June 6, 2023
Finance International

Swiss regulator FINMA explains why allowing Credit Suisse’s bankruptcy was not an option

The Swiss financial regulator, FINMA, has stated that allowing troubled lender Credit Suisse to go bankrupt would have had severe consequences for Switzerland’s economy and financial center. According to FINMA, the bankruptcy would likely have led to deposit runs at other banks. Instead, FINMA and the Swiss central bank facilitated the takeover of Credit Suisse by UBS for 3 billion Swiss francs ($3.3 billion), with Credit Suisse instructed to write down 16 billion Swiss francs worth of higher-risk AT1 bonds to zero.

Equity shareholders would be entitled to payouts at the stock’s takeover value. The CEO of FINMA, Urban Angehrn, stated that the bankruptcy plan was deprioritized early on due to its high tangible and intangible costs, and would have resulted in the erasure of the Credit Suisse Group and its parent bank, Credit Suisse AG, while retaining the systemic Credit Suisse (Schewiz) AG entity.

According to FINMA CEO Urban Angehrn, if Credit Suisse had gone bankrupt, it would have been disastrous for Switzerland’s financial center and private banking industry, potentially leading to a run on deposits at other Swiss banks. Angehrn explained that while the emergency measure would have rescued Credit Suisse’s payments and lending functions to the Swiss economy, the cost would have been too high and dis-aligned with the principle of proportionality.

The damage to the Swiss economy, financial center, and reputation would have been significant and the effects on tax revenues and jobs unquantifiable. One of FINMA’s other options was to downsize Credit Suisse, with liquidity assistance loans backed by a federal default guarantee from the Swiss National Bank. In this scenario, the bank’s equity and AT1 bonds would still have been written down to zero, and other bondholders would have been bailed in. However, this would have heavily eroded investor sentiment, even though it would have altogether freed up 73 billion Swiss francs of capital.

If Credit Suisse had gone bankrupt, it would have been a significant blow to the Swiss financial system. The bank is one of Switzerland’s largest lenders, and it has a significant presence in both the investment banking and wealth management sectors. The collapse of such a large and important institution would have likely caused a chain reaction of events, leading to a severe economic downturn.

The decision to avoid bankruptcy and instead arrange for a takeover by UBS was a calculated move by FINMA and the Swiss central bank. While the move may have cost more in the short term, it was seen as a necessary step to prevent a broader financial crisis.

The write-down of AT1 bonds to zero was a significant part of the deal, and it was done to ensure that equity shareholders received payouts at the stock’s takeover value. This move was necessary to prevent the loss of investors’ trust in the Swiss banking system and to ensure that Credit Suisse could continue to function as a going concern.

Overall, the move to prevent Credit Suisse’s bankruptcy was a difficult decision that required careful consideration of the potential risks and benefits. While it may have been more expensive in the short term, it was seen as the best course of action to prevent a broader financial crisis and to protect the Swiss economy.

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