2023 witnessed the return of the spectre of banking crisis. In the US, three regional and specialised banks failed in rapid sequence and in Switzerland, a globally systemic bank stood on the brink, for the first time since Lehman Brothers. This was a wake-up call after a decade of relative calm, marked by a succession of reforms designed to prepare for an orderly resolution of a systemically important bank. While initial market jitters and fears of systemic repercussions were palpable, they soon subsided following the Swiss government's intervention, as it orchestrated the takeover of Credit Suisse by UBS.
Lessons from the crisis in the US were quickly drawn and have been analysed in some detail including in a recent rapid-response report by CEPR (Acharya et al. 2023). In contrast, the Credit Suisse crisis has received less scrutiny. Nevertheless, it raises several pivotal questions about the ‘too big to fail’ (TBTF) regime, and a direct comparison with the situation of US banks is not straightforward.
For Switzerland, the downfall of Credit Suisse sent shockwaves comparable to, if not worse than, the grounding of Swissair some two decades before. Both the political and technical aspects of coming to terms with this crisis are still unfolding. In line with their commitment to address the implications of the Swiss TBTF regime, the Federal Department of Finance established an independent Expert Group on Banking Stability. While the primary mandate of this expert group was forward-looking, given the ongoing investigation by a Swiss Parliamentary Commission into the precise sequence of events leading up to the crisis, it conducted hearings with relevant institutions, supervisors, and market participants both domestically and abroad. The full report (Eggen et al. 2023) was published on 1 September 2023 and can be downloaded here.
In this column we present findings that focus on the ‘why’ and ‘how’ of the crisis, emphasising the lessons with broader implications beyond Switzerland. The report holds many detailed recommendations which are specific to the Swiss framework.
Credit Suisse was different
The initial point to note is that Credit Suisse was undeniably unique in its predicament. It was on the brink of resolution during the weekend of March 19th, but this crisis had been years in the making, characterised by persistent losses, scandals, flawed strategies, and poor risk management practices. These issues had eroded its reputation and shaken confidence in the viability of its business model. Consequently, the share price of Credit Suisse had plummeted by over 90% since 2021, while during the same period, the STOXX Europe index of banks had seen an increase of approximately 10% (see Figure 1). Thus, it is fair to assert that the failure of Credit Suisse was an idiosyncratic event.
Nevertheless, its downfall and resolution may still have had dramatic impact on other financial institutions. The memory of Lehman Brothers suddenly seemed very fresh and was certainly also on the minds of the troika of Swiss authorities – the Federal Councillor, the Chairwomen of the Financial Supervisor (FINMA) and the President of the Swiss central bank (SNB) – who managed the crisis during the resolution weekend. In the run up to the weekend they had considered several options:...
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