[Text/Observer Network columnist Wen Bo]
As the saying goes, "the year is sad", for banks, the financial report disclosure day in the first quarter of this year is like a ghost door.
The flash collapse of the Silicon Valley Bank (SVB) in the United States was only "old news" about 10 days ago, and as a result, the market that was relieved by the US bailout was immediately shocked by the thunderstorm of Credit Suisse, the second largest bank in Switzerland.
Plummeting Credit Suisse shares (Photo: Yahoo Finance)
Unlike the recent Silicon Valley bank thunderstorm, Credit Suisse's problems have a long history, and it's no coincidence that something went wrong. Over the years, it has been embroiled in a series of scandals and management issues. Sometimes it feels like its annual report is nothing more than a long list of old and new lawsuits and a bound copy of poorly managed risks.
The international financial credit crisis started by SVB is the last straw that killed the camel and the last nail on the coffin board for Credit Suisse.
Let's briefly sort out the timeline of the crisis from the end of the wind to the current building will fall.
The Credit Suisse crisis stemmed from a series of scandals at the Swiss bank since 2021, resulting in massive losses, regulatory scrutiny and eventual acquisition by rival UBS:
In March 2021, Archegos Capital Management, an American family hedging capital, collapsed. The company defaulted on deposits owed to Credit Suisse and other banks, causing them to lose billions of dollars.
In April 2021, supply chain finance funds linked to the UK's Greensill Capital were frozen. Greensill Capital is a UK financial institution that provides credit services for supply chain finance. Its bankruptcy amid allegations of fraud and mismanagement has left Credit Suisse and its clients at risk of billions of dollars.
In June 2021, a drug trafficking money laundering scandal. Credit Suisse was indicted in connection with laundering money for a criminal gang operating a cocaine trafficking network in Europe, involving several former and current Credit Suisse employees.
In January 2023, a cyberattack leaked the personal data of millions of Credit Suisse customers, leading to lawsuits and reputational damage.
On March 15, 2023, Credit Suisse proposed to borrow CHF 50 billion from the Swiss National Bank to address liquidity issues. The market news caused panic, and Credit Suisse's stock fell sharply on the same day, driving the entire international stock market to plunge. The Credit Suisse crisis began to erupt rapidly.
In March 2023, UBS made a hostile takeover offer, offering a low price to Credit Suisse shares and threatening to initiate a proxy battle if the board rejected the offer. The deal was announced on March 20, 2023, after Credit Suisse failed to find another solution or partner.
The series of events eroded market and investor confidence and trust in Credit Suisse as a leading global bank, forced it to accept the UBS offer, and marked the end of its 166-year history as an independent institution.
Credit Suisse (right) and UBS AG in Geneva, Switzerland, March 20
Decision-making issues of Swiss regulators
Although the problem is well known, for a long time, the Swiss regulatory authorities have done little to solve the obvious problems.
First, regulators underestimated the extent of Credit Suisse's problem in advance.
Just last week, at first the regulator did not think that Credit Suisse's liquidity had a big problem, but just an hour later, Credit Suisse opened its mouth and asked the Swiss National Bank to replenish liquidity for 50 billion Swiss francs, and Credit Suisse's major shareholder Saudi Arabia said that it would not continue to pay Credit Suisse to fill the hole, so the Swiss National Bank had to let UBS come forward, plus tens of billions of federal funds to save the crisis.
These measures can only be said to prevent the collapse of market confidence for a while, and do not inspire confidence in the Swiss banking sector, but only reinforce the dangerous logic of banks "too big to fail". After Credit Suisse is acquired, a financial giant will be born in Switzerland. What happens next time when UBS gets into trouble? Who will buy UBS? A Swiss cantonal bank?
All at the expense of taxpayers. The guarantee given to UBS indirectly through the Swiss National Bank is a huge national burden. This concentrated risk-style bailout is clearly going in the wrong direction.
The question that should be asked is: what have the Swiss authorities done over the past 15 years? The "too big to fail" banking law did not solve these problems, but only accelerated the concentration of the financial industry.
"Too big to fail" undoubtedly creates a moral hazard: managers of financial institutions take on more and more risk at the expense of taxpayers. When things don't go well, it's "perfect" for the managers involved, because it's the taxpayers who end up taking the risk, and they've already received millions in bonuses and then slapped their asses and walked away. Almost no bank and institutional executives were held accountable during the 2008 financial crisis, and 15 years later, that hasn't changed.
Unprecedented operation: $13.7 billion in creditors' blood, skipping shareholders' approval of a direct merger
Compared with Credit Suisse executives, who still seem to be able to retreat, investors and creditors are on the front line of bearing losses this time, and even many creditors have lost their money. One of the focal points was Credit Suisse's $17 billion AT1 bonds, which were declared directly zero.
AT1 is short for Supplemental Tier 1 Assets, and Credit Suisse's assets are mainly emergency convertible bonds known as CoCo bonds. CoCo is taken from the first two letters of the English Contingent Convertible for emergency transferability.
The main difference between emergency convertible bonds and general convertible bonds is the trigger for conversion. Convertible bonds give bondholders the option to convert them into equity at a predetermined price, while contingency convertibles are automatically converted into equity when the bank's capital adequacy ratio falls below a certain level. That said, emergency convertibles are riskier for bondholders because they could lose their principal and interest if banks face financial problems. Another difference is that many contingency convertible bonds do not have a maturity date, while general convertible bonds have a fixed maturity.
The priority order of corporate bankruptcy settlement is that claims are compensated in priority over equity. In other words, holders of emergency convertible bonds can enjoy higher yields when banking is safe; Once the bank's asset position deteriorates, the bonds are converted directly into common equity, so that other shareholders bear the brunt of losses.
To put it more simply, this bond can be understood as a financial institution buying an insurance from the market, and when there is no accident, the institution pays investors a high return income as a premium; If something happens, the institution's losses will have to be compensated for through the losses of investors.
Credit Suisse's zeroed CoCo bonds added another layer of debt conversion/cancellation conditions to the terms of the product: in addition to the usual capital adequacy ratio, Credit Suisse also included the regulator's decision power in the convertible event. This paved the way for the regulatory-led UBS takeover to zero $13.7 billion in bonds.
Original text of the emergency convertible bond clause provided by Credit Suisse
Readers with good English can take a look at the full text of the 168 pages, in which various clauses are winding, which shows that Credit Suisse's legal fees are not paid for nothing. Most investors may not initially think that this kind of regulation will actually happen to zero out their debts, or they may not have looked at these twisted clauses in the first place.
As early as the end of last year, there were rumors that many wealthy people in Hong Kong had transferred assets from Credit Suisse, and there were even cases where Credit Suisse's old customers of more than 15 years had taken away hundreds of millions of dollars of assets.
Large institutional investors are less responsive than individual investors. We have quite a few of these investors on the other side – according to Taiwanese media reports, the impact of the Credit Suisse incident has caused heavy losses to Taiwan's insurance, banking and investment communities, with an estimated exposure of more than $7.3 billion.
However, even if Credit Suisse wrote this in the terms of the bond, it does not mean that there is no problem at all. After all, the operation of keeping creditors in front of ordinary shareholders to bear losses is, if not impossible, at least unprecedented, challenging known economic and financial rules.
On March 20, the European Central Bank and the European Banking Regulatory Office issued a statement on the Swiss National Bank's rescue measures, welcoming the Swiss National Bank's timely rescue measures, while expressing concern about the abnormal handling of asset settlement priorities, suggesting that the intervention of Swiss regulators did not respect the general asset liquidation rules, leaving AT1 assets rather than ordinary shareholders to bear losses first.
Joint statement by the European Central Bank and other institutions
On Sunday, intervention by Swiss regulators, the central bank and the parties involved skipped a shareholder vote, with Credit Suisse's majority shareholders – the National Bank of Saudi Arabia and the Qatar Investment Fund – among others – having no say in the decision. They will have to accept a 0.76 CHF per share UBS takeover. To that end, the Swiss authorities said they would change the law to complete the acquisition, which skipped the shareholder vote.
If nothing else, UBS, Credit Suisse and even the Swiss National Bank face a series of lawsuits from investors and shareholders.
There is no better option for the Swiss National Bank
The reason why the Swiss authorities chose to intervene in just a few days, like the US regulatory authorities, and dared to risk violating the general financial rules and forcibly pass the bailout program, is precisely because any financial thunderstorm is contagious, and once panic begins to spread, even the most healthy banking system will have a systemic crisis.
This time Credit Suisse became the weakest link among Europe's global systemic banks, but it was also a somewhat strange weak link, because it had ample capital and sufficient liquidity, at least on paper.
It is not the only bank with low profitability, nor is it even the only bank to experience a deposit outflow in Q4 2022. It certainly isn't the only bank to face scandal in years. However, it is the one that has all these weaknesses at the worst moment. If the market is not bailed out with decisive action, it is not good that the next big bank will soon follow in its footsteps.
What are the options for stopping the bleeding in Switzerland's financial system?
The Swiss authorities also have virtually no choice. In the end, it was Credit Suisse's own customers, not investors, who had made up their minds and withdrew their funds. Merging with UBS is an obvious solution on the table. Perhaps the Swiss authorities will be criticized for reportedly not opening bids to non-Swiss banks, yet panic is gathering fast, and Swiss authorities don't have the luxury of slowly searching for the best financiers in the market.
On March 19, local time, the Swiss Federal Council held a press conference to confirm that UBS, Switzerland's largest bank, would acquire Credit Suisse, the second largest Swiss banking group, which was in crisis. (Photo/The Paper)
That's why UBS has been in a very strong negotiating position.
One will argue about the possibility of litigation losses, further non-performing loans, or the cost of closing Credit Suisse Investment Bank. But UBS paid a fraction of Credit Suisse's shareholder equity (about $49 billion) at the end of last year. Even taking into account the possible sale of some assets of the Swiss retail bank to manage competition issues, the deal could provide a very significant value boost for UBS shareholders.
Considering Switzerland's consistent legislative tendencies to protect the internal management of the banking sector, legal action for shareholders and creditors will not be easy. But the Swiss authorities will not do so without cost, at least from now on, the market interest in emergency convertible bonds will plummet and will not recover anytime soon, and there will be big questions about the apparent liquidity and capital adequacy ratio of financial institutions.
The risks are far from over
After the 2008 financial tsunami, countries did not thoroughly deal with the accumulated problems in financial institutions and markets, such as moral hazard such as "too big to fail" and information disclosure of complex financial products.
To maintain apparent economic growth, countries have introduced long-term credit easing, especially as the pandemic that began three years ago has accelerated the process.
Although Credit Suisse is not the second Lehman brothers, and the liquidity problem that killed Credit Suisse is not the junk asset problem that fills the entire financial market like Lehman back then, Credit Suisse will definitely not be the last global systemically critical bank to fall.
No one knows which giant will be next in the headlines.
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