Credit Suisse Collapse: What Happened? A Look at Risky Behavior & Their Demise

By Chika


Last Updated: March 28, 2023


The nearly 167-year run of Credit Suisse came to an abrupt end when its larger and longtime rival UBS Group agreed to buy it.

This marks the biggest deal in the global banking system in years.

The seemingly rushed acquisition to take over Credit Suisse for around $3 billion materialized after Swiss authorities helped steer the deal following the plummet of the bank's stock price amid steep outflows from customers.  

But what happened at Credit Suisse?

In this article, we take a look at the events leading up to Credit Suisse's fall and its acquisition by UBS. 



History of Credit Suisse

Credit Suisse has long been a symbol of Swiss financial power, stability and prestige.

The bank is involved in:

  • wealth management
  • investment banking
  • asset management

Initially named Schweizerische Kreditanstalt, Credit Suisse was established by 19th-century industrialist Alfred Escher to open up the country to trade across Europe. 

Escher described Switzerland as Europe's forgotten backwater. He was eager to get his country involved in the economic boom that was happening across the continent. 

To do this, the Alpine country had to open up its borders to other parts of Europe to make it easily accessible. Escher established Schweizerische Kreditanstalt in 1856.

Soon after, the bank became the catalyst behind Switzerland's economic growth, from helping develop its currency to financing its electrical grid. It also funded the country's railway network which linked it to northern and southern Europe. 

The bank made its first international foray when it expanded into Europe and opened its first branch in New York in 1940. In 1978, the bank struck a deal to partner with US investment bank First Boston

This made it possible for the Swiss lender to join the global market. It became entrenched in the "bulge bracket" of global investment banks through a series of increasingly aggressive acquisitions in Zurich, London, and New York. 



Credit Suisse's Culture of Risk 

Credit Suisse has long been viewed as the problem child of the banking system.

Sector analysts and former executives of the bank believe that dabbling into capital markets and trading changed the mentality and DNA of Credit Suisse. To them, this is when trouble started to brew - albeit on a distant horizon. 

The bank survived the 2008 financial crisis, but former executives believe it was down to luck. Its balance sheets were buoyed by investments from two Middle Eastern investors. The Olayan family of Saudi Arabia and the Qatar Investment Authority, which are still among its biggest shareholders.

Credit Suisse emerged relatively unscathed from the financial crisis, but this sowed the roots for its eventual demise.

While other banks were compelled to clean up their act and reduce their balance sheets in the years following the financial crisis, Credit Suisse was more willing to take risks and put off dealing with legacy problems.


A Domino Effect

This led to a domino effect of unethical practices, financial controversies, and losses. These caused the bank to occasionally clash with financial regulators.

In one instance, Credit Suisse executives arranged $1.3 billion in loans for Mozambique to develop a tuna fishing industry. The majority of the funds, however, were consumed by bribes paid to local officials and financiers involved in the transaction.

The bank was reprimanded in 2020 for spying on former wealth management head Iqbal Kahn, who had departed to work for UBS. The bank had engaged private investigators and attempted to conceal its tracks by altering surveillance invoices to mislead regulators.

This resulted in the precipitous termination of Tidjane Thiam's five-year tenure as Chief Executive Officer.

More recently, its ties to these organizations have also harmed its reputation.

The collapse of Archegos cost Credit Suisse $5 billion in 2021, which was equivalent to more than a year's worth of profits. 



What Caused Credit Suisse's Crash?

In October, wealthy clients left the bank due to a social media firestorm concerning the institution's health.

Last year, deposits declined 40% to $252 billion, while total assets fell 30% to $571 billion

The frenzy of withdrawals prompted the bank to personally reach out to more than 10,000 affluent customers to reassure them of the bank's health. This, however, was insufficient to prevent the bank from disclosing a $7.9bn loss. This, compared to a net loss of approximately $1.84bn the previous year.

Earlier this year, the bank was compelled to delay publication of its annual report. This, after auditors PwC identified "material weaknesses" in its internal controls and the Securities and Exchange Commission demanded additional information.

After the failure of Silicon Valley Bank, the problems of the Swiss bank took on a new sense of urgency.

The repercussions of the seemingly unrelated incident prompted investors to wonder which bank would be the industry's next vulnerable link. As a result of the speculation that followed and the search for indicators of bank contagion, shares of global banks (including that of Credit Suisse) plummeted. 

When its greatest shareholder, Saudi National Bank, announced that it had no plans to increase its investment due to regulatory restrictions, the Swiss bank's problems became especially severe. 

Credit Suisse is 9.9% owned by Saudi National Bank. Capital requirements prohibit banks from possessing more than 10% of other banks. The comment from the SNB chairman precipitated an additional avalanche of withdrawals and subsequently sent the bank's shares down by 25% that very day. 


Why did UBS acquire Credit Suisse?

The agreement was forced upon UBS by regulators anxious to prevent further panic about the banking industry's stability. The Swiss government demanded that Credit Suisse be sold to UBS or perish. The fate of the bank was sealed.

The so-called " Swiss trinity" of the Swiss National Bank, the regulator Finma, and the minister of finance facilitated the hasty marriage. Swiss regulators feared that the bank would fail if nothing was done. 

UBS has been viewed as part of any state-backed solution for Credit Suisse for quite some time. Executives at UBS are already developing detailed plans for which portions of the business they will retain, sell, or wind down.

UBS has dispatched Iqbal Khan to Credit Suisse to stem a potential talent exodus and reassure private bankers of their employment. 


What does the acquisition of Credit Suisse imply for UBS?

The acquisition of Credit Suisse makes UBS the second largest wealth management firm in the world. They have more than $5 trillion in assets under management.

Analysts believe that UBS may have received the bargain of the decade with this transaction. UBS agreed to pay $3.2 billion in stock for Credit Suisse's equity, $0.82 francs per share. This represents less than half of the company's market value and less than 7% of its tangible book value.

The controversial write-off of Credit Suisse's $17 billion in AT1 bonds was taken by the Swiss regulator rather than UBS. Thus, the bank is not liable for the costs associated with the inevitable litigation that would ensue.

Paying nothing for a significant portion of Credit Suisse's debt and almost nothing for its shares places UBS in an enviable position with a large cushion of capital.

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