Switzerland dodged a total bank run

Credit Suisse’s bankruptcy would have had a disastrous impact on Switzerland’s economy, resulting in deposit runs at other banks, warns the Swiss regulator, FINMA. It would have wiped out the holding company Credit Suisse Group and parent bank Credit Suisse AG while retaining the Credit Suisse (Schewiz) AG entity because of its “systemic importance.” FINMA CEO Urban Angehrn explained that the emergency measure would have rescued Credit Suisse’s payments and lending functions to the Swiss economy but at a higher overall cost that dis-aligned with the “principle of proportionality.”

Angehrn noted that the failure of Credit Suisse on the recent footsteps of U.S. bank collapses has stoked concerns over the strain testing the banking sector as a result of aggressive central bank interest rate hikes to combat inflation. The European Central Bank and U.S. Federal Reserve, nevertheless, proceeded with further increases in March. Among FINMA’s other options, the resolution recourse would have downsized Credit Suisse, with the Swiss National Bank supplying liquidity assistance loans backed by a federal default guarantee. The bank’s equity and AT1 bonds would still have been written down to zero, with other bondholders being bailed in. FINMA estimates these measures would have altogether freed up 73 billion Swiss francs of capital, but this liquidity buffer would have heavily eroded investor sentiment.

As part of the takeover, the regulator instructed Credit Suisse to write down 16 billion Swiss francs worth of AT1 bonds to zero while entitling equity shareholders to payouts at the stock’s takeover value. FINMA brokered UBS’ takeover for embattled Zurich rival Credit Suisse for 3 billion Swiss francs ($3.3 billion), in a deal announced on March 19. The merger plan was ultimately preferred both to stabilize Credit Suisse and to prevent an overspill of the crisis into the international banking sector, FINMA argues.

FINMA’s management of Credit Suisse’s unravelling and union with UBS have drawn intense public scrutiny, forcing the regulator to unprecedented levels of public disclosure, said Marlene Amstad, chair of FINMA’s board of directors. Switzerland’s Federal Prosecutor has now opened an investigation into the takeover, looking into potential breaches of the country’s criminal law by government officials, regulators and executives at the two banks, according to Reuters. Several bondholders are studying legal action over the AT1 writedown.