How Swiss banking went from a Rolls-Royce to a toxic mess

Swiss central bank said it would lend up to $54 billion (£44 billion) to Credit Suisse – Francesca Volpi/Bloomberg/Bloomberg

For a long time, Swiss Banking was considered the Rolls Royce of the financial world – a synonym for discretion, exceptional service and, above all, security.

But while Credit Suisse is on the brink, that reputation is so tarnished that it seems irretrievable.

Instead, parts of the industry are seen as the biggest threat to financial stability in Europe due to years of malfunctions and failures since the 2008 crisis.

CreditSuisse could now be taken over by Swiss competitor UBS in a deal brokered by the country’s regulators.

“If you have a problem or two, you could say it’s bad luck,” says Guy Ellison, an analyst at wealth manager Investec.

“But when you see a multitude of these reputational damages appearing, you have to suspect that something is wrong with the structure, the governance within Credit Suisse and the decisions that have been made about what risks it is willing to take.”

The Swiss banking industry began in the early 18th century and became a haven for wealthy international clients looking for a neutral home for their money.

As the country’s reputation grew and underground vaults were dug deep into the mountains to store gold and diamonds, companies like the Union Bank of Switzerland gained a reputation for safety in times of crisis – as well as a willingness to engage with all sides in conflicts erupted, giving the industry a reputation as a mercenary that it was hard to shake.

Credit Suisse itself was founded in 1856 and helped fund the country’s development, fund its railroads and even develop its monetary system.

After World War II – when the industry was heavily criticized for accepting money from Axis powers – there was a wave of mergers as Swiss financiers entered investment banking.

Credit Suisse founded a joint venture with US competitor First Boston in the late 1970s and took full control of the American bank in a rescue agreement in 1990.

UBS was formed in 1998 from the merger of two major banks – Union Bank of Switzerland and Swiss Bank Corporation.

Three years earlier, Swiss Bank Corporation became a major player in investment banking following the purchase of SG Warburg & Co., a UK leader in the industry.

This was perhaps the pinnacle of the industry. In 2008 it was rocked by the financial crisis. Credit Suisse, in particular, never seemed to fully recover.

The bank brought in Tidjane Thiam, former chief executive of FTSE 100 company Prudential, in 2015 to try and fix the slide.

Tidjane Thiam resigned as CEO in 2020 - Michele Limina/Bloomberg/Bloomberg

Tidjane Thiam resigned as CEO in 2020 – Michele Limina/Bloomberg/Bloomberg

But in 2020 he had to stop after one Industrial espionage scandal in which Credit Suisse hired private investigators to pursue two outgoing executives.

The bank’s next attempt to clean up its act was spearheaded by a new chairman, Antonio Horta-Osorio, the former head of Lloyds, but it was he Forced to resign after breaching Covid quarantine rulesamong other things by participating in the Wimbledon final.

Since then, the lender has continued to hobble under CEO Ulrich Körner – but doubts about its long-term stability are growing.

In February, the bank posted an annual loss of £6.5 billion, the largest since the financial crisis. Then it became the focus of a market sell-off last week when a belated annual report revealed problems with its internal financial controls.

Credit Suisse shares are down 70 percent over the past two weeks, unsettling investors as it said it spotted a “material weakness” in its financial reporting.

It’s now likely to be taken over by UBS, but wider questions remain as to whether the world’s rich will ever trust the Swiss again. The clients of the industry, experts emphasize, have no difficulty in transferring their funds to other jurisdictions.

“From Credit Suisse’s point of view, it doesn’t help that they’ve been courting larger, internationally oriented clients,” says Ellison.

“That means the size of the deposits is larger, but these are also international citizens. They can choose where they want to do their banking and they can very quickly reconsider whether Switzerland is a market they need to operate in.”

Whatever happens now, the reputation of Swiss banking is ruined and it’s hard to imagine how it can be seen as a Rolls Royce again. “It clearly hasn’t helped the reputation of Swiss banking,” says Ellison.

Antonio Horta-Osorio resigned as chief executive after breaking Covid rules - Leon Neal/AFP/AFP

Antonio Horta-Osorio resigned as chief executive after breaking Covid rules – Leon Neal/AFP/AFP

He says Credit Suisse’s problems have been well documented for years, with its share price weakening over the past decade. That’s just the last straw that broke the camel’s back.

He says the bank doesn’t have a solvency problem, but a liquidity problem because of the speed of withdrawals. “It’s very tough once a bench rush starts,” he says.

Further problems loom, not least the costs for the Swiss government.

Credit Suisse and UBS will have combined assets of £1.3 trillion, twice the size of the Swiss economy.

Douglas McWilliams, vice chairman of the Center for Economics and Business Research, an economics consultancy, says it will be challenging and the state of Credit Suisse remains shrouded in mystery.

He says the “holes in the balance sheet” have not been fully disclosed and if they are larger than expected they could make it more difficult for the government to intervene.

McWilliams says he would expect UBS to get guarantees from the Swiss government so that if something happens they don’t know about, UBS won’t have to pay the costs.

Ellison says the merger of Switzerland’s two largest banks isn’t what regulators want, but they have no choice.

Mergers between the two banks have been prevented for years in order to maintain competition in the Swiss banking market.

But they may now be the only option for keeping this increasingly dingy Rolls-Royce on the road.

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