The forced takeover of Credit Suisse is a blow for the Swiss Confederation. The country has built much of its economy on the reputation of excellence of its banks. Heir to a 160-year history, Credit Suisse was the second largest institution in the country, with 50,000 employees and more than 1.6 trillion euros under management. Monday, March 20, this venerable Zurich institution disappeared in a few hours, bought by the number one, UBS.
Credit Suisse was the victim of clumsy communication in a context of great nervousness among investors. But above all, it has paid for an accumulation of bad investments in recent years that have caused it to lose billions. She was considered the“problem child of European finance”according to a good connoisseur of the file.
Exceptional measures
To stop this descent into hell, the Swiss authorities pushed for the takeover, inflicting a heavy loss on the shareholders without their being consulted. To justify this departure from good rules, the government invoked an article of the Constitution which allows derogation from common law in the event of “serious threat to public order”.
The shareholders woke up furious, Monday, March 20 in the morning. But those who lose the most are the holders of subordinated bonds. Their investment is reduced to zero, again by decision of the Swiss authorities. However, the bank had issued 17 billion euros of these specific securities, known as “AT1”, which are used to consolidate banks’ equity.
These exceptional measures are making waves. Many voices are raised in Switzerland to denounce a “undermining the rule of law”. Hundreds of shareholders are preparing legal remedies. These decisions are also making waves in Parliament, which will launch a commission of inquiry. What happened is a “shame for Switzerland”, is indignant, for example, Thierry Burkart, president of the Liberal-Radical Party (PLR), member of the opposition.
A new Lehman was avoided
“We had to put out the fire. One can always criticize the action of the authorities a posteriori. But at least it avoided the spread”judge for his part Samy Chaar, chief economist of Lombard Odier, a small Swiss bank.
With this takeover completed in a weekend, the Swiss Confederation has preserved the essentials. It avoided a bankruptcy comparable to that of Lehman Brothers in 2008. It now finds itself with only one large hypertrophied generalist bank, the new UBS: “We killed a zombie to give birth to a monster”headlined a Swiss newspaper ironically.
But above all, as calm returns to the markets, the entire Swiss finance industry risks being permanently affected. Switzerland has long been one of the world champions of wealth management. It has a multitude of small private banks, based in Geneva or Zurich, specializing in the preservation of the heritage of wealthy individuals from all over the world. It is also a major player in insurance and a platform for commodity trading.
420,000 qualified employees in finance
According to a study by Bak Economics carried out for the Swiss Bankers Association (SBA), the sector accounts for 10% of the country’s GDP, employs 420,000 people and brings in 13% of the Confederation’s tax revenue. It has developed thanks to the reputation of reliability and discretion of local banks. But the end of tax secrecy since 2009 means that discretion no longer really exists. This measure has already dealt a severe blow to the wealth management business. The fall of Credit Suisse now tarnishes the image of reliability and excellence of Swiss banks.
The takeover will quickly result in several thousand skilled job cuts, due to the merger of Credit Suisse and UBS. The Bloomberg agency reports that for the past few days, headhunters in London have been inundated with CVs sent by Swiss bank employees looking to find a new job. The Swiss financial sector will now need several years to recover, if it ever succeeds.