Credit Suisse collapse & UBS's takeover

Credit Suisse, a global investment bank and financial services firm founded in 1856 to fund Switzerland's rail system, had become a leading provider of investment banking, private banking, asset management, and shared services. With its headquarters in Zurich, Credit Suisse was the second-largest bank in Switzerland and was known for its strict bank-client confidentiality and banking secrecy. The company had expanded its services through various acquisitions and was considered a globally important bank. Despite facing multiple international investigations for tax avoidance, Credit Suisse managed to accumulate approximately CHF 1.3 trillion in assets under management as of the end of 2022. However, in March 2023, Switzerland's executive branch voted to allow UBS's takeover without shareholder approval.

SCANDALS: Despite the magnitude and the reputation this bank reached, Credit Suisse has been involved in many scandals in the last five years, which can be seen as the prelude of this collapse. In February 2020, Credit Suisse was rocked by a spying scandal that led to the resignation of its then-CEO, Tidjane Thiam. The controversy began after Credit Suisse's wealth management boss, Iqbal Khan, left the bank for rival UBS. Private contractors were then hired to conduct surveillance on Khan in an attempt to determine if he had poached clients from Credit Suisse. The scandal brought to light issues of corporate espionage and ethics within the banking industry, ultimately resulting in the resignation of Thiam. The fallout from the scandal has continued to affect Credit Suisse's reputation and has sparked discussions around the need for greater transparency and accountability in the financial sector.

In 2021, the bank suffered a pre-tax loss of almost $1 billion due to the collapse of two major clients: US family investment fund Archegos Capital and British finance firm Greensill Capital. The fallout from the collapse of Archegos was particularly damaging, leading to the departure of Credit Suisse's investment bank CEO and chief risk and compliance officer. An independent investigation into the bank's role in the scandal found that Credit Suisse had failed to effectively manage risk, although no evidence of fraudulent or illegal conduct was revealed. The events have raised concerns about the adequacy of risk management practices within the banking industry, and Credit Suisse has pledged to improve its risk management framework to prevent similar incidents from occurring in the future.

In January 2022, Credit Suisse faced another setback when its Chairman, Antonio Horta-Osorio, resigned from the bank's board after only nine months in the position. His resignation came after a scandal involving his breach of Covid-19 quarantine protocols in Switzerland and the UK. The incident caused significant controversy and highlighted the importance of adhering to public health guidelines during the pandemic. The departure of the Chairman further compounded the challenges faced by Credit Suisse, which has been working to rebuild its reputation and restore investor confidence in the wake of recent scandals.

Credit Suisse's efforts to turn a new page under CEO Ulrich Koerner hit a snag in late summer 2022 when an unfounded rumour began circulating that the bank was on the brink of collapse. Despite the lack of evidence to support the claim, the rumour triggered a wave of panic among clients, who withdrew a staggering 110 billion CHF (approximately $119 billion) of funds in the final quarter of the year. This represented a significant setback for Credit Suisse, which had been working to regain investor confidence and stabilise its position in the financial markets. The incident highlighted the power of rumours and the need for banks to maintain transparency and clear communication to prevent unfounded speculation from causing harm.

CREDIT SUISSE TO BORROW $54 BILLION FROM CENTRAL BANK: The recent collapse of Silicon Valley Bank and Signature Bank, coupled with poor management practices, prompted a wave of withdrawals from Credit Suisse by its clients. This, in turn, resulted in a significant drop in the bank's stock price. Responding to the crisis, the Swiss National Bank stepped in and offered support to Credit Suisse. In a move to ease concerns about its financial health, Credit Suisse announced it will borrow up to 50 billion Swiss francs, or about $54 billion, from the Swiss National Bank. Additionally, it announced plans to buy back debt of up to 3 billion Swiss francs. Despite these measures, the Chairman of the Saudi National Bank, Credit Suisse's largest shareholder, stated that the state-owned bank would not be investing further money in Credit Suisse. However, he did clarify that this was due to regulatory constraints, and his bank would not exceed the 9.9 per cent stake it already holds in the company.

UBS AGREE TO BUY CREDIT SUISSE: In a drastic move to curb the financial panic that had swept the world, UBS, Switzerland's largest bank, agreed to purchase Credit Suisse for about $3.2 billion on March 19, brokered over the course of a few days by the Swiss government. This deal marked the fall of a 166-year-old institution that was once a symbol of Swiss pride and could be considered the most significant shake-up of the global banking sector since the 2008 financial crisis. Swiss government leaders and regulators stated that the deal was the most effective way of reassuring investors about the health of the country's financial sector and the possibility of its trouble-spreading. To support UBS's efforts to finalise the agreement, the Swiss National Bank agreed to lend up to 100 billion Swiss francs, and Finma, the Swiss financial regulator, took various extraordinary steps to aid UBS in quickly digesting its primary competitor, including removing $17 billion worth of Credit Suisse's bonds and eliminating the need for UBS shareholders to vote on the deal.

UBS' acquisition of Credit Suisse has sent shockwaves through the global financial system, leaving the future uncertain for the bank's employees and offices worldwide. UBS may absorb some or all of Credit Suisse's 50,000 employees, while others may face layoffs or office closures. The deal is set to increase UBS' assets under management to a staggering $5 trillion.

This acquisition marks the latest peak in a new financial crisis that claimed its first European victim. Despite almost receiving a clean bill of health under Finma's "Too Big To Fail" regulatory regime, Credit Suisse's loss in confidence from its customers was too great, triggering a stampede of fund withdrawals for the second time in months. This collapse marks the third major financial institution to fail in three weeks following the implosions of Silicon Valley Bank and Signature Bank, which were the second and third largest lenders to collapse in US history, respectively.

CONSEQUENCES OF THE TAKEOVER: To manage the acquisition and Credit Suisse's legal troubles, UBS has brought back former CEO Sergio P. Ermotti. The task ahead involves shutting down parts of Credit Suisse's investment banking operations and overseeing extensive layoffs in overlapping divisions. Ermotti previously led a successful revival of UBS during a bout of restructuring, refocusing the bank on its historical strength of managing the wealth of global elites.

The merger with Credit Suisse is expected to make UBS even larger and more stable than it already is, and this may result in the shuttering of parts of Credit Suisse's operations, which could cause concern about the reputation of Switzerland's banking industry. In a seemingly prophetic statement made last September, Ermotti stated that there was no "compelling" reason for Switzerland to have two banking giants, highlighting the uncertainty surrounding the future of Credit Suisse. The road ahead for both UBS and Credit Suisse remains uncertain, and it will be interesting to see how the deal unfolds and how it will impact the global financial system.

The acquisition of Credit Suisse by UBS has led to the dismantling of its once-renowned investment bank. While UBS is considering retaining some of Credit Suisse's investment bankers in select industries to enhance its advisory operations and complement its core wealth management business, it intends to scale down Credit Suisse's trading activities and restrict the scope of its investment banking division.

The collapse of two major US banks, Silicon Valley Bank and Signature Bank, has begun a domino effect that is now hitting Europe with the collapse of Credit Suisse. When banks borrow from each other, the collapse of one can lead to the collapse of another, and the effects can continue until action is taken. The 2008 financial crisis highlighted the need for better monitoring of banks to prevent such events, but it seems we have not learnt from our mistakes.

The consequences of a failure of this proportion could have been devastating, but the Swiss Central Bank has acted swiftly to enable UBS's takeover of Credit Suisse, preventing chaos from occurring. This acquisition may bring some temporary calm to the banking environment as Credit Suisse customers become part of UBS. It is only a matter of time before another bank falls, and the domino effect continues across the world, and further action will have to be taken. If only such actions had been taken in 2008, the consequences of the crisis may not have been as severe.

Kabir Hassan is a Professor of Finance at the University of New Orleans, USA. KabirHassan63@gmail.com. José Antonio Pérez Amuedo is a Ph.D. student at the University of New Orleans, USA