When they hear the name “Credit Suisse”, my grandchildren will likely have to google (or whichever search engine exists then) these two words. For most of my contemporaries here in Switzerland, Credit Suisse is an inherent part of Swiss history and culture. The past weekend has been historical in many dimensions for Switzerland. The country used to be praised as a successful financial center due to its stability and lack of political uncertainty, but instead recent developments have prompted a combination of curiosity and panic. A too-big-to-fail institution has indeed failed, some of its bonds written off, and its remaining assets purchased by its neighbor and competitor UBS.

Why has this happened? Certainly Credit Suisse’s problems did not start last week. Its fate results from a combination of poor strategic decisions, a rotting culture, and bad luck. The power of its brand had kept the bank afloat despite corporate governance scandals, the choice of wrong partners, and a sequence of CEOs and top executives that were unable to restore confidence and lead a turnaround. And when there was turbulence in financial markets because of the default of Silicon Valley Bank (SVB), the weakest banks sunk first.

While the SVB collapse demonstrates the gaps in US banking regulation, the response of the Swiss National Bank (SNB), FINMA, the Swiss financial regulator, and the Swiss Confederation should be praised as adequate and speedy. SVB’s shareholders and depositors were the victims of a regulatory framework that allows non-systemic banks in the United States to account for fixed income securities as “held to maturity securities” – that is, accounted at cost of acquisition instead of at fair value or market value. When SVB showed financial weakness, depositors started to withdraw their money. Being forced to liquidate such fixed-income securities at depressed values, SVB became undercapitalized and technically bankrupt.

As financial panic spread throughout the world, it reached Switzerland, and Credit Suisse wealth management clients, depositors and shareholders became concerned about the going-concern value of the bank. We heard last night in a historical press conference that survival alternatives for Credit Suisse had been considered from last Wednesday, including splitting the business into parts, nationalization, and an outright sale to UBS. The latter is what ultimately happened after a frantic weekend.

Extracted from: Bris, A. (2023). Credit Suisse: How the mighty fell.

https://www.imd.org/ibyimd/finance/credit-suisse-how-the-mighty-fell/

Weigh up the pros and cons of the merger between Credit Suisse and UBS. In your expert opinion as a strategic financial expert, is this a sound business decision or does it merely prolong what will inevitably be a painful economic end for the once-giant credit institution? Provide your response in no more than 500 words, concentrating on the following discussion points:

• Consideration of capital costs as well as its associated risks and return; (10)

• The impact of different international finance options available to the bank; (10) and

• The influence of credit management and debt collection (or lack thereof) on the bank’s financial liquidity. (10)

What was behind the shocking demise of a treasured institution – and how will the proposed rescue package play out?

Answer rating: 100% (QA)

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