The Demise of Credit Suisse, Who is to blame?

I have used SWI for information a number of times in the past having gained approval to do so from time to time. Management had changed and I had to ask for permission to use their articles again. They were gracious enough to allow Angry Bear the opportunity to rebroadcast their reports in the United States. For that privilege, I am grateful.

Who’s to blame for the demise of Credit Suisse? SWI, Keystone / Martin Ruetschi

The final months of the doomed Credit Suisse bank are a hot topic of discussion Switzerland. Who is to blame? The main suspects are busy exonerating themselves.

The emergency takeover of Credit Suisse by its banking rival, UBS, in March was a public relations disaster for the supposedly secure Swiss financial sector.

While the debacle inflicted less damage than the collapse of American bank Lehman Brothers in 2008, it has raised many uncomfortable questions.

Chief among them: Why were the warning signals missed? How did it get to the point of an emergency takeover by UBS over the course of a single weekend? What happens if UBS now gets into trouble?

SWI sifts through the evidence to examine the role of the main suspects during the Credit Suisse crisis.

The suspects

Investors lost faith in the bank after a series of scandals and business blunders, leading to a catastrophic bank run between autumn 2022 and spring 2023.

But what about the state actors charged with keeping order at ‘Too Big to Fail’ banks: the Swiss Financial Market Supervisory Authority (FINMA), the Swiss National Bank (SNB), the finance ministry and legislators?

The regulator

FINMA has issued a long report on its dealings with Credit Suisse, which can be summarized as: “We did everything we could, but our powers were too limited to be truly effective”.

The regulator has repeated demands for the power to issue fines, name-and-shame bad actors, curb excessive pay and effectively discipline senior bank managers.

But a Reuters news agency report blames FINMA for vetoing a plan by the central bank to nationalise Credit Suisse around six months before the forced takeover by UBS.

FINMA has not answered this accusation directly but has given some clues to its thinking in its report on the way it handled the Credit Suisse affair.

“Generally speaking, a private solution is preferable to measures imposed by the government,” because this route is “more appropriate, more targeted, and more proportionate”, states the report.  

But the final decision rested with the Federal Council, which opted for a different course, it adds.

Some media have also attacked FINMA chair Marlene Amstad for being dictatorial and overly-critical of her staff. Amstad has been blamed for the departures of several staff, including two CEOs since she took position in 2021: Mark Branson in 2021 followed by Urban Angehrn six months after the Credit Suisse takeover.

Whatever the office politics, FINMA is currently operating with an interim CEO just as it is demanding greater powers.

The central bank

The Swiss National Bank also contends that it did everything in its powers by offering hundreds of billions of francs in emergency loans to Credit Suisse and to smooth the takeover by UBS.

It was also instrumental in securing backing of the UBS takeover plan among central banks in other countries.

Unlike FINMA, the SNB is not asking for extra powers. Quite the opposite. Central bank chair Thomas Jordan wants to limit direct entanglement with commercial bank failures, particularly the risk of bailout losses.

The message is clear: emergency funds can be provided, but only if they are backed by the commercial bank’s assets or by taxpayer money.

The SNB declined to comment on the Reuters allegation that FINMA vetoed its recommendation to temporarily nationalize Credit Suisse in the autumn of 2022.

The finance ministry

Two finance ministers were in office during the final months of Credit Suisse: Ueli Maurer until the end of 2022 and Karin Keller-Sutter from the start of 2023.

Of the two, Maurer has received by far the most criticism as he had occupied the office from 2016 and was the only one who could have stopped the rot at Credit Suisse.

Maurer has been accused by media reports of keeping the Federal Council in the dark about the full gravity of the situation – even of cancelling a planned meeting to discuss the issue in November 2022.

He later admitted to holding back some information, fearing it would be leaked to discredit him.

There is media speculation that both Maurer and Keller-Sutter were against the state taking control of the bank, even temporarily, with a federal election looming in October 2023.

The legislators

Parliament has also received a share of negative comments for failing to set up an adequate framework to deal with the failure of such a large bank.

Some measures were passed, such as beefing up capital reserves of big banks. But there was no provision in place for emergency state funds – called a Public Liquidity Backstop – when they were most needed. This was rushed through by emergency and temporary legislation in March.

Legislators have also been criticized for listening too much to banking lobbyists who urged restraint in setting up ‘Too Big to Fail’ measures and setting the powers of FINMA.

Lack of coordination

Doubts have also arisen about the way each of the above-mentioned parties worked together throughout the crisis.

FINMA, the SNB and the finance ministry “each looked above all to their own interests”, writes Dirk Schütz, editor-in chief of the Bilanz business magazine, in his book “Too Close to the Wind: Why Credit Suisse Had To Go Down”.

“It is important that the CS crisis is dealt with as transparently as possible by those involved. But it is even more important that responsibility is taken in the next banking crisis. Therefore, cooperation between FINMA, the Finance Department and the Swiss National Bank must be improved,” states an editorial in the Tages Anzeiger newspaper.

The Swiss Bankers Association also says “it is important for cooperation between the Federal Department of Finance, the SNB and FINMA to be further optimized and for the division of responsibilities in the event of a crisis to be made clearer”.

It is now even more imperative to fix problems before they spin out of control. Switzerland is left with one remaining international bank, UBS, whose $1.6 trillion balance sheet is almost twice the size of the Swiss economy.