The Rise and Fall of Credit Suisse

Introduction

Credit Suisse, once a resilient powerhouse in Switzerland's banking industry, faced a catastrophic collapse in March of this year. The 167-year-old institution, having successfully weathered the storm of the 2008 financial crisis, found itself in an insurmountable crisis that ultimately led to its acquisition by Swiss rival UBS for a staggering 3 billion Swiss francs ($3.5 billion). This desperate deal, brokered by the Swiss state, aimed to prevent a potentially devastating global financial meltdown.

Reasons behind the Collapse

Share Price

A succession of scandals and significant financial losses had an immense impact on Credit Suisse's share price, post the 2008 financial crash. These widespread scandals eroded confidence in the bank, making it increasingly challenging for Credit Suisse to both attract new customers and secure capital from investors and the public market.

Over a 15-year period, Credit Suisse experienced a steady decline in its share value, plummeting from record highs of 96 Swiss francs in April 2007 to a mere 2.76 Swiss francs by the end of 2022. When the acquisition by UBS took place in June 2023, Credit Suisse shares were valued at a minuscule 0.8 Swiss francs each.

The bank's financial performance exhibited notable volatility, exacerbated by the hefty fines and settlements it was compelled to pay. This instability severely undermined trust and confidence in Credit Suisse. Furthermore, despite reporting substantial losses in certain years, the bank continued to distribute substantial bonuses to its staff. This dubious practice contributed to the erosion of its risk culture. Moreover, Credit Suisse's attempts to downsize its investment banking division as a means of curbing volatility failed to impress the market.

Shakeups at Credit Suisse Board: A Loss of Institutional Knowledge

The tumultuous events surrounding the Greensill and Archegos scandals caused major shakeups within Credit Suisse's board. Unfortunately, this resulted in a significant loss of institutional knowledge, hindering the board's ability to find long-term solutions for the bank's shortcomings. As a consequence, a "poor risk culture" emerged within the institution.

Depleting Cash Reserves: A Consequence of Repeated Scandals

The aforementioned poor risk culture led to a series of scandals at Credit Suisse, subsequently depleting its cash reserves due to the numerous losses, fines, and settlements incurred as a result. Between 2010 and the present, the bank has had to pay a staggering 15 billion Swiss francs in fines and settlements.

Social Media Rumors Sparked Major Withdrawals

In October 2022, Credit Suisse experienced a significant wave of withdrawals triggered by rumors circulating on social media. These rumors—especially prevalent in Asia—claimed that a major bank was on the verge of collapse. With confidence in Credit Suisse already diminished, customers rapidly withdrew their funds from the institution, resulting in a digital bank run orchestrated through electronic channels.

Crisis Deepens as Top Shareholder Rule Out Further Capital Injections

In March, the crisis at Credit Suisse intensified further when the Silicon Valley Bank in the United States collapsed. Media reports also emerged indicating that Saudi National Bank—Credit Suisse's top shareholder—had decided against any additional capital injections.

Buffers Prove Insufficient Amidst Ongoing Withdrawals

Before the run on the bank's reserves, Credit Suisse had bolstered its liquidity reserves substantially following interventions by Swiss regulators during the COVID-19 pandemic in 2020. These reserves provided some stability during the initial wave of outflows in October 2022, affording both the bank and Switzerland's regulators time to prepare for the potential deterioration of Credit Suisse's position.

Swiss National Bank's Bailout: A Lifeline for Credit Suisse

To prevent the collapse of Credit Suisse, the Swiss National Bank (SNB) injected vast amounts of state money into the institution. By the end of March 2023, Credit Suisse had received a total of 168 billion Swiss francs in support from the SNB. Eventually, this paved the way for the bank's merger with its rival, UBS.