Global regulators have defended Switzerland’s decision to support a rescue deal for Credit Suisse rather than liquidating the bank, according to a report issued by the Financial Stability Board (FSB). The report highlighted the shortcomings of a regime established after the global financial crash to manage such crises. The FSB, which comprises central bankers, regulators, and officials from leading economies, concluded that the regime was generally successful, but revealed tensions and conflicts within the process. Switzerland’s finance minister, Karin Keller-Sutter, stated that she had little choice but to support the emergency rescue of Credit Suisse with public money, given the potential economic fallout. However, this move contradicted a key principle of post-crisis reform, which aimed to avoid using taxpayers’ money to save troubled banks.
The report examined why Swiss authorities chose to back a takeover by UBS rather than winding up Credit Suisse using a resolution mechanism designed after the 2008 financial crash. The FSB concluded that the resolution rules could have worked for Credit Suisse, although public money would still have been required. It suggested that only enhancements to the application of the rules might be necessary, rather than changes to their substance. However, it was noted that putting the resolution mechanism into practice proved challenging, with a person familiar with the report’s preparation stating that winding up a globally active bank would result in considerable economic damage.
The FSB’s report contrasted with earlier criticism when UBS became Switzerland’s largest bank after the government quickly arranged and partly funded its takeover of Credit Suisse. The report shed light on events leading to Credit Suisse’s collapse, including crisis talks in 2022 with Swiss regulator FINMA considering winding up the bank, nationalization, or a merger. US authorities advised against liquidation, citing legal obstacles. In October 2022, the bank faced liquidity stress and experienced panicked client withdrawals. Although it recovered initially, a drop in share prices and further withdrawals in March 2023 pushed Credit Suisse into the hands of UBS.
The report refrained from criticizing Switzerland, despite comments from Bank of England Governor Andrew Bailey, who said the Swiss did not follow the “playbook” and created market “ambiguity” regarding the credibility of resolving major banks. Arturo Bris, a professor of finance at IMD business school, commented that the rules proved “totally useless” in practice, as they did not account for the speed of reaction required during a banking crisis. The FSB argued that Switzerland’s actions maintained financial stability, even though questions remained as to why resolution was not chosen.
More detail via Reuters here… ( Image via Reuters )