Credit Suisse crash: ‘Switzerland is not as market oriented as you may think’

Zurich's Paradeplatz, where UBS and Credit Suisse have their headquarters. © Keystone / Ennio Leanza

The end came for banking stalwart Credit Suisse 167 years after its founding, when the government forced UBS to take over its ailing competitor. Economic historian Tobias Straumann on Switzerland and its big banks, on wishful thinking in Bern – and on whether little Switzerland still needs an international banking giant at all.

Swiss Review: Tobias Straumann, does the loss of Credit Suisse with its long history mark a tipping or turning point for Switzerland?

Tobias Straumann: Well, it is certainly a milestone. Credit Suisse was Switzerland’s oldest big bank still in existence. But its demise is not a huge turning point as such. Big banks were already failing back in the 1990s. Switzerland had five big banks around 30 years ago. Now there is one. The 2008 global financial crisis and ensuing government bailout of Switzerland’s biggest bank UBS were of much greater significance. So was the end of banking secrecy for foreign clients.

Swiss Review: From rescuing UBS to forcing it to acquire Credit Suisse, the state has had to bail out Swiss big banks twice in the last 15 years – in a country that prides itself on its free-market principles. How does that make sense?

T.S.: Switzerland is not as market oriented as you may think. This country has many state-owned or pseudo state-owned enterprises. You have the cantonal banks for a start – these are also public-sector entities. Moreover, in my view government bailouts of big banks are no longer as shocking as they used to be. Since the 1990s, the vulnerabilities of the highly globalised and liberalised banking system have been in evidence all over the world.

Tobias Straumann is Professor of Economic History at the Universities of Zurich and Basel. © Keystone / Marcel Bieri

Repeated state intervention has become the norm. Indeed, there is no other option, because the alternative would be global financial meltdown. Other countries do not want Switzerland to be a source of contagion for the entire banking system.

Swiss Review: But after the UBS bailout, parliament’s too-big-to-fail law was meant to prevent the government and taxpayers from having to take so much financial risk again. Is the fall of Credit Suisse a rude awakening for lawmakers?

T.S.: As a historian, I am not too surprised about what happened. In a crisis, you need the mechanisms to be very simple. Not only was the too-big-to-fail law too complicated, it was also untested and a little naive. You have to remember that foreign authorities are always involved and have their own responses. It can take a while before they all agree.

Swiss Review: What can Bern still do, if anything, in the face of the global financial markets?

T.S.: I would say that Bern can – and must – still do a lot to keep the banking sector on an even keel. It did a good job with UBS in 2008. The bank was partially nationalised for a time, while the federal government even ended up earning something from the deal. UBS also overhauled its risk culture. In the case of Credit Suisse, Bern believed a merger was the safer option. Time will tell whether it was the right one.

Swiss Review: Who or what was primarily responsible for the collapse of Credit Suisse?

T.S.: The management and the board of directors. Credit Suisse had been poorly run for years. But the authorities must also take a good look at themselves. They had known since October 2022 that the bank was in difficulty, yet it still took a long time in March to put together a rescue plan. It all seemed a bit off the cuff, unlike the bailout of UBS. This surprised me.

The two brand logos of the banks UBS and Credit Suisse: UBS formally completed its acquisition of Credit Suisse in June 2023. © Keystone / Ennio Leanza

We still don’t know enough to pass verdict. A parliamentary inquiry committee has been set up to look into the takeover. However, the bank itself still has a part to play. It should be proactive in producing a comprehensive report on what went wrong at Credit Suisse. It owes Switzerland that much.

Swiss Review: Despite losses and scandals, Credit Suisse paid exorbitant salaries and bonuses. Some bankers only seem to be driven by greed and are ready to risk everything in their pursuit of money. What happened to the entrepreneurial bank of yesteryear that helped to develop the country’s economy?

T.S.: Credit Suisse kept supporting business until the very end, doing a very good job with its corporate lending. It is true that founding father Alfred Escher and his peers invested in infrastructure in the 19th century, but the railways were also a risky business. The early years at Schweizerische Kreditanstalt were turbulent, with railway stock prices going up and down. Bankers earned handsomely when things went well, but their bonuses vanished into thin air when stocks plummeted. That is the difference from today. Credit Suisse did make mistakes because of greed, but the bank’s demise was mainly down to the incompetence of the board of directors and management.

Swiss Review: Why this incompetence?

T.S.: From the 1990s onwards, the Swiss big banks turned into international businesses. However, Swiss-managed companies have always had an extremely hard time of it in London and New York, where investment bankers have a completely different mindset. The approach in these English-speaking financial centres sits uncomfortably with Swiss business culture. Furthermore, the Swiss big banks often employed second-rate staff in London and New York, who behaved like mercenaries and were only out to make as much money as they could as quickly as possible.

Swiss Review: UBS took over Credit Suisse in June and is now a huge bank. Will this story end well?

T.S.: Just to give some perspective: the new UBS is smaller than the UBS before the financial crisis – and will probably shrink a bit more. But it is still very big of course, with a balance sheet twice the size of Switzerland’s GDP. Will the story end well? I don’t know. However, it is highly likely that this new banking giant will also find itself in a predicament and need the government to step in. It is already clear that greater regulation will not solve the problem.

Swiss Review: Politicians are nevertheless calling for greater regulation of systemically relevant banks.

T.S.: Banks having more of a buffer, i.e. a greater share of equity, would make sense, I think. But it still wouldn’t make UBS secure, we need to realise that. The global financial system is very fragile. Credit Suisse was struggling, but not so badly off either. It was meeting all the financial regulator’s requirements. But all it takes is something to happen, and the contagion begins. Governments can neither predict nor prevent financial crises. All they can do is mitigate them in time and prevent a catastrophic outcome. But it is hard to know when best to intervene.

Swiss Review: Can a small country like Switzerland still afford to have a major global bank, given the risk?

T.S.: There are advantages to having a big bank on your doorstep offering the full range of services. These advantages would be lost if UBS had to spin off its problematic international operations at the behest of lawmakers, or if it moved its headquarters elsewhere. But you would have more stability.

Tobias Straumann. © Keystone / Marcel Bieri

Foreign subsidiaries would take care of certain areas of business – in much the same way that the airline SWISS covers a specific area of the market for its German parent carrier Lufthansa. It would work. The end of banking secrecy did us no harm either, did it? Is Zurich any poorer than it was before? Quite the opposite.

Swiss Review: How important was being an international financial hub for Swiss prosperity?

T.S.: We overstate the economic importance. The First World War turned Switzerland into an international financial centre, although in 1914, just before the outbreak of hostilities, we were already the richest country on the European continent based on per capita GDP. Industrial activity was the primary driver of that. Industry was highly dynamic and has underpinned Swiss prosperity from the 19th and 20th centuries to the present day. Switzerland only became a financial hub as a result of industrialisation, with wealth management providing a completely new, rich source of income. This has always had its pros and cons from an economic perspective.

Swiss Review: What were the drawbacks?

T.S.: High wages in the banking sector attracted many highly qualified workers, who were then missed in other, more innovative industries. With the banking sector now being less of a draw, there is more scope for other industries and innovations to thrive again. Zurich is also a very successful insurance hub – a more predictable and stable line of business that suits the Swiss mentality much better, I feel.

This article first appeared on August 11 in the Swiss ReviewExternal link.

Addendum

Further developments just after the publication of this article:

UBS pays bac billions in aid

August 11, 2023: UBS decides faster than expected to repay the state aid granted by the government and the National Bank. In addition, it waives the loss guarantee of CHF9 billion granted by the federal government. CommentExternal link by the Neue Zürcher Zeitung: “The bank wants to create goodwill for the foreseeable difficult political battles.” The statementExternal link of the National Bank on the UBS decision.

Credit Suisse small investors file suit against UBS

August 14, 2023: Small investors in Credit Suisse have filed a lawsuit against UBS at the Zurich Commercial Court. The approximately 1,000 shareholders suffered heavy financial losses in the takeover of Credit Suisse by UBS. The plaintiffs are primarily small investors from Switzerland.