UBS & Credit Suisse: Looking Back; Looking Ahead

What does the UBS takeover of Credit Suisse mean for Switzerland?

Switzerland has built itself a reputation of financial prudence, stability and safety.

How then, does one of the banks called ‘systemically important’ by legislators and regulators alike, then find itself on the brink of bankruptcy?

The answer begins with the collapse of Silicon Valley Bank in the United States and the subsequent halting of withdrawals by a number of other banks in the country, such as Signature Bank.

Systematic malpractice by Silicon Valley Bank, including practices such as opening accounts for businesses without a physical address eventually caught up with the company. This led to a massive bank-run in which ultimately the regulators, the government and the FDIC [Federal Deposit Insurance Corporation] had to step in.

This acted as a trigger for the global financial markets to enter into a period of instability. The rising interest rates had caught out several investors, institutional and retail. US Treasury Bills, once considered one of the safest assets on the market; were now getting marked to market, leaving banks and financial institutions holding worthless bonds.

Banking in the Continent

International banking in Europe is regulated by authorities such as the European Banking Authority, the Basel Committee, the IOSCO, the FATF to name a few. The European Central Bank sets the policy for the continent, which is then tweaked and experimented upon by national banks. In Switzerland, the FINMA safeguards the national sphere of the almost mythical banking industry.

Switzerland had previously put in place Too Big To Fail legislation, and a modified version of the same regulation came into play when structural issues and bleeding negative cash flow finally forced Credit Suisse to look for a buyer. The previous announcement by the head of the Saudi National Bank, refusing to give the bank additional funds to prop it up, resulted in a large negative movement in the already depressed stock price of the group.

Eventually, push came to shove and under Swiss emergency laws, a group of six legislators bypassed the Swiss parliament in order to bankroll the merger on behalf of UBS. The Swiss National Bank injected funds into Credit Suisse as a backstop, but it proved to be insufficient. UBS for its part, demanded waiver of certain debts and bad investments made by Credit Suisse and legal protection for any conflicts with the US Compliance apparatus.

Nonetheless, upon working together with the authorities from FINMA, leaders of both UBS & Credit and various Swiss ministers; the merger was announced on a Sunday evening - the 19th of March, 2023.

What does the Credit Suisse & UBS Merger mean for Swiss Trust Companies?

From an operational perspective, customers of Credit Suisse shall soon become customers of UBS. From a philosophical perspective, there now exists only one bank on the Paradeplatz. Credit Suisse will be swallowed by its arch-rival, which itself needed a government bailout during the Global Financial Crisis.

While Switzerland is generally known for the safety and security of its financial markets; it is a lesson that the AT1 bondholders of Credit Suisse were effectively wiped out. Numerous cases were filed both at the cantonal and federal level of Switzerland disputing this merger. Both houses of the Swiss Parliament passed symbolic no votes against the liquidity provided to first Credit Suisse and subsequently UBS to finance the merger. While it had no legal validity, one would be forgiven for using it to gauge public sentiment against the upcoming acquisition of Credit Suisse.

Private Trust Companies in Switzerland could consider themselves isolated from the events and effects caused by a rather significant moment in the financial history of this small alpine nation. Due to the nature of Swiss laws, and the reorganization of the financial market infrastructure - most institutions, customers and depositors were protected against any financial fallout.

From a macroeconomic point of view, one can see the government's actions in preventing the failure of Credit Suisse as an indication of the robustness of the financial industry in Switzerland. The country remains the preferred destination for foreign investors amidst global turmoil that is magnified in effect outside the borders of Switzerland.