The debate is in full swing: Why are international observers criticizing the CS rescue?

The expert thus underlines the arguments in a highly critical report of the Financial Stability Board (FSB). This body brings together the world’s most important financial supervisory authorities, ministries and central banks. According to the FSB report, there were “no material obstacles to the resolution” by Credit Suisse. Since US authorities are a major player in the FSB, it is possible to assume that the US Treasury and the Fed also support the report. An expert report commissioned by the Federal Council on the consequences of the CS crisis also concludes that the liquidation or restructuring of CS may be possible under Finma’s management.

The FSB document therefore contradicts the assessments of the Swiss authorities. The Federal Ministry of Finance justifies the chosen takeover solution with the following words: “The huge loss of confidence experienced in Credit Suisse before the weekend of March 18 and 19 was so extensive that it was extremely doubtful whether further capital increases and restructuring would restore the necessary confidence. There can be trust.”

How would financial markets react?

The regulatory expert cited above admits that it is difficult to predict the market’s reaction to the solution. “What matters is what story you tell the markets on Monday, that is, what will happen to the bank once the solution is decided.” In the event of liquidation, Finma would have to explain who the restructuring officer is and what exactly will happen to the CS (for example, which parts of the bank will be sold or ultimately liquidated).

The liquidation of the CS could look like this: Supervisory authority Finma declares that the CS is no longer valid. Capital is reduced to zero. AT1 bonds and other loss-absorbing capital instruments are written off or converted into equity. Finma takes control of the bank, dismisses management and appoints a restructuring officer.

The following Monday CS would reopen its stalls and have new equity capital of 73 billion francs. Additionally, in case of a solution, the central bank would need new liquidity support.

Blackrock was interested in some parts of CS

“If Credit Suisse had been liquidated, the end of the process could have been taken over by UBS,” the expert said. It would have been better to process the deal as part of the liquidation. Thus, the creditor hierarchy would be preserved, where shareholders lose their money first and then it is the bond investors’ turn. There was an international outcry over the UBS deal because CS shareholders still received UBS shares worth three billion francs, while AT1 creditors lost everything.

During the liquidation process, in addition to the full acquisition of CS, its partial sale would also be possible. As is known, BlackRock was interested in Credit Suisse’s asset management and even established a crisis team during the March weekend in question. However, as it was not possible to book the core part of CS in just one weekend, Blackrock withdrew again.

Strong buyout candidates such as Santander or BNP Paribas were likely to be found for the Swiss company that is Credit Suisse’s jewel. It remains questionable how markets will react to the filleting of CS and whether customer confidence can be restored in this way.

This is exactly what Swiss officials suspect: “The bank that would go ahead would be Credit Suisse, whose reputation would certainly be further damaged by the ordered restructuring,” Finma boss Urbahn Angehrn said in April when asked about the reason for the previous audit. shrunk.

“The solution has an 80 percent chance of success”

Switzerland would be the first authority in the world to send a major bank into liquidation. Therefore, it seems that there is great sadness abroad that Switzerland did not do this. This would give the solution greater international credibility in the markets. “CS was one of the smallest systemically important banks globally and quite unimportant in the eurozone,” the interviewee analyzes.

“Europe is currently lobbying hard for liquidating a bank to remain an option,” says one Finma insider. He also regrets that they did not dare to reach a broad compromise in the CS case. “I estimate the chances of success are 80 percent, but I can also understand why the Federal Council thinks the remaining risk of failure is very high.”

The interviewed EU expert also acknowledges that the merger solution undoubtedly has the advantage of immediately calming financial markets. UBS is in such good shape that players are confident it will take over and integrate successfully. “The problem with this solution is that it brings with it subsequent problems,” warns the EU expert. On the one hand, Switzerland faces a competition problem because UBS now has a dominant position in its market – an assessment that UBS boss Sergio Ermotti passionately disputes and likes to point to the great market power of the cantonal banks. state owned.

The next problem, according to the expert, is that Switzerland now has a larger bank in UBS and it is now completely unclear what will happen to it if it gets into trouble in the future, as it did in 2008. A private takeover of UBS seems impossible because the buyer must be a foreign bank. But cross-border mergers of major banks cannot be achieved over a weekend.

Managers need to write scripts

“Given this background, it is important for the future that supervisory authorities around the world are better prepared for the solution,” the expert said. For this, Switzerland, for example, needs to develop a scenario with precise steps for what will happen to which parts of UBS if it is liquidated. This plan must be good enough to convince the markets.

CS is history. But their collapse continues to reverberate. It remains unclear whether carefully developed solution plans will survive the reality test.