Credit Suisse's demise: a new twist on the ‘Swiss finish'
. The Swiss bank UBS has fallen, damaging Switzerland's reputation in investment banking, wealth management and regulation.
The term "Swiss Finish" was used to describe the additional financial protections required by Swiss bank regulators. It is a reflection of the country's high quality, from its watches to its banking industry. Credit Suisse's demise has given the term a sad new meaning.
The irony of the situation may not end there. The failure of CS, its rescue by arch rival UBS, and the repercussions for 'Finanzplatz Schweiz -- the Swiss financial center as a whole -- were devastating.
Credit Suisse is largely to blame for its problems. This includes its aggressive culture, poor risk management, and misguided decision-making. The regulatory system, which was supposed to give banks a halo effect of virtue, was actually another problem.
A trio of academics from the Yale School of Management, Deutsche Bundesbank and the Yale School of Management will be joining us in 2019.
The unusually significant role of contingent capital instruments in the country. These instruments can be written down in value or converted to equity when they are needed to absorb losses. According to academics, the amount of AT1 bonds being used in banks' regulatory capital structure "may raise questions about the extent to which Swiss Finish to [global] rules represents a meaningful enhancement of the [global] framework".
Finma, the prudential regulator has been criticized for not adequately policing Credit Suisse's financial stability. US investors are now focusing on Finma and the Swiss government.
The decision to overthrow the investor hierarchy and expel AT1 bondholders while maintaining some equity value was interpreted as a 'banana republic'. The entire purpose of contingent capital, which is to stabilize a failing institution in a predictable manner, has been cast into doubt.
It is a vast banking system in Switzerland, which makes this all more important. Its total assets amount to approximately
520 per cent
The country's GDP is a much higher percentage than in any other country.
For Swiss banks, the past 15 years has been difficult. UBS, the current rescuer of CS was on its knees in 2008's financial crisis. The US tax authorities soon pursued Swiss banks that helped US citizens evade taxes. By 2018, the country's long-standing fiscal problems had been resolved.
Rules had been removed. Some Swiss bankers are happy, saying it removes any potential criminal association. However, some clients still have a draw.
The drip-drip scandal at CS continued, eventually leading to this month's collapse. As a result, at least half a dozen more injuries will be inflicted upon the Swiss financial center. The episode has had a devastating impact on Switzerland's reputation as a country in wealth management, investment banking and regulation.
The authorities' use of an emergency ordinance to reduce the AT1 bond value to zero without a parliamentary vote has yet to undermine Switzerland's reputation for being a reliable and predictable law-enforcer.
Details of how CS's AT1 bondholders will be treated are now the topic of
This has harmed the reputation of both the Swiss authorities and the country's banks. It will be difficult to issue further issuance in the future. Key investors, especially wealthy Asians who are clients of Swiss banks, have lost a lot -- and their faith in them.
The shareholders have also been virtually extinguished, causing a loss of another wealth management client group. This time, it is in the Middle East where shareholders from Qatar, Saudi Arabia, and other countries have lost billions.
UBS alone will now contribute two-and-half times to Switzerland's GDP, making it a more difficult 'too big-to-fail" risk for the country. Due to the agreement's competition waiver, there is a risk for retail banking in the domestic market. JPMorgan projects that the combined bank will control around 30% of the market.
New York and London also bounced back from their bank failures. It might also end up with a more powerful national champion in UBS. It is evident that Switzerland should have recognized the extent of Credit Suisse's problems earlier and taken more aggressive measures to address them. Complacency is a factor that led to the collapse of Credit Suisse. This lesson applies not only to the country, but also to the rest of the financial world. The Credit Suisse shock serves as a reminder about the fragility of banking confidence, even after reforms. Credit Suisse's fall can cause other banks to follow suit.