Understanding the Credit Suisse Collapse and Its Global Impact

The collapse of Credit Suisse sent shockwaves around the world, with far-reaching consequences for global markets and economies. On March 15, 2023, Credit Suisse's shares plummeted, and the bank's future was put in jeopardy.

The bank's struggles were a long time coming, with a history of scandals and poor management decisions. Credit Suisse's asset management arm was forced to write down the value of its investments by $5.5 billion in 2022.

The bank's collapse was a major concern for the global financial system, with many experts warning of a potential domino effect. The Swiss National Bank had to intervene to stabilize the situation, providing an emergency loan of $54 billion to Credit Suisse.

The collapse of Credit Suisse has had a significant impact on the global economy, with many investors and businesses affected by the bank's struggles.

The collapse of Credit Suisse was a complex event with multiple causes. One key factor was the bank's shortcomings in strategy and management, which led to numerous strategic changes that were not implemented consistently, resulting in volatile earnings.

The bank's Board of Directors made several strategic changes, including downsizing the investment bank and focusing on asset management, but these changes were not effectively implemented. This lack of consistency led to ongoing volatility in the bank's earnings.

Recurrent scandals also undermined the bank's reputation, causing clients, investors, and the market to lose faith in it. This loss of confidence was further exacerbated by the bank's problems in various business areas and risk types, which were often due to serious deficiencies in risk management.

The bank's problems were not limited to a single area, but rather were widespread and multifaceted. Some of the key issues included:

These issues ultimately led to a crisis of confidence that brought the bank to the brink of insolvency.

Credit Suisse's collapse was a result of numerous factors, but one key aspect stands out: the importance of fine print in contracts. According to FINMA, the contract clearly states that in case of a viability event, the CoCos would be written down.

Recurrent scandals undermined the bank's reputation, weighed on its results, and resulted in clients, investors, and the market losing faith in it. This led to a crisis of confidence that ultimately brought the bank to the brink of insolvency.

FINMA's measures targeted the deficiencies in risk management and tightened up checks and controls. Despite these adjustments, the bank's governing bodies were unable to find long-term overall solutions to the shortcomings in the bank's organisation identified by FINMA.

The contract between Credit Suisse and its investors contained a clause that was buried in the fine print, which stated that in case of a viability event, the CoCos would be written down. This clause was not explicitly stated in the investment proposition.

The bank's problems manifested themselves in a range of business areas and due to various risk types. In almost all of these problems, serious deficiencies in risk management played a role.

Here are some key takeaways from the collapse of Credit Suisse:

FINMA's decision to cancel the AT1 rights was based on the contract's fine print, which stated that in case of a viability event, the CoCos would be written down. This decision was justified by the concept of "pacta sunt servanda", or "agreements must be kept."

The TBTF regime was put to the test with Credit Suisse, but the chosen solution was not a bail-in resolution.

The authorities had prepared for a bail-in over several months, but the Swiss troika ultimately decided that a merger with UBS was preferable due to fewer execution risks.

A bail-in resolution would have been possible, but it's unclear whether it would have been feasible in practice. The involved authorities expressed confidence in the preparation, but the option of a merger with a domestic bank is no longer available if UBS were to face an existential crisis.

The Expert Group identified an execution risk in a bail-in resolution, specifically in jurisdictions like the US, where the conversion process could take longer than a weekend due to the demands of the US securities act.

Four possible explanations for the collapse of a bank like Credit Suisse can be puzzling, but they can be broken down into four main possibilities.

The first possibility is that a bank run, a random event that causes customers to withdraw their deposits, can quickly become a self-fulfilling prophecy, leading to a bank's failure.

This can happen even if the bank has been struggling for a long time, as was the case with Credit Suisse. Markets and clients had been withdrawing their assets and trust for a long time before the crisis.

The second possibility is that regulatory indicators may not be suitable for identifying a crisis of confidence in a timely manner. These indicators may show whether a bank has sufficient capital and liquidity, but they don't provide information about the bank's strategy, management, or profit outlook.

Regulatory indicators can be like a snapshot of a bank's financial health at a particular moment, but they don't show the underlying issues that may be causing problems.

The third possibility is that regulatory indicators may provide an incomplete picture of a bank's capital and liquidity. For example, the indicators may add up for the group, but the liquidity and capital may not be fungible within the group, limiting the bank's ability to access its resources.

In the case of Credit Suisse, some market analysis feared that trapped capital would limit the dividend capacity of the parent bank, contributing to the loss of confidence.

The fourth possibility is that the regulatory indicators may not be transparent or relevant, leading to questions about the bank's financial health and contributing to the loss of confidence.

This can happen if the indicators are not clearly explained or if they don't accurately reflect the bank's financial situation.

Here are the four possible explanations for a bank's collapse:

The regulatory response to the Credit Suisse collapse was swift and decisive. The Confederation, Swiss National Bank, and FINMA took measures to safeguard the bank's solvency and support its takeover by UBS.

FINMA had been actively involved in supervising Credit Suisse long before the crisis, taking measures to rectify deficiencies in corporate governance and risk management. These measures began in summer 2022.

The authorities' goal was to protect the bank's creditors and ensure financial stability. To achieve this, they implemented a takeover by UBS.

FINMA's supervisory approach will be adapted in certain areas, and they will step up their review of whether stabilisation measures are ready to implement. This is in response to the lessons learned from the Credit Suisse crisis.

FINMA is calling for a stronger legal basis, including instruments such as the Senior Managers Regime, the power to impose fines, and more stringent rules regarding corporate governance.

The lessons learned from the Credit Suisse collapse are crucial for preventing similar crises in the future. FINMA, the Swiss financial market supervisory authority, has identified key takeaways from its comprehensive analysis of the crisis.

A stronger legal basis is needed to prevent banks from losing client trust. This includes instruments like the Senior Managers Regime, which holds top executives accountable for their actions. FINMA is calling for more stringent rules regarding corporate governance.

FINMA's supervisory approach needs to be adapted in certain areas to better prevent crises. This involves stepping up reviews of whether stabilisation measures are ready to implement. By doing so, authorities can ensure banks are prepared for emergencies.

The Credit Suisse crisis highlights the importance of effective risk management and risk culture. FINMA took far-reaching measures to rectify these deficiencies, particularly in the bank's corporate governance and risk management. However, more needs to be done to prevent similar failures.

FINMA's report emphasizes the need for more stringent rules, including the power to impose fines on banks that fail to meet regulatory requirements. This will help maintain market stability and protect creditors.

A timeline of FINMA's supervisory activities and the key events leading up to the crisis is as follows:

The Credit Suisse collapse had significant ripple effects on the global economy. The bank's failure led to a 3.5% drop in the Swiss stock market, with the SIX Swiss Exchange plummeting to a 12-year low.

Many investors lost billions of dollars due to their exposure to Credit Suisse's troubled assets. The bank's collapse also caused a 1.5% drop in the European stock market.

You might like: Fix Collapseable Stock Ar15

The Swiss government had to step in to prevent a complete collapse of the financial system. This included a $53 billion bailout package to stabilize the country's banking system.

Credit Suisse's collapse also led to a 10% drop in the value of the Swiss franc against the US dollar. This had a significant impact on the country's trade and tourism industries.

The bank's failure also raised concerns about the stability of the global financial system. Credit Suisse's collapse highlighted the interconnectedness of the global economy and the potential risks of a major bank failure.

The bank's collapse led to a loss of confidence in the entire Swiss banking system. This resulted in a massive exodus of deposits from other Swiss banks to safer havens.

The Credit Suisse collapse also had a significant impact on the global economy, with many analysts predicting a recession in the coming months.

For more insights, see: Vive Financial Credit Card

Some people argue that Credit Suisse's collapse was a result of its failure to adapt to changing market conditions.

The bank's decision to expand its investment banking operations in the early 2000s led to significant losses, which ultimately contributed to its downfall.

Credit Suisse's lack of transparency and poor risk management practices were major factors in its collapse.

The bank's failure to disclose the true extent of its losses and its reliance on complex financial instruments made it difficult to recover from the crisis.

The collapse of Credit Suisse highlights the importance of effective risk management and transparent financial reporting practices.

Discover more: Exploring Credit Inquiry Solutions for Smarter Financial Decisions