How Swiss Banking Went From A Rolls-Royce To A Toxic Mess

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The Swiss central bank said it would lend up to $54bn (£44bn) to Credit Suisse - Francesca Volpi/Bloomberg/Bloomberg

The Swiss central bank said it would lend up to $54bn (£44bn) to Suisse – Francesca Volpi/Bloomberg/Bloomberg

Swiss was long regarded as the Rolls-Royce of finance – a byword for prudence, exceptional service and, above all, .

But as teeters on the brink, that reputation has been so tarnished that it appears irreparable.

Instead, years of procrastination and mistakes have meant that parts of the industry are facing the biggest threat to financial stability in since the 2008 crisis.

credit Suisse May now be taken over by Swiss rival UBS One deal was brokered by the country's regulators.

“When you have an issue or two, you can say it's bad luck,” says Guy Allison, an analyst at wealth manager Investec.

“But once you see a multitude of these coveted hits, you have to suspect that something is wrong within the structure, the governance within Credit Suisse, and the risk it has been prepared to take.” The decision has been taken.”

The Swiss banking industry began in the early 18th century and became a bolthole for wealthy international clients looking for a neutral home for their money.

As the country's prestige grew, and underground vaults were dug deep into the mountains to store gold and diamonds, institutions such as the Union Bank of Switzerland gained a reputation for security in times of crisis – as well as providing support to all sides in times of conflict. Also acquired a desire to deal with. went broke, giving the industry a reputation for mercenaries that it struggled to shake off.

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Credit Suisse itself was founded in 1856 and helped grow the country's bankroll, finance its railways, and even develop its currency system.

After World War II – when the industry was heavily criticized for accepting money from the Axis powers – a wave of mergers began as Swiss financiers branched out into banking.

Credit Suisse began a joint venture with American rival First Boston in the late 1970s, taking full control of American Bank in a rescue deal in 1990.

UBS was the result of a 1998 merger of two large – Union Bank of Switzerland and Swiss Bank Corporation.

Three years ago, Swiss Bank Corporation became a major player in investment banking after purchasing SG Warburg & Company, a leading British firm in this sector.

This was probably the pinnacle of the industry. In 2008 it was shaken by the financial crisis. Credit Suisse, in particular, never fully recovered.

The bank brought in Tidjene Thiam, the former chief executive of FTSE 100 company Prudential, in 2015 to try and address the slide.

Tidjane Thiam resigns as chief executive in 2020 - Michel Limina / Bloomberg / Bloomberg

Tidjane Thiam resigns as chief executive in 2020 – Michel Limina / Bloomberg / Bloomberg

but in 2020 a corporate espionage scandal in which Credit Suisse hired private detectives to follow two outgoing executives.

The bank's next attempt to clean up its act was driven by a new chairman, Antonio Horta-Osorio, a former Lloyd's boss, but that was Forced to resign after breaking Covid quarantine rulesIncluding participating in the Wimbledon final.

Since then the lender has been operating under chief executive Ulrich Koerner – but doubts about its long-term sustainability have only grown.

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In February, the bank posted a £6.5bn annual loss, its biggest since the financial crisis. Then it became the center of a selloff last week when a delayed annual report revealed problems with its internal financial controls.

Shares of Credit Suisse have plunged 70% over the past two weeks after investors said it found “material weaknesses” in its financial reporting.

It is now likely to be acquired by UBS, but widespread questions remain about whether the world's wealthy will ever trust the Swiss again. Experts say that clients of the industry do not face any difficulty in moving their funds to other jurisdictions.

“It is unhelpful from Credit Suisse's point of view that they have attracted large, internationally focused clients,” says Ellison.

“That means deposit sizes are larger, but they are also international citizens. They can choose to bank wherever they want, and they can very quickly reconsider whether or not Switzerland is a market they need to be in.

Whatever it is now, the reputation of Swiss banking is in tatters and it is hard to see how it can ever again be regarded as a Rolls-Royce. “Clearly it hasn't helped the reputation of Swiss banking,” Allison says.

Antonio Horta-Osorio resigns as chief executive after flouting COVID rules - Leon Neill/AFP/AFP

Antonio Horta-Osorio resigns as chief executive after flouting COVID rules – Leon Neill/AFP/AFP

He says that while Credit Suisse's problems have been well-documented over the years, its share price has languished over the past decade. This is just the last straw that broke the camel's back.

They say that the bank does not have a solvency problem, but has a liquidity problem due to the speed of withdrawals. “Once the bank run starts, it becomes very difficult,” he says.

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There are other looming problems, not the least of which will cost the Swiss government.

Credit Suisse and UBS will have a combined balance sheet of £1.3 trillion, twice the size of the Swiss economy.

Douglas McWilliams, vice president at the Center for and Research, an economic consultant, says it will be challenging and Credit Suisse's situation is shrouded in mystery.

He says the “hole in the balance sheet” has not been fully disclosed, and if they are larger than expected they could make it more difficult for the government to step in.

McWilliams says he would expect UBS to be guaranteed by the Swiss government so that if something happens that they don't know about, UBS doesn't have to absorb the cost.

Ellison says a combination of Switzerland's two biggest banks is not what regulators want, but they have no choice.

Mergers between two banks have been discouraged for years in order to maintain competition in the Swiss banking market.

But now they may be the only option to keep this increasingly shoddy Rolls-Royce on the road.