2022, outflows that it was fighting to reverse.
A rainmaker who brokered a number of European bank rescues during the
financial crisis, speaking on condition of anonymity, told Reuters that
after seeing the U.S. banking collapses there was little doubt UBS would
be called upon to shore up Credit Suisse.
The banker on March 13 rang up UBS warning the world's biggest wealth
manager that it should prepare to receive a call from Swiss authorities.
By Wednesday, two days later, Credit Suisse was swept up in a full-blown
crisis. Comments by the chair of Saudi National Bank, Ammar Al Khudairy,
who said that he could not invest further in the Swiss bank sent Credit
Suisse shares into a tailspin.
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It mattered little that Credit Suisse's biggest investor also reiterated
confidence in the lender. "They're a globally systemically important
bank so ... monitored on a daily basis," he told Reuters. "There's no
surprises like you would have in a middle-sized bank in the US. It's a
completely different ecosystem."
Significant deposit outflows followed, the source who would go on to
advise UBS on the merger told Reuters, declining to put a number on
them.
In banking center Zurich and Bern, the Alpine state's capital, pressure
was building. Yet as the discussions to salvage Credit Suisse got
underway, Swiss regulators FINMA and the Swiss National Bank said that
"the problems of certain banks in the USA do not pose a direct risk of
contagion for the Swiss financial markets", conceding, however, that
they would fund the bank with unlimited access to funding.
Credit Suisse too was conveying stability. The bank told Reuters on
Thursday that its average liquidity coverage ratio, a key measure of how
much cash-like assets the bank has, did not change between March 8 and
March 14, despite the global banking crisis.
Swiss Finance Minister Karin Keller-Sutter, a former translator and
teacher just months on the job, told the Sunday media conference that
additional support for Credit Suisse had been agreed but held secret for
fear of panicking people with a succession of emergency announcements.
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![](../images/032123PIX/busine40.jpg)
A logo of Credit Suisse is seen on the
Credit Suisse headquarter as people demonstrate against the buying
of Swiss bank Credit Suisse by UBS in Zurich, Switzerland March 20,
2023. REUTERS/Denis Balibouse
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She said was in close contact with U.S. Treasury Secretary Janet
Yellen and British finance minister Jeremy Hunt. Both countries have
large Credit Suisse subsidiaries employing thousands.
There was far less communication with the European Central Bank in
Frankfurt, said one person familiar with the matter. Credit Suisse's
arms in Luxembourg, Spain and Germany were far smaller.
European regulators were, in particular, worried that the Swiss
could impose losses on bondholders - a radical step that they did
take, as the costs of a rescue spiralled for taxpayers.
"They did this on their own," said the person, asking not to be
named, describing the outcome as a "big surprise".
A spokesperson for FINMA said that although it laid emphasis on
Britain and the U.S. because of the scale of Credit Suisse's
business in those countries, it had also informed European
authorities.
Not everyone, however, was kept in the dark.
Saudi investors, with roughly a 10% stake in the bank, put pressure
on the Swiss, warning that they could take legal action if they did
not recover some of their ill-fated investment, said another person
with knowledge of the matter.
Saudi National Bank did not immediately respond to a request for a
comment
"The money had to come from somewhere," said one of the officials
involved in the negotiations.
The Credit Suisse board, interested in preserving some unity in an
increasingly fractious setting, stood behind them, and argued for a
payout to shareholders, said the person.
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Regulators too wanted to avoid a wipeout for shareholders that would
have resulted in the winding up of the bank, potentially a bigger
headache for the nation and a loss of face just hours after standing
by Credit Suisse.
In the end, the Swiss agreed, choosing to wipe out 16 billion of
francs of bonds, compensating shareholders with 3 billion francs and
turning a key principle of bank funding on its head - namely, that
shareholders rather than bondholders take the first hit from a bank
failure.
It marks an ignominious end for an institution founded by Alfred
Escher, a Swiss magnate affectionately dubbed King Alfred I, who
helped build the country's railways. Credit Suisse banks many Swiss
companies and citizens - including finance minister Keller-Sutter.
On Sunday, as a panel of Swiss officials and executives announced
the deal, they were unrepentant.
"This is no bailout," Keller-Sutter told journalists. Thomas Jordan,
the central bank chief, defended the package, as necessary to
counter any wider shock.
"The taxpayer in this scenario has less risk," said Keller-Sutter.
"The bankruptcy would have been the highest risk because the cost to
the Swiss economy would have been huge."
Still, markets are reeling from the extraordinary turn of events.
"When you are a bank for billionaires, deposits can fly away very
quickly," said one of the people involved. "You can die in three
days."
($1 = 0.9287 Swiss francs)
(Additional reporting by Stefania Spezzati, John Revill, Greg
Roumeliotis, Saeed Azhar and Rachna Uppal in Dubai; editing by Elisa
Martinuzzi and Anna Driver)
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