Business

How the Swiss bank went from a Rolls-Royce to a toxic mess


Switzerland's central bank says it will lend Credit Suisse up to $54 billion (£44 billion) - Francesca Volpi/Bloomberg/Bloomberg

Switzerland’s central bank says it will lend Credit Suisse up to $54 billion (£44 billion) – Francesca Volpi/Bloomberg/Bloomberg

The Swiss bank has long been considered the Rolls Royce of finance – a dictionary for prudence, exceptional service and, above all, safety.

But as Credit Suisse teetered on the brink, that reputation was so tarnished that it seemed impossible to recover.

Instead, years of turmoil and missteps mean parts of the industry are becoming the biggest threat to financial stability in Europe since the 2008 crisis.

Credit Suisse could now be taken over by Swiss rivals UBS in an agreement brokered by the country’s regulatory authorities.

“When you have a problem or two, you can assume it’s bad luck,” said Guy Ellison, an analyst at wealth management firm Investec.

“But once you see these countless reputational attacks unfold, you have to suspect that something is amiss in the structure, governance of Credit Suisse and the decisions that have been made about the risks. risk it was prepared to accept.”

The Swiss banking industry began in the early 18th century and became the go-to destination for wealthy international clients looking for a neutral home for their money.

As the country’s reputation grew, and bunkers were dug deep in the mountains to store gold and diamonds, institutions like the Union Bank of Switzerland gained a reputation for security in times of crisis – as did the Swiss Confederation Bank. ready to deal with all sides in the event of a conflict. broke out, giving the industry a mercenary reputation it had struggled to shake off.

Credit Suisse itself was founded in 1856 and helped finance the development of the country, finance the railroads, and even develop the monetary system.

After World War II – when the industry was heavily criticized for receiving money from the Axis – there was a wave of mergers as Swiss financiers moved into investment banking.

Credit Suisse formed a joint venture with American rival First Boston in the late 1970s, taking full control of the American bank in a rescue deal in 1990.

UBS was the result of the merger of two major banks – Union Bank of Switzerland and Swiss Bank Corporation – in 1998.

Three years ago, Swiss Bank Corporation became a major player in investment banking after acquiring SG Warburg & Co., a leading British player in the sector.

This is probably the pinnacle of the industry. In 2008, it was rocked by the financial crisis. Credit Suisse, in particular, never seems to have fully recovered.

In 2015, the bank invited Tidjane Thiam, a former chief executive officer of FTSE 100 Prudential, to try and solve the problem.

Tidjane Thiam steps down as CEO in 2020 - Michele Limina/Bloomberg/Bloomberg

Tidjane Thiam steps down as CEO in 2020 – Michele Limina/Bloomberg/Bloomberg

But in 2020, he was forced to quit his job after a corporate espionage scandal in which Credit Suisse hired private detectives to track down two outgoing executives.

The bank’s next attempt to clean up its conduct was made by the new president, Antonio Horta-Osorio, the former boss of Lloyds, but he forced to resign because of violating Covid isolation regulationsincluding attending the Wimbledon final.

Since then, the lender has lagged under chief executive Ulrich Koerner – but doubts about its long-term stability have only grown larger.

In February, the bank posted an annual loss of £6.5 billion, its biggest loss since the financial crisis. Then, last week, it became the focus of a market sell-off as a delayed annual report revealed problems with internal financial controls.

Shares of Credit Suisse have fallen 70% in the past two weeks, worrying investors when it said it had discovered “significant weakness” in its financial statements.

It is now likely to be taken over by UBS, but bigger questions remain about whether the world’s wealthy will trust Switzerland again. Experts point out that industry clients should have no trouble moving their funds to other jurisdictions.

“From Credit Suisse’s point of view, it’s useless for them to woo larger, internationally-focused clients,” Ellison said.

“That means the size of the deposits is larger, but these are also international citizens. They can choose to bank anywhere they want and they can quickly consider whether Switzerland is a market they want to be in.”

Whatever happens now, the Swiss bank’s position is shaken and it’s hard to see how it can be considered a Rolls Royce again. “Clearly this does not help the reputation of the Swiss bank,” Ellison said.

Antonio Horta-Osorio resigns as chief executive officer after violating Covid rules - Leon Neal/AFP/AFP

Antonio Horta-Osorio resigns as chief executive officer after violating Covid rules – Leon Neal/AFP/AFP

He says Credit Suisse’s problems have been well documented for years, with its share price weakening over the past decade. This was just the last straw that broke the camel’s back.

He said the bank did not have a solvency problem, but a liquidity problem due to the speed at which withdrawals were made. “It was tough when a run for the bank started,” he said.

There are other potential problems, not least of which will be costs to the Swiss government.

Credit Suisse and UBS will have a combined balance sheet of £1.3 trillion, twice the size of the Swiss economy.

This will be a challenge and Credit Suisse’s status remains a mystery, said Douglas McWilliams, vice president of the Center for Economic and Business Research, an economic consulting firm.

He said that “balance sheet holes” have yet to be fully disclosed and if they are larger than expected, they could make it harder for the Government to intervene.

McWilliams said he hopes UBS will receive guarantees from the Swiss government so that if anything happens without their knowledge, UBS won’t incur the costs.

Ellison said that the combination of the two largest banks in Switzerland is not what regulators want, but they have no choice.

A merger between the two banks has been discouraged for many years in order to stay competitive in the Swiss banking market.

But now they may be the only option to keep this increasingly shabby Rolls-Royce on the road.

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