Explained: The Collapse Of Credit Suisse And Attempts By Swiss Government To Salvage Bank With Long And Dubious History

Over the last few decades, Credit Suisse has earned itself a rather dubious reputation due to its various banking deals that helped dictators, criminal gangs, embargoed states, and others.

Regulators have also pulled it up for tax evasion, frauds carried out against its own customers money-laundering, kickbacks, and several other offences. In has racked up more than $4.2bn in fines or settlements.

Troubles have been mounting at the bank for years, with its CEO and COO stepping down in 2019 over a spying scandal – at a time when the company had managed to post the highest profit since 2010.

Since 2019, two CEOs have tried to turn the bank around, including the current CEO Ulrich Koerner.

In 2021, Credit Suisse lost $5.5 billion during the collapse of the Archegos Capital Management investment fund and the collapse of Greensill Capital.

In 2022, Credit Suisse declared a massive loss of $7.6 billion, which was higher than the profits it had made during the previous decade.

In February 2022, massive leak (details of more than 30,000 bank customers and their more than 18,000 accounts) revealed that Credit Suisse harboured the hidden wealth of clients involved in torture, drug trafficking, money laundering, corruption and other serious crimes. The revelations point to apparently widespread failures of due diligence by the lender, despite repeated pledges to weed out dubious clients and stamp out illicit funds.

While the bank made efforts to turn around operations, investors have been bearish on the stock for the last several years, and things came to a head after the bankruptcy of Silicon Valley Bank (SVB) that prompted a sell-off in the stocks and bonds of banks across the globe. But banks like Credit Suisse have been more vulnerable due to their already delicate position.

Credit Suisse’s recent announcement in its annual report about material weaknesses in its financial reporting didn’t help the company’s cause either – scaring investors even more.

Unlike other industries, perception can make or break a company in the deposit and lending space. If customers believe that you are on the verge of bankruptcy even if you aren’t, there might be a run on the bank resulting in liquidity issues.

According to reports, Credit Suisse began seeing withdrawals upwards of $10 billion a day last week. It is for this reason that regulators often act very quickly and try to control the situation through various means – one of which is merging the weaker bank with a financially stronger bank to prevent a larger issue.

Swiss banking authorities’ attempts at calming investors and depositors of Credit Suisse failed, leading to the step of merging it with UBS.

UBS has done much better than Credit Suisse, doubling its stock price in the last three years. UBS has seen an inflow of deposits, possibly with customers withdrawing money from weaker banks and depositing it in stronger banks like UBS.

UBS’ shareholders would have to agree to such a deal in the first place, which could make it a tricky proposition. But merging two behemoths would be a very tough task, and the resulting financial entity would be a systemically important entity. In addition, it is reported that the Swiss regulators wouldn’t prefer a foreign entity taking over Credit Suisse, which would limit options for the bank.

Dividing Credit Suisse could be another option to sell the company in parts since it is one of the largest wealth managers and investment banking companies in the world. These spin-offs could be sold off to raise funds for the banking group. Thirdly, regulatory rules could possibly be relaxed for investors like Saudi National Bank, who declined an opportunity to make a new investment due to regulatory issues.

In the US, First Republic bank is being injected with uninsured deposits worth $30 billion in total from eleven major US banks, including the major ones such as Bank of America, Wells Fargo, Goldman Sachs, Citigroup, Morgan Stanley, and several others.

Credit default swaps (CDS) an instrument that was used during the 2008 financial crisis by investors to bet against mortgage back securities has come back into prominence. Credit Suisse has seen the sharpest rise in its CDS’ compared to peers, indicating that investors and banks are buying up CDS to protect themselves against default.