Recent turbulent events with its collapse and takeover Credit Suissethey questioned a “constant” that seemed undeniable. After all, the Swiss banking system today remains as stable and reliable as it was after the Credit Suisse case.;

In a Politico article, he talks about the most “dramatic case of bank failure following the 2008 financial crisisraising the question of whether and to what extent the collapse of Credit Suisse could create domino conditions.

On Sunday, March 19, UBS – once a rival bank – buys Credit Suisse for 3 billion Swiss francs in the form of shares in order to protect investors and deposits, which, according to Politico, has been achieved, at least temporarily.

“But the devil is in the details,” comments Politico, expressing concern that the bailout structure could “make things worse.”

Why does the Credit Suisse case spark domino fear?

After the 2008 financial crisis, regulators tried to use strategies to prevent “pollution” of banking institutions by other banks that were already at risk.

However, in the case of Credit Suisse, the Swiss authorities reversed this rule by charging bondholders first, causing a financial panic throughout the system.

It is this development that “generates” the concern of many subjects of the banking system about the possible “spread” of “contagion”. Thus, the underlying fear is that investors will perceive themselves as holding bonds that are now “risky” and then sell those bonds on a “sale” basis, driving prices down and calling into question the credibility of banking in in general. system.

Following the sale of Credit Suisse, European regulators issued a statement reassuring investors that shareholders would be the first to suffer if the bank collapsed.

Despite the assurances and the hopeful atmosphere of the early days, the collapse of Credit Suisse raises a number of questions and doubts about the stability of the system.

The first issue raised by Politico has to do with the fact that Credit Suisse was a well-capitalized bank and had many assets, parameters that may indicate a lack of regulation in the banking system after the big 2008 crisis. It is noted that the Swiss authorities confirmed that the bank was not affected by higher interest rates, unlike SVB.

All of that came to an end last week when assurances of containment of the share price were falsified and the National Bank of Saudi Arabia, one of Credit Suisse’s investors, decided to withdraw its money.

The “sinful” past of Credit Suisse

However, Credit Suisse’s problems start much earlier. With pressure to increase the bank’s profitability, Credit Suisse hired Tijan Thiam as CEO in 2015 with a mission to strengthen the institution.

Only Thiam introduced an extensive restructuring program aimed at cutting thousands of jobs as well as cutting costs in the investment department.

These efforts soon ran into serious setbacks, culminating in the bank’s involvement in a series of money-losing scandals, including the collapse of the Archegos hedge fund, which left the bank with a $5.5 billion loss. Meanwhile, a case of surveillance of an employee was another blow that forced the head of the bank to leave.

Credit Suisse’s board attempted to continue the restructuring efforts started by Thiam, but the next CEO, Thomas Gottstein, acknowledged that more reforms were needed to overcome structural problems. In 2021, the bank took another hit with its involvement in the collapse of Greensil Capital. Cutbacks and restructuring plans continued under successive administrations to no avail, while the Russian invasion of Ukraine was to be another “blow” to the banking institution, until we finally hit a crash a few days ago.

Given the “turbulent” history of the banking institution, the collapse of Credit Suisse seemed “a matter of time.” What remains to be seen is its impact on future banking development in the short to medium term.

Source: Politico