Who would trust a Swiss bank after this disaster?

Shenanigans at Credit Suisse have turned a financial centre that was once the epitome of sense and stability into, well, a bit of a circus

If investors’ nerves were already frayed by the problems of several regional American banks, then they have been shot to pieces by the crisis that has quickly engulfed Credit Suisse. For context, Silicon Valley Bank had total assets of $212bn (£175bn) when the Federal Reserve stepped in to protect depositors and shore up confidence in the banking system.

Credit Suisse meanwhile, had total assets of $574bn at the end of 2022, and its massive asset management arm sits on another $1.7 trillion in assets, which is why it is one of just 30 global banks that the international Financial Stability Board has deemed to be systemically important.

Put another way, it is simply too big to fail. A banking crisis may have been averted – for now at least – after Switzerland’s central bank stepped in with a mammoth Sfr50bn (£44.5bn) liquidity lifeline, restoring some calm to markets.

The bank’s shares jumped by a record 40pc at the open and the cost of insuring its bonds against default eased. However, the intervention may be too late to save the bank’s reputation as well as Switzerland’s status as a pre-eminent financial centre after it was effectively turned into a circus. Indeed the post-mortem has already begun with Switzerland’s second largest political party demanding greater transparency regarding how it came about that Credit Suisse had to be rescued, as well as pushing for those responsible to be held accountable. “We could have seen this coming,” said Cederic Wermuth, the co-president of the Social Democrats.

Quite. The problems at Credit Suisse run deep and have existed for years. It has become a byword for scandal and been at the centre of some of the biggest blow-ups in global finance, exposing a free-wheeling culture that has cost it billions of francs, and worryingly lax risk management procedures.

The bank lost money in 2021, chalked up its biggest loss since the financial crash in 2022 and expects to remain in the red this year as well. With its reputation in tatters, it has been haemorrhaging funds. In the final three months of 2022 alone, clients withdrew $120bn from Credit Suisse accounts. A plan to overhaul its investment bank, is the eighth attempt at turning it around in just over a decade.

The bank’s unravelling has been a slow motion car crash that regulators seem to have largely sat back and watched unfold. True, the bank had a 4bn francs rights issue imposed on it last year but that now looks to have been too little too late, compared to the 50bn francs that the central bank has had to provide.

It’s obviously not the job of regulators to tell management how to run the bank. If it was, then we may as well nationalise the entire financial sector. But could they have asked more searching questions, and exerted greater pressure for quicker, more meaningful change? Both the European and Swiss financial regulators appear to have been asleep at the wheel.

It certainly isn’t the moment for European officials to be criticising how their US counterparts handled the collapse of SVB. In the end, it was US regulators who stepped in and forced the bank to fess up to “material weaknesses” in its internal controls.

Economist Nouriel Roubini has described Credit Suisse as “too big to fail, but also too big to be saved” but that won’t stop the Swiss from trying if its emergency loan turns out to be nothing more than a reprieve.

It’s anyone’s guess as to where Credit Suisse goes from here, which is precisely what analysts are doing.

Jpmorgan has mapped out four possible scenarios. The first is that the Swiss central bank steps in, guaranteeing Credit Suisse’s deposits and forcing management to offload its struggling investment bank. A second possibility is that the Swiss National Bank takes a stake in Credit Suisse, again as a demonstration of confidence in the future of one of its most prized institutions. A third scenario would see Credit Suisse allowed to try to fix its own problems by selling a minority stake in its retail arm and deploying the proceeds to turn around the rest of the bank. This seems like the most high-risk manoeuvre of all, given the utterly risible attempts of management to get their house in order so far. Jpmorgan analysts think the fourth and most likely outcome is that, if the situation deteriorates further, a shotgun merger with local arch-rival UBS is on the cards.

JP Morgan makes the point that it is unlikely that Credit Suisse would be allowed to fail for two reasons: its importance to the Swiss economy; and Zurich’s status as a global financial centre.

Yet by the same token, whichever course of action the Swiss take, further intervention will do nothing to repair the reputation of Credit Suisse or indeed Switzerland’s carefully crafted image as an ultra-safe banking hub.

It may be too late anyway. The liquidity backstop provided by the Swiss authorities may be proof that the system works but it’s hardly a measure of financial prudence when a central bank has to prop up one of its biggest lenders.

The glaring question for any money manager now is why would you entrust Credit Suisse with your clients’ wealth when there are lots of other options out there. Why take the risk? Further outflows seem inevitable.

After a string of scandals, including money laundering, spying allegations, tax evasion, and bribery, the damage from this latest calamity will surely be irreparable. Once the source of immense pride, the country’s battered banking industry has become a national embarrassment and the weak link in European finance.

‘Scandal-hit bank’s problems run deep and have existed for years’