Credit Suisse collapse tarnishes Switzerland’s reputation as investment haven

The shocking demise of Credit Suisse may well sully Switzerland’s banking reputation for years to come.

Last week, Swiss President Alain Berset went so far as to say that an “uncontrolled collapse” of one of the country’s biggest and oldest banks would lead to “incalculable consequences” for the country and the international financial system.

As the shockwaves of UBS’ takeover continue to ripple through the industry, there are fears that deposits worth hundreds billions of dollars may be withdrawn after the 3 billion Swiss franc US$3.26 bn) acquisition is complete.

Last year, Credit Suisse customers withdrew 123 billion Swiss francs ($134 bn), with the lion’s share during the fourth quarter.

A Bloomberg report in October 2022, quoting unnamed sources, said that several large private banking clients in Asia and the Middle East transferred hundreds of millions of dollars from the bank late last year. That same report also said that some clients in Singapore had requested to withdraw tens of millions of dollars in cash and other assets.

In February this year, the bank reported an annual net loss of about 7.3 billion Swiss francs, the largest since the global financial crisis in 2008. UBS, of course, was among those that were bailed out at that time.

S&P has negative outlook for UBS

While UBS chairman Colm Kelleher said that the buyout of Credit Suisse is poised to create a business worth more than US$5 trillion in total invested assets and sustainable value opportunities, analysts don’t seem to be convinced. Despite that heady claim, S&P Global Ratings slashed UBS’ outlook to negative.

S&P noted in a report that the Swiss National Bank will provide 100 billion Swiss francs ($109 bn) as a bulwark against massive withdrawals and other risks. The Swiss government has also promised 9 billion Swiss francs as “protection” against further losses.

“However, given the size and weaker credit profile of Credit Suisse and the complexity in winding down a large part of its investment banking operations, there is a risk,” said S&P, adding that the combined group’s competitive position may well be worse. Restructuring or “substantial litigation costs” could dent profitability for an extended period of time.

As things stand, Credit Suisse shareholders will receive one UBS share for 22.48 shares in Credit Suisse, equivalent to 76.5 cents a share on UBS’ closing price of 17.21 Swiss francs on Monday (Mar 20).

Bonds worth zero

But it’s also worth noting that 16 billion Swiss francs worth of risky notes were wiped out, triggering a complete write-down of the bank’s additional tier 1 (AT1) bonds.

Investors in these bonds include the Qatar Investment Authority sovereign wealth fund and Norway’s pension fund Norges Bank Investment Management. There are reports that some AT1 bond investors are even threatening to sue the Swiss authorities.

According to a paper by French financial consultant Lazard Freres Gestion, the AT1 market is worth as much as US$254 billion. . There are currently 100 issuers and 245 bonds in the investment universe, with 97 per cent of issuers being banks and the remaining 3 per cent being insurance companies

European banks and insurance companies have been the main issuers, but the majority of these bonds are denominated in US dollars. As such, there is also a currency risk as the greenback has been strong against the euro over the past year.

To counter potential problems in the global banking sector, the US Federal Reserve and several other major central banks including the Bank of England and the Bank of Japan announced a coordinated effort on Sunday to boost the flow of US dollars through the global financial system, with the aim of keeping credit flowing to households and businesses.

The network of swap lines serves as an important liquidity backstop to ease strains in global funding markets, the central banks said.

Overall, the total assets of Swiss banking corporations have more than doubled over the past 20 years – from US$1.82 trillion in 2002 to US$3.19 trillion in 2021. As the fallout of UBS’ takeover continues to be felt, it’s still too soon to give a firm assessment of the state and health of the Swiss banking sector.

Foreign investors may also be wary of State interference as the Swiss government has promised 9 billion Swiss francs as “protection” against further losses, contends Brendan Brown, editor Monetary Scenarios, a newsletter.

More government regulation and greater transparency as a result of Credit Suisse’s collapse, however, could deter the world’s rich from putting their money and assets into Switzerland and force them to look elsewhere. It will take years to repair Switzerland’s longstanding reputation as one of the safest places in the world to invest.

© copyright Neil Behrmann.  This article was first published in The Business Times Singapore . For other Asian and global articles try

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