In just a few short months, Swiss banking has become a risk factor for the functioning of the international financial system. How could this happen? An analysis by finews.asia founder Claude Baumann.
Who would ever have thought it? Swiss banking's reputation which has proven itself over centuries for safe, sound, and stable money management, is becoming a threat to the entire financial world. So threatening in fact that numerous countries are calling on Switzerland to solve its problems and take precautions against a meltdown of the financial system.
On Wednesday, French Prime Minister Elisabeth Borne called on Swiss authorities to solve Credit Suisse's problems. The same day, the European Central Bank (ECB) urged its member banks to report what exposures they had to the troubled Swiss institution.
The Finance of Mathematics and Models
The whole situation is not without a certain irony. Swiss banking was always based on values and people, while international high finance, like in the United States, is committed to algorithms, mathematics, and models. Over the past three decades, the belief in the predictability of risks has increasingly taken hold in Switzerland.
This was particularly evident in 2008 when UBS's risk models failed in the wake of the global financial crisis when complex investment products based on subprime US mortgage loans blew up. This in turn put Switzerland's largest bank in distress and had to be rescued by the state or with taxpayers' money.
Cloak-and-Dagger
This appears to be the new normal. But 15 years ago, Swiss banking was not the global threat it is considered to be today. Why?
It is worth noting Credit Suisse was rescued in a cloak-and-dagger operation over the past two days. What it revealed is those involved, from executives responsible for the bank to the authorities in Bern, to the politicians, waited too long and placed too much trust in mathematical models.
People and Professional Ethics
Based on their experience with UBS 15 years ago, their attention was primarily focused on the financial condition of Credit Suisse. The latter, for its part, repeatedly said it was sufficiently capitalized to cope with any turbulence in the financial markets. And people believed in this. Crucially, also those in Bern.
This belief proved to be not only deceptive but also short-sighted. Swiss banking is not an industry that can be measured only in terms of models and math. Equally important are the influencing factors such as people and their professional ethics and values like reliability, quality, and honesty.
Over time, Switzerland and its banking industry have made a name for themselves worldwide in these areas and have become the benchmark for exemplary asset management. More than any other country, Switzerland has been a trusted partner for people and their wealth. It is precisely this trust that Switzerland has recklessly gambled away in recent weeks.
Unlucky Major Shareholder
Anyone who thinks that banks go under because they have no liquidity or no capital left is naive. Instead «they go under much earlier when doubts about the security of deposits begin to spread,» says Swiss finance professor Teodoro Cocca, summing up the problem.
This was confirmed with brutal clarity on Thursday when the chairman of a major Credit Suisse shareholder, Ammar Al Khudairy, declared the bank was sufficiently capitalized and didn't require additional funds. Even though the Saudi National Bank Chairman was presumably correct, the world neither believed nor trusted this. Credit Suisse's share price plummeted by 30 percent within a few hours. As soon as a financial institution has to reaffirm its trustworthiness, it is too late. It's as simple as that.
Confidence-Building Over Bonus Systems
Here is where the rescue of Credit Suisse differs significantly from that of UBS 15 years ago. UBS effectively had the problem of insufficient capitalization, while Credit Suisse was always solidly financed and still is today. What it lacks is confidence in it which once lost, is not easily regained, even with the help of the Swiss National Bank. The dramatic outflow of client funds is also unlikely to stop overnight.
More than ever, it is up to the top management of Credit Suisse to concentrate on confidence-building measures rather than introducing new bonus systems for personal enrichment.
