By Rieshav Chakraborty

Abstract

The essay explores the historical background of Credit Suisse, one of the biggest and oldest financial companies in Switzerland. Despite having a solid reputation, Credit Suisse has endured a string of controversies in recent years, notably the failure of Archegos Capital and Greensill Capital, in which the bank had a significant stake. As a result, Credit Suisse announced intentions to borrow up to USD 54 billion in early 2023, and the bank’s stock lost almost 75% of its value in a single year. The Saudi National Bank (SNB), Credit Suisse’s largest shareholder, declined their request to contribute more money as a result of regulatory restrictions, which led to a 31% drop in the value of the bank’s stock in a single day. In the end, the Swiss government provided Credit Suisse with a 50 billion Swiss franc (USD 55 billion) emergency line of credit, but it was intended to buy time rather than to actually preserve the bank. Eventually, Swiss authorities instructed UBS to prepare an acquisition out of concern that a Credit Suisse bankruptcy would jeopardize Switzerland’s financial standing.

Historical Context of Credit Suisse 

Credit Suisse has been one of Switzerland’s oldest and biggest financial institutions over the last 150 years since its predecessor  Schweizerische Kreditanstalt was formed in 1856. Credit Suisse became a bulge bracket bank after purchasing First Boston during the late 20th century, going on to compete with global banks such as Goldman Sachs. During the financial crisis of 2008, Credit Suisse was not affected much while UBS was rescued by the Swiss National Bank by buying $60 billion in toxic assets and $5.3 billion in stock as a form of capital infusion. Post-financial crisis, while many large American Banks as well as UBS pursued conservative tactics and sold off riskier assets to de-risk their portfolios, Credit Suisse continued to engage in risky transactions to compete with large US Banks. 

However despite its long history, in recent years, Credit Suisse had been involved in a number of scandals including a spying scandal, the collapse of Archegos Capital and Greensill Capital in 2021 in which the bank was heavily involved, the flagging of the bank’s internal control over financial reporting by its auditor PwC from 2020-2022, and a rotating group of executives. 

How it Unfolded

Following the years of scandals and losses, Credit Suisse CEO (2015-2020), Tidjane Thiam used to discuss the idea of a merger with UBS, the largest bank in Switzerland, with his coworkers. As Credit Suisse weakened, executives at UBS started planning to purchase their rival and the kind of government support they could avail if Credit Suisse were to falter. Swiss authorities prepared to write down a significant amount of the bank’s stock and bonds as necessary to avoid utilizing public funds once more, if assistance was required. While the idea of Credit Suisse and UBS merging was so unlikely, so much so that it was a sort of joke in the Swiss Financial Industry, it eventually ended up happening during mid-March, 2023. 

Tidjane Thiam resigned in February 2020 in the wake of a 2019 spying scandal. Iqbal Khan, the head of wealth management at Credit Suisse, went for UBS after which he was monitored by private contractors to see if he had stolen any clients. In the midst of the pandemic in 2021, Credit Suisse suffered a loss of about $1 billion due to the failure of the British financing company Greensill Capital and the American family investment fund Archegos Capital. A few months later, after serving in the role for nearly nine months, Chairman Antonio Horta-Osorio left the bank’s board of directors in January 2022 due to a scandal involving his violation of Swiss and British COVID-19 quarantine standards. 

Here, we can notice a pattern of a very unstable rotating group of executives in response to poor decisions. Ulrich Koerner, the new CEO, promised a strategic assessment by July 2022, but it was delayed by an unfounded report that Credit Suisse was about to fail. Clients responded by withdrawing 110 billion CHF (or USD 119 billion) in the fourth quarter of 2022 as a result.

In order to increase investor confidence and shore up liquidity in the face of a stock that lost about 75 percent of its value in a single year, Credit Suisse revealed plans to borrow up to $54 billion in early 2023. Now, it’s important to remember that the Saudi National Bank (SNB) was Credit Suisse’s largest shareholder, with almost 10%. SNB Chairman Ammar Al Khudairy denied their request to give more money and go above 10% shareholding due to regulatory barriers. Despite stating their reasons as purely regulatory, investors panicked and Credit Suisse bonds fell by 10 cents per Euro within two hours. Moreover, their stock declined 31% in a single day. 

They realized they could not control the stock price, but they were still deeply concerned about their bonds becoming distressed securities. The company chose to buy back bonds that same day, but required assistance.  The Swiss authorities determined that they had to save a bank in order to prevent a global panic, despite the current post-2008 plan to never again utilize public cash to save a bank. On that day, the Swiss National Bank offered Credit Suisse a safety net in the shape of a 50 billion Swiss franc (USD 55 billion) emergency line of credit. Nonetheless, demand deposit withdrawals amounted to more than 10 billion Swiss francs per day during that same week. That day, Credit Suisse’s one-year credit default swaps increased from 799 basis points to 3701 basis points, the highest levels for significant banks since the 2008 financial crisis.

No rescue of Credit Suisse was feasible due to public outrage at the Swiss authorities’ government-funded rescue of UBS back in 2008. Despite officially claiming to be in good health, Credit Suisse was not being saved by the backstop; rather, it was meant to allow the Swiss National Bank and Swiss Financial Market Supervisory Authority (FINMA) time to find a buyer. 

Initially, the US Investment Management Company – Blackrock, considered acquiring Credit Suisse. Credit Suisse contacted Deutsche Bank and a few others. However, it didn’t go through since there was not enough time to find another buyer. Blackrock dropped out soon since the Swiss Authorities wanted a domestic buyer. Since UBS was the largest bank in Switzerland, Swiss Authorities ordered them to plan an acquisition. They were obliged to obey despite not fully understanding Credit Suisse’s financials since a collapse of Credit Suisse would threaten the financial reputation of Switzerland. 

UBS was only willing to acquire Credit Suisse if there was a reasonable cost and the Swiss authorities protected them from any sort of regulatory infractions. On the morning of March 19, UBS made an offer of 0.25 Swiss francs (USD 0.27) per share, valuing Credit Suisse at roughly USD 1 billion. However, Credit Suisse was persuaded to decline the offer by their Middle Eastern investors. 

UBS followed their previous offer by countering with an offer of 0.50 Swiss francs (USD 0.55) per share, which valued them at about USD 2 Billion. Still, the board was not very happy with the offer in response to which the Swiss authorities threatened to remove the board. As a final offer, UBS increased their bid and a deal was finalized for them to purchase Credit Suisse for CHF 3 billion (USD 3.2 billion). Through this acquisition, all Credit Suisse stockholders were to receive 1 UBS Share per 22,48 Credit Suisse shares. The stock price at which it was purchased was 1% of its all-time high value back in 2007. This transaction meant a complete write-down of 16 billion CHF (USD 17.28 billion) of Credit Suisse-issued AT1 Bonds, thus undermining the creditworthiness of the newly acquired bank. 

Another important thing to note in the context of this acquisition and the failure of Credit Suisse is the collapse of the Silicon Valley Bank and Signature Bank in the USA which happened just earlier that month, which sent shock waves throughout the global banking system which can explain the erratic investor behaviour. 

Impact

The future is still uncertain for the bank’s 50,000 workers and its 50,000 offices worldwide because UBS could take some or all of them and fire others. It’s being reported that UBS may cut about 36,000 jobs worldwide. Since Switzerland has pledged to provide 100 billion CHF (USD 108.4 billion) to ensure the deal’s completion, its government is severely affected. Investor losses on contingent convertible bonds issued by Credit Suisse amount to around 16 billion CHF (more than 17 billion USD) as a result of the acquisition.

Moreover, the failure of Switzerland’s 2nd largest bank would harm its reputation as a powerful banking nation.  Swiss citizens in and out of the banking business may be crushed by the loss of one of the nation’s oldest financial organizations, the bank that funded the development of Switzerland’s railways. Since the Swiss Authorities are not requiring UBS to get shareholder approval, property rights have been described as weakened. Moreover, UBS bought back €2.75 billion of bonds that it issued days before the acquisition announcement in order to compensate its investors and help the markets recover from a bond selloff brought on by the AT1 bond wipeout.

About the Author

Rieshav Chakrabortyis a 1st -year student at the Jindal School of Government and Public Policy, pursuing BA (Hons) Economics. His research interests include Behavioral Economics, Environmental Economics, and Development Economics.

Image Source: Fabrice Coffrini | Afp | Getty Images