Credit Suisse Collapse: What Went Wrong and What’s Next?
- Felipe Malfitani
- Dec 21, 2024
- 4 min read
In the midst of the panic, confusion, and misinformation, it’s important to dissect exactly what happened regarding Credit Suisse and their recent collapse. This article will examine and explain the causes and what led to this occurrence, the exact economic mechanics of this collapse, and what this means for the future of the global economy.
What Exactly Happened?
In 2023, the bank collapsed and was merged with UBS, ending its independent operations after 167 years. Switzerland on Friday published a long-awaited parliamentary report into last year's collapse of Credit Suisse, an event that called into question the country's reputation for financial stability and prompted far-reaching questions about what went wrong.
Credit Suisse is receiving attention now due to the aftermath of its collapse and merger with UBS in 2023, which has led to ongoing scrutiny and legal repercussions. The report criticized the Swiss financial regulator FINMA and the bank's management for mishandling the situation, which nearly caused a global financial crisis.
Additionally, there are numerous lawsuits against Credit Suisse, especially concerning the controversial write-down of AT1 contingent convertible bonds, which caused significant investor losses. These events have triggered extensive legal challenges and could reshape the future of financial instruments like AT1 bonds.
How Did This Happen?
First and foremost, the bank faced significant setbacks from risky investments, notably the collapse of Archegos Capital and Greensill Capital in 2021, which led to nearly a billion dollars in losses. Additionally, high-profile departures and scandals also plagued the bank. For example, the bank's chairman resigned in 2022 after breaching COVID-19 quarantine rules, which drove down investor confidence.
By late 2022, rumors of the bank's impending failure triggered massive withdrawals by clients, significantly straining its liquidity. Furthermore, the global financial market was in a tough spot, especially after the failures of U.S. banks like Silicon Valley Bank and Signature Bank in early 2023, which only worsened the situation, creating a domino effect.
In an effort to stabilize this dangerous situation, Credit Suisse tried to create emergency liquidity from the Swiss National Bank, eventually leading to a takeover by UBS in March 2023, arranged without shareholder votes, in an effort to prevent perpetuating this financial crisis or creating a global one.
How Does a Collapse like Credit Suisse Happen?
Credit Suisse faced a classic liquidity crisis, where depositors and investors made large withdrawals. This is what’s known as a bank run, which led to a severe shortage of liquid assets. Banks operate under a fractional reserve system, meaning they only keep a fraction of depositors' money as liquid assets, lending out the rest. When many depositors withdraw their money at once, the bank can run out of liquid assets (cash), creating an urgency to raise funds.
At the heart of the crisis was a failure in risk management. Credit Suisse engaged in high-risk financial activities, including dealings with the aforementioned Archegos Capital and Greensill Capital, which exposed the bank to volatile markets and complex financial products that ultimately led to substantial losses. Furthermore, Credit Suisse was a globally systemic important bank (G-SIB), which means its failure posed a risk to the global financial system.
The regulatory frameworks established post-2008 financial crisis, like higher capital requirements and contingency planning (living wills), are meant to mitigate these risks. However, the implementation of these regulatory measures was insufficient at Credit Suisse. In order to stop this crisis, the Swiss government and central bank intervened, emphasizing a merger with UBS to prevent further harm. This is a classic example of a government bailout, where state resources are used to support a failing institution due to its systemic importance.
What Does This Mean for the Future?
This collapse and subsequent merger suggest several future changes in the banking and financial sector. There will likely be stricter regulatory oversight to address deficiencies in risk management and crisis preparedness. The banking industry might shift towards more conservative practices and simpler, more transparent financial products. The creation of larger banks through mergers raises concerns about increased systemic risks, as their failure could have more severe global implications. This scenario could lead to more cautious investment strategies and potentially higher funding costs for banks.
Furthermore, financial institutions will need to focus on rebuilding trust by emphasizing ethical practices and robust risk management. Finally, the tighter regulatory environment could spur innovation within the banking sector, potentially benefiting smaller, agile fintech companies. These changes are crucial for maintaining financial stability and restoring confidence in global financial markets.
The Bottomline
This collapse serves as a reminder of what happens with poor risk management and regulatory oversight. Moving forward, the incident is set to trigger tighter regulations and might encourage a shift towards more conservative banking practices. This could mean banks opting for simpler, more transparent products and a financial environment where trust needs to be rebuilt from the ground up.
As the industry absorbs these lessons, it's also headed towards innovation, potentially giving smaller, nimble fintech players a chance to shine. Credit Suisse’s fall is a call to action for the banking sector to prioritize stability and transparency, ensuring that such a financial shake-up doesn’t occur again.
Works Cited
"Credit Suisse's Demise: A Timeline of Scandal and Failures." Morningstar, Accessed 20 Dec. 2024, https://www.morningstar.co.uk/uk/news/233178/credit-suisses-demise-a-timeline-of-scandal-and-failures.aspx.
"Swiss Findings on Credit Suisse Collapse." Reuters, 20 Dec. 2024, Accessed 20 Dec. 2024, https://www.reuters.com/business/finance/swiss-findings-credit-suisse-collapse-2024-12-20/.
"Swiss Inquiry Castigates Failings of Credit Suisse Oversight, Pins Most Blame on Bosses." Reuters, 20 Dec. 2024, Accessed 20 Dec. 2024, https://www.reuters.com/business/finance/swiss-inquiry-castigates-failings-credit-suisse-oversight-pins-most-blame-bosses-2024-12-20/.
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