Credit Suisse rescue: What does it mean for Switzerland?

© Keystone / Michael Buholzer

Credit Suisse has to borrow up to CHF50 billion ($54 billion) to shore up its liquidity and boost investor confidence. Here are the most important points to know about the Swiss National Bank's intervention.

How did it come to this?

It is a chain of unfortunate circumstances made worse by an already weak bank. Anxiety was high over the weekend after two American banks collapsed and were rescued. At the same time, however, the US Securities and Exchange Commission delayed the publication of Credit Suisse’s annual report. This raised initial questions about the solidity of Switzerland’s second largest bank.

This was followed on Wednesday by a thoughtless remark by a majority shareholder: the chairman of Saudi National Bank said they would not inject any more money into Credit Suisse. That was probably the trigger for the sudden loss of confidence.

However, it is no coincidence nor surprising that Credit Suisse has been the one to implode. It is probably the weakest bank in Europe at the moment and has had problems for a long time: it is struggling with high cash outflows, cannot find a strong earnings base, and is groaning under a realignment.

Does Credit Suisse need the money?

First and foremost, it was a signal. Market players and the bank’s clients had to reassured that Credit Suisse is not wavering. But the fact that the Swiss National Bank (SNB) had to act overnight shows that the situation was very critical.

Are there other comparable cases internationally?

The US has just seen two of its banks wobble. But Silicon Valley Bank and Signature Bank are much smaller than Credit Suisse. In addition, the Fed did not rescue the banks, but only guaranteed the deposits of their clients.

The SNB’s bailout is therefore more comparable to the UBS bailout during the 2008 financial crisis. The difference, however, is that back then, in addition to the SNB, the federal government also came to the rescue with CHF6 billion. It is still unclear whether the the government will also take the risk this time.

Will the SNB get the money back?

If everything goes well, yes. Perhaps even the Ministry of Finance will guarantee the SNB’s loans to a certain extent. If that were to be the case, any losses would not fall on the SNB but on the federal government. In the case of the UBS rescue, the government and the SNB even ended up with a profit. That could also be the case here, if everything remains stable and Credit Suisse does not go under completely.

What does that mean for the Swiss banking centre?

It will probably have a negative impact on the image of the Swiss financial centre. After all, Credit Suisse has “Suisse” in its name which means it is clear to everyone that a Swiss bank is affected. And that is atypical, especially since Swiss banks are considered very stable abroad. However, it cannot be ignored that a major Swiss bank has had to be stabilised twice in the last 15 years.

Will this intervention be enough?

Trust can be restored relatively quickly if there is a trustworthy player with a lot of money in the background. That is the case now. The logic of central bank intervention is general: it works if you say you will do whatever it takes and if that is credible.

So it is a question of willingness on the one hand and credibility on the other. The SNB intervention offers the credibility but the question of willingness is open. After all, the SNB has not said whether there is an upper limit for liquidity support.

Where does the SNB get the money?

At the moment, the SNB is printing new Swiss francs, which it passes on to Credit Suisse as a loan. Theoretically, it can do this to an infinite extent. But if it goes overboard, it can lead to strong market distortions. The SNB would certainly like to avoid that.