Banks failing: Lessons learnt from the Credit Suisse collapse

June 13, 2023 •

7 min reading

Banks failing: Lessons learnt from the Credit Suisse collapse - Part 3

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This is the third installment in a three-part series on the mega-merger between Switzerland’s two biggest banks: Credit Suisse and UBS. The repercussions of rising interest rates on the housing market and the broader economy are also discussed.

We sat down with Dr. Giuliano Bianchi, an Associate Professor of economics at EHL, to find out more about the merger and its impact on markets around the world. Dr. Bianchi’s research, which focuses on applied econometrics, corporate governance and business law, is regularly published in top journals.

The Credit Suisse - UBS bank merger and its impact on the economy


Where are we with the UBS takeover of Credit Suisse?

Dr. Bianchi: Now that the markets have efficiently absorbed the information and factored it into their prices, an army of lawyers is hammering out the myriad legal aspects. The merger must comply with the Swiss code of obligations, merger and acquisition law, stock exchange regulations, financial market norms, and antitrust laws…to name just a few. The antitrust issue, however, should be a moot point given that the Swiss government is the one arranging the deal. Then, of course, there is all the debate about taxes and protecting jobs.


What is actually being debated?

Dr. Bianchi: There are several issues currently being mulled over. In the blue corner, there is the question related to the protection of shareholders (both CS and UBS). And in the red corner, there is the question related to the market power that this monster will have.


That’s just it: The combined balance sheet will be bigger than that of the Swiss National Bank. Does this present a systemic risk? What happens when ‘too big to fail’ becomes ‘too big to rescue’ for a national bank?

Dr. Bianchi: The power of the Swiss National Bank depends more on the level of confidence that it inspires than its actual financial firepower. If the markets do not believe in the SNB's strength and start speculating against it, the SNB would not be able to carry out its monetary policy. In the past, the SNB was able to rescue UBS and maintain a fixed exchange rate. But, do we really believe that if the international markets were to start speculating against the SNB’s decisions, the SNB would be able to respond to such attacks? Personally, I think it is actually more of a Nash equilibrium issue, in which no one wants to be the first to start speculating against the bank’s decisions. Thus, as long as the SNB maintains its sterling reputation, I do not think the banks will be too big to be rescued. It is worth, however, repeating this rather pernicious point: The SNB must maintain its reputation.


Deposit holders ran for the exits, withdrawing some $69bn in the first quarter of 2023, in a textbook example of a bank run.

Dr. Bianchi: There is indeed uncertainty, but we’re a long way off from the scenes of panic we saw in Greece and the UK after the 2008 meltdown. The key difference is that now, in Switzerland, there is a general confidence that the system works. Again, everything relies on reputation. The opacity of the system and the genuine (not to say naïve) idea that the Swiss banking system is “Swiss” (i.e., stable) helps immensely. There is a general feeling that, if needed, the government will step in and provide a backstop to halt a run on the banks. However, if we look a bit closer, we see that this idea is not grounded in fact.


What do you mean? Isn’t the Swiss banking system known for its stability?

Dr. Bianchi: Yes of course, but historically Swiss bankers have tried to keep the government away from the finance industry under the motto: “We know, you don’t”. An example? According to Article 37a of the Swiss Banking Act, deposits are fully guaranteed “only” up to an amount of CHF 100,000 by ESISUISSE, a private, self-regulated association of Swiss banks and security firms. That is to say: in the event a bank fails, up to CHF 100,000 in deposits will be paid by ESISUISSE. Not the government. In the event the association does not pay (the law has anticipated this possibility), the deposit holder will be placed in the second class of bankruptcy claims (which, de facto, is a third class out of four as it comes after payments to debt holders and employees). Again, the government has no obligation to step in.


Given that, in the United States, First Republic Bank was recently forced to sell itself to J.P. Morgan, a move that followed several other fire sales, do you see a risk of further contagion?

Dr. Bianchi: Never say never. But in general, the problem in Switzerland was linked and limited to Credit Suisse, which had been struggling for several years and its spiraling downfall did not come as a surprise. But its problems didn’t lead to an inner meltdown; it failed because the market stopped trusting the Swiss bank after the Silicon Valley Bank debacle and started speculating against it. Credit Suisse was not capitalized enough to reassure the market. I think, for Switzerland, the fever has subsided. Now, market doubts have been priced into the share prices of the wobblier banks.


Now that the nuts and bolts are being hashed out, how will the broader landscape in Switzerland (and beyond) be affected?

Dr. Bianchi: Switzerland used to have five systemic banks running the show: UBS, CS, Postfinance, Raiffeisen and the Zurich Cantonal Bank. Now that the two biggest banks are merging, and the concentration of the industry has increased, the 3-billion-franc question is whether the other players will follow the lead of the new monster and consolidate or compete against it. In the first scenario, competition decreases and clients will eventually suffer; while under the second scenario, bank users will simply acknowledge that a historical institution now belongs to history.


The new executive management team is taking shape at UBS, but each bank will “operate independently for the foreseeable future”. Nevertheless, “each institution will continue to have its own subsidiaries and branches” when the deal is closed, which is expected by late June. Or are you hearing otherwise?

Dr. Bianchi: We’ll have to wait and see, but it appears as if the process will be a steady one.


Didn’t interest rate hikes by central banks spark this latest wave of bank failures?

Dr. Bianchi: Yes, indeed. The bank crisis started with the fire sale of Silicon Valley, which was directly affected by the increase in the interest rates by the FED (see our previous article on the subject). The story went more or less as follows: the interest rate increases, the value of Fed bonds, used as collateral, decreased, thus leaving the Silicon Valley Bank uncovered. At the same time, the increase in the price of money led to a drop in demand for loans, which translated into less business and more deposits being withdrawn. All this contributed to the failure of Silicon Valley Bank, which triggered a domino effect, endangering other banks that were already in trouble because of the rate hike.


What are the current or future risks? Is the market not seeing something (just as it overlooked the subprimes)? Do you see higher interest rates, for example, popping property price bubbles, say in Switzerland?

Dr. Bianchi: No, I do not think there are any dangers lurking in the banking industry, like the one we faced in 2008. I think what we are dealing with now is mainly a business cycle correction: inefficiency is being punished. For several years, we have been living with cheap money. Starting in 2001, with the bubble, central banks have done a lot of pump priming through quantitative easing, an unconventional measure, in an attempt to prop up investment levels. This fueled the subprime crisis in 2008, which was countered with easier money. Central banks fought the Covid crisis with evermore expansionary monetary policies. All those measures kept interest rates artificially low. All in all, for more than 20 years, the economy, and the banking system in particular, has been awash in cheap money. Now that interest rates are increasing, we should expect all inefficiencies in the market to be battered.


With 1% interest rates now a thing of the past for would-be homeowners, will the Swiss property market bubble be bursting anytime soon?

Dr. Bianchi: The Swiss real estate market has always been a special case. Higher interest rates will indeed weigh on property values and make housing less accessible, but not to the extent that it will put the Swiss economy at risk.


In a recent report, Credit Suisse expects a “soft landing” for the Swiss property market. Do you agree?

Dr. Bianchi: Yes, the changes in legislation in the past few years have strengthened the safety of the market. Also, the characteristics of the property owners (and their financial collateral) should be a guarantee.


Circling back to UBS, how does the merger shake out for the taxpayer? How have previous bailouts affected Swiss taxpayers?

Dr. Bianchi: It is difficult to say. Already in the past, what seemed like a bad deal for the taxpayer turned out to be a good deal. I am referring to the 2008 rescue of UBS, in which the SNB bought a massive amount of toxic assets that then turned out to be less toxic than expected. They even paid dividends to the cantons! This time around, however, the deal is a bit different as the SNB is guaranteeing access to liquidity if needed. However, as for UBS, I do not think the Credit Suisse is as “toxic” as the market thinks…so I do not expect the SNB or the Swiss taxpayer to come out on the short end of the stick.

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Associate Professor of Economics at EHL Hospitality Business School

Andrew Brenner
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Andrew Brenner