Switzerland would face bank run if Credit Suisse goes bankrupt: Swiss regulator

Allow troubled lender to go bankrupt Swiss credit would have crippled the Swiss economy and financial center and likely led to a rush for deposits at other banks, Swiss regulator FINMA said on Wednesday.

FINMA (the Swiss Financial Market Supervisory Authority) and the Swiss central bank have negotiated UBS’s takeover of embattled Zurich rival Credit Suisse for 3 billion Swiss francs ($3.3 billion), as part of a an agreement announced on March 19. As part of the deal, the regulator instructed Credit Suisse to write down 16 billion Swiss francs worth of AT1 bonds – widely seen as high-risk investments – to zero, while entitling shareholders to value-for-money payments. acquisition of the share.

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The bankruptcy plan, Urban Angehrn, CEO of FINMA said in a press release, was “deprioritized from the start due to its high tangible and intangible costs”. It would have wiped out the holding company Credit Suisse Group, as well as the parent bank Credit Suisse AG and its branches, while retaining the entity Credit Suisse (Schewiz) AG because of its “systemic importance”.

“The parent bank Credit Suisse AG would have gone bankrupt – a Swiss bank with total assets of more than 350 billion francs and ongoing activities also amounting to several billion,” warned Angehrn. “It is not difficult to imagine the disastrous impact that the failure of a bank and wealth manager as important as Credit Suisse AG would have had on the Swiss financial center and the private banking sector. Many other Swiss banks would probably have had to deal with a run on deposits, as Credit Suisse itself did in the fourth quarter of 2022.”

Angehrn noted that the emergency measure would have saved Credit Suisse’s payment and lending functions to the Swiss economy, but would have a higher overall cost that would not comply with the “proportionality principle”.

“The damage to the Swiss economy, the financial center and Switzerland’s reputation would have been enormous, with unquantifiable effects on tax revenues and jobs.”

Among FINMA’s other options, the resolution remedy would have reduced the size of Credit Suisse, with the Swiss National Bank providing liquidity support loans backed by a federal default guarantee. The bank’s equity and AT1 bonds would still have been reduced to zero, with other bondholders being bailed out. FINMA estimates that these measures would have freed up a total of 73 billion Swiss francs of capital, but this buffer of liquidity would have seriously eroded investor sentiment.

The merger plan was ultimately preferred both to stabilize Credit Suisse and to avoid a spillover of the crisis into the international banking sector, FINMA argues.

“The current fragile state of the financial markets due to the shift to monetary tightening in 2022, the uncertain economic outlook, the crisis of certain banks in the United States and the whole geopolitical context were also relevant to our decision”, has said Angehrn. “There was a high probability that the resolution of a global systemically important bank had led to contagion effects and jeopardized financial stability in Switzerland and around the world.”

Credit Suisse’s failure in the wake of recent U.S. banking meltdowns has fueled concerns about the strain testing the banking sector following the central bank’s aggressive interest rate hikes to fight inflation. The European Central Bank and the US Federal Reserve nevertheless made further hikes in March.

Angehrn said the regulator had had recent dialogue with the United States, but had not come under international pressure in its oversight of Credit Suisse.

FINMA’s handling of the collapse of Credit Suisse and its union with UBS has drawn public scrutiny, forcing the regulator to unprecedented levels of public disclosure, says Marlene AmstadChairman of the Board of Directors of FINMA.

“In this case, however, there is a particular need for oversight to expose the most important facts and clarify rumors and assumptions.”

Domestically, Switzerland’s federal prosecutor has now opened an investigation into the takeover, examining potential violations of the country’s criminal law by government officials, regulators and executives of the two banks, according to Reuters. Several bondholders are considering legal action regarding the AT1 writedown.

FINMA said its handling of the Credit Suisse crisis was based on the “too big to fail” standard developed after the financial crisis, with Switzerland becoming the “first country to have to deal with the practical application of the second part of the TBTF legislation”. Namely, FINMA has tackled a “gone concern”, where the TBTF requirements require that systematically significant banks have sufficient capital to be able to restructure or liquidate in response to serious financial difficulties.

“For the first time, AT1 buffers have been used at a global systemically important bank – they are an essential part of TBTF legislation,” Amstad noted, adding that a TBTF instrument applying to resolutions or bankruptcies constitutes a drastic measure of last resort created to limit financial contagion.

“On March 19, however, we were in a different situation. The authorities would have risked not stopping an impending financial crisis using the tool of resolution, but rather triggering such a financial crisis.”

Peter V. Kunz, who holds the chair of economic law and comparative law at the University of Bern, told CNBC on Wednesday that it was likely that the Swiss Parliament would convene a commission to investigate the management by the competent authorities of the bailout deal.

The takeover has curbed Credit Suisse’s independence concerns, but heightens the risks posed by the increased size of the new UBS-led entity brought about by the merger. The regulator downplayed these dangers in the context of UBS’s historical weight.

“As a proportion of Switzerland’s GDP, UBS will in fact be only half the size it was before 2008, even after the merger with CS,” Angehrn said, describing UBS as a “solidly capitalized and well-organized bank ” whose strategic plans are ” grounded ” and which will face increasing regulatory demands after the completion of the takeover bid.

“In Switzerland’s ‘too big to fail’ regime, bank capital requirements increase gradually with the size of a bank. In other words, a bank that is twice the size must hold more than double the capital. After an appropriate transition period, these higher capital requirements will apply to the new UBS. FINMA will monitor and enforce these capital requirements.”

FINMA’s comments come on the same day as a UBS annual general meeting, where investors are eyeing the bank – and Returning CEO Sergio Ermotti for advice on next steps after the takeover.