Credit Suisse rescue rocks global finance

Choice pick: A pedestrian walks past the office building of Credit Suisse in Hong Kong. In the buyout deal by UBS, shareholders are to receive US$3.2bil (RM14.4bil) in compensation, at the expense of bondholders. — Reuters

ZURICH: Days before a hastily convened press conference on Sunday that would make the world’s front pages, Switzerland’s political elite were secretly preparing a move that would jolt the globe.

While the nation’s central bank and financial regulator publicly declared that Credit Suisse was sound, behind closed doors the race was on to rescue the nation’s second-biggest bank.

The chain of events led to the erasure of one of Switzerland’s flagship banks, a merger backed by 260 billion Swiss francs (US$280bil or RM1.25 trillion) of state funds, and a move that would upend global finance – favouring the bank’s shareholders to the detriment of bond investors.

The events that unfolded in the landlocked nation – long a bastion of political neutrality that has secured its standing as a safe-haven favourite for wealthy elites – go against one of the key lessons of the 2008 financial crisis. The rescue concentrates even greater risks into one banking behemoth, UBS Group AG.

What is more, making bondholders cushion the blow to stock investors from the UBS-Credit Suisse tie-up rattled lenders, pushing up their borrowing costs in a threat to world economic growth.

The Swiss National Bank declined to comment, while the Finance Ministry did not respond to a request for comment.

Battered by years of scandals and losses, Credit Suisse had been battling a crisis of confidence of its own making for months. In a matter of days, its demise was sealed.

Soon after news broke on March 12 that the United States would step in to guarantee all the deposits of two mid-sized lenders struggling to keep up with demands for cash, the spotlight was on Credit Suisse and how it would maintain depositor confidence.

Customers had already pulled US$110bil (RM492.5bil) from the Zurich-based bank in the last three months of 2022, outflows that it was fighting to reverse.

A rainmaker who brokered a number of European bank rescues during the financial crisis, speaking on condition of anonymity, told Reuters that after seeing the US banking collapses, there was little doubt UBS would be called upon to shore up Credit Suisse.

The banker called UBS on March 13, warning the world’s biggest wealth manager that it should prepare to receive a call from Swiss authorities.

By Wednesday, two days later, Credit Suisse was swept up in a full-blown crisis. Comments by the chair of the Saudi National Bank, Ammar Al Khudairy, who said that he could not invest further in the Swiss bank, sent Credit Suisse shares into a tailspin.

It mattered little that Credit Suisse’s biggest investor also reiterated confidence in the lender. “They’re a globally systemically important bank. They’re monitored on a daily basis,” he told Reuters.

“There are no surprises, as you would have in a middle-sized bank in the US. It’s a completely different ecosystem.”

Significant deposit outflows followed, the source who would go on to advise UBS on the merger told Reuters, declining to put a number on them.

In the banking centres of Zurich and Bern, the state’s capital, pressure was building.

Yet as the discussions to salvage Credit Suisse got underway, the Swiss Financial Market Supervisory Authority (Finma) and the Swiss National Bank said that “the problems of certain banks in the United States do not pose a direct risk of contagion for the Swiss financial markets”, conceding, however, that they would fund the bank with unlimited access to funding.

Credit Suisse, too, was conveying stability. The bank told Reuters on Thursday that its average liquidity coverage ratio, a key measure of how many cash-like assets the bank has, did not change between March 8 and March 14, despite the global banking crisis.

Swiss Finance Minister Karin Keller-Sutter, a former translator and teacher just months on the job, told the Sunday media conference that additional support for Credit Suisse had been agreed upon but held secret for fear of panicking people with a succession of emergency announcements.

She said she was in close contact with US Treasury Secretary Janet Yellen and UK Finance Minister Jeremy Hunt. Both countries have large Credit Suisse subsidiaries, employing thousands.

There was far less communication with the European Central Bank in Frankfurt, said one person familiar with the matter. Credit Suisse’s arms in Luxembourg, Spain and Germany were far smaller.

European regulators were particularly worried that the Swiss could impose losses on bondholders, a radical step that they did take, as the costs of a rescue spiralled for taxpayers.

“They did this on their own,” said the person, asking not to be named and describing the outcome as a “big surprise”.

A spokesperson for Finma said that although it placed emphasis on the United Kingdom and the United States because of the scale of Credit Suisse’s business in those countries, it had also informed European authorities. — Reuters

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