In a surprising and swift move, Switzerland’s political leaders orchestrated a rescue of Credit Suisse, the country’s second-largest bank, days before a press conference that stunned the financial world.
Despite public reassurances from the Swiss National Bank and financial regulators that Credit Suisse was stable, a behind-the-scenes effort was underway to save the bank, resulting in a merger with UBS Group AG supported by 260 billion Swiss francs ($280 billion) in state funds.
This emergency merger, which favors shareholders over bond investors, contradicts one of the key lessons of the 2008 financial crisis and concentrates more risks into UBS, Switzerland’s largest bank.
By wiping out $17 billion in bonds while compensating shareholders, Swiss authorities rattled global financial markets, raising borrowing costs for lenders and threatening broader economic growth.
Credit Suisse had been mired in a crisis of confidence for months, worsened by years of scandals and losses, and saw its end rapidly approach as outflows of $110 billion were recorded in the last three months of 2022.
After U.S. authorities stepped in to guarantee deposits for two mid-sized banks on March 12, attention turned to Credit Suisse and its ability to maintain depositor confidence.
By March 13, a banker who had previously brokered multiple European bank rescues during the financial crisis had warned UBS to prepare for a call from Swiss authorities regarding a takeover of Credit Suisse.
On March 15, comments from Saudi National Bank Chairman Ammar Al Khudairy, stating that further investment in Credit Suisse was not possible, triggered a steep decline in the bank’s shares, losing nearly 25% of their value.
Despite assurances of stability from Credit Suisse and Swiss regulators, behind-the-scenes negotiations accelerated. Swiss Finance Minister Karin Keller-Sutter revealed that additional support for Credit Suisse had been secretly agreed upon to avoid market panic.
There was limited communication with European regulators, which caused concern, particularly over the decision to impose losses on bondholders — a radical move that shocked financial markets.
Saudi investors, who held a significant stake in Credit Suisse, pressured Swiss authorities to ensure they would recover part of their investment, threatening potential legal action.
In a controversial decision, Swiss authorities wiped out 16 billion Swiss francs in bonds, compensating shareholders with 3 billion francs, effectively reversing the usual hierarchy where shareholders bear the brunt of bank failures.
This marked a dramatic end for Credit Suisse, a 167-year-old institution founded by Alfred Escher, a prominent Swiss industrialist.
At the press conference announcing the deal, Swiss officials remained unapologetic, defending the package as necessary to avert broader financial collapse. Finance Minister Keller-Sutter stated, “This is no bailout,” emphasizing that the taxpayer faced less risk compared to a full bankruptcy.
The Swiss central bank chief, Thomas Jordan, supported the merger, arguing that a Credit Suisse bankruptcy would have inflicted enormous costs on the Swiss economy.
Markets remain unsettled by the rapid turn of events, highlighting the fragility of confidence in major financial institutions. One person involved in the negotiations noted, “When you are a bank for billionaires, deposits can fly away very quickly. You can die in three days.”
The dramatic rescue of Credit Suisse has sent shockwaves through global finance, raising questions about the stability of other financial institutions and the potential for future crises.
