‘Whatever it takes’ – why Credit Suisse’s demise will strengthen Switzerland’s place in global finance
AS SWITZERLAND digested the news of Credit Suisse’s takeover by rival UBS, the headlines were unequivocally bleak. The deal is a “historic scandal”, wrote the daily Tages-Anzeiger. It marks the “end of an era”, according to Switzerland’s public broadcaster SRF. The country’s leading daily, Neue Zürcher Zeitung, found even stronger words: “A zombie is gone, but a monster has been created,” read one headline. NZZ commentator Christoph Eisenring summed up the overwhelming sentiment when he wrote that Mar 19, 2023 was a “dark day for Switzerland’s place in global finance”. I disagree.
It is of course quite literally the end of an era when a 167-year-old banking institution that has been near-synonymous with Swiss finance ceases to exist as an independent entity. And there are important, and as-of-yet unanswered, questions about the deal brokered by the Swiss government and its short, medium, and long-term implications. But Credit Suisse’s demise has been years in the making – a slow, painful unravelling marked by disastrous decisions, multi-billion-dollar bets gone awry, a revolving door on the C-suite floor, and steadily eroding confidence. Its 100-billion-Swiss-franc (S$145 billion) market capitalisation in 2007 had withered to a paltry seven billion Swiss francs by last week. If anything, the swift, decisive action over the weekend by a diverse set of public and private stakeholders shows that Switzerland remains trustworthy as a place to bank.
“Don’t compare me to the Almighty. Compare me to the alternative,” is one of US President Joe Biden’s favourite aphorisms. Let’s imagine what Monday, Mar 20, 2023, could have looked like. Overnight, Credit Suisse’s share price would likely have been under further pressure on Asian markets, leading to a sharp drop as soon as Zurich opened on Monday morning. Spooked by a free-falling share price, depositors would have further accelerated withdrawals, quickly topping the previous week’s 10 billion Swiss francs in outflows. Several Credit Suisse counterparties had already curbed any new dealings with the bank, and a number of them could have moved to unwind their positions. With earlier Swiss National Bank lifelines clearly not calming markets, and counterparty risk taking centre stage, investor fears could have spread to other European banks and financial institutions, in turn putting pressure on their share prices and liquidity. And this is how the failure of Silicon Valley Bank in the US combined with Saudi National Bank chairman Ammar al-Khudairy’s poor choice of words in a Bloomberg TV interview (“The answer is absolutely not”, in response to a question about bolstering the Saudi equity stake in Credit Suisse) might have triggered the kind of contagion dynamics that engulfed global financial markets in 2008.
Of course, none of this happened because the trinity of Swiss National Bank, finance regulator Finma, and the Swiss finance ministry organised a shotgun wedding, cheered on by America’s Fed and Treasury as well as regulators in Brussels and London. To pull this off, they were willing to set aside basic standards of good corporate governance; impose a significant haircut on Credit Suisse shareholders, including powerful investors from Saudi Arabia and Qatar; wipe out 16 billion Swiss francs worth of Additional Tier 1 (AT1) capital bonds; expose taxpayers to unknown future liabilities; accept significant job losses in Switzerland; and create a near-monopolist in domestic national banking.
Let me be clear: as a liberal, I am not thrilled about what transpired. I sympathise with those who argue that capitalism means that sometimes firms go bankrupt, that we need more competition and not less, and that the whole notion of “too big to fail” is a perpetual moral hazard that invites excessive risk-taking. And yet, we live in a world in which governments, if necessary, must be prepared to take decisive action. Whether it is responding to Covid, mobilising to support Ukraine, keeping the lights on amid gas shortages, reducing dependence on Taiwanese semiconductors, or facing down French unions over pension reforms, assertive governments are back.
Why should anybody be reassured by the fact that the Swiss government was willing to run roughshod over principles, powerful interests, and even the law? “You make fun of dictatorships, and then you can change the law over the weekend. What’s the difference between Saudi Arabia and Switzerland now?,” the Financial Times quoted a person close to Credit Suisse’s three largest Middle Eastern shareholders. The Swiss government’s actions are reassuring precisely because they are costly (financially and perhaps reputationally) and because they represent such a decisive departure from established protocols and prior expectations.
In 2012, Mario Draghi saved the euro with three powerful words, telling investors the European Central Bank was willing to do “whatever it takes” to preserve the common currency. The fact that politicians in Bern were able to put together a deal of this magnitude over a weekend, in concert with American and European counterparts, sends an unmistakable signal: that the Swiss government will do “whatever it takes” to preserve and protect financial stability. Ultimately, in a world of chaos and turbulence, that is good news for those concerned about Switzerland’s place in global finance.
David Bach is professor of strategy and political economy, and dean of innovation and programmes at the International Institute for Management Development (IMD)
