Experts warn that the failure of Credit Suisse has given a serious blow to Switzerland’s credentials as the world’s leading centre for wealth management. This puts Switzerland’s reputation for stability, regulation, and corporate governance into question.

Credit Suisse had been battling a crisis of confidence for months, having been battered by years of scandals and losses. The bank’s demise was sealed in just a matter of days last week when Swiss authorities brokered a takeover of the bank by bigger competitor UBS.

After a catastrophic venture into U.S. mortgage securities in 2008, UBS needed to be rescued by the government itself.

Arturo Bris, a professor of finance at the International Institute for Management Development (IMD) in Lausanne, predicted that the failure of Credit Suisse and the events that followed “are going to be very damaging.” He also suggested that the failure could be beneficial to competing financial centers.

According to a survey conducted by Deloitte in 2021, Switzerland is the largest financial center in the world because it is responsible for the management of $2.6 trillion in international assets. This places Switzerland ahead of Britain and the United States. However, it encounters competition from other centers such as Luxembourg and especially Singapore, which has experienced rapid growth in recent years.

According to comments made by Bris to Reuters, “the bankers in Singapore are going to be uncorking the champagne bottles.”

According to him, recent events, such as the decision to null and void the possessions of Credit Suisse bondholders, have severely damaged the reputation of Switzerland as a reliable and consistent nation.

Holders of Credit Suisse AT1 bonds will receive nothing as part of the takeover deal. On the other hand, shareholders will receive $3.23 billion, despite the fact that they typically rate lower than bondholders in terms of compensation.

Even though the AT1 prospectus issued by Credit Suisse made it abundantly obvious that hybrid (AT1) holders would not recover any value, very few people anticipated that the bank would fail.

The Swiss Bankers Association has made an effort to portray a courageous stance regarding the crisis by portraying the rescue effort that was orchestrated by the government, the central bank, and the regulator as a sign of strength.

Marcel Rohner, the current Chairman of the Swiss Banking Association and a former Chief Executive Officer of UBS, told reporters on Tuesday that the Swiss financial industry was successful in solving a major problem faced by a significant player.

“In this sense, I also see a prosperous future for the financial center because we have hundreds of banks that are very well capitalized, as well as very successful wealth management and asset management banks,” the author says. “[T]here is a lot of room for growth.”

Despite this, the number of financial institutions has decreased, going from 356 in 2002 to only 239 in 2021. Since 2011, the number of staff members has decreased, going from 108,000 to 91,000.

Others had a more pessimistic outlook on the future, which highlighted a reluctance to confront errors that had been made at Credit Suisse or to accept accountability for the consequences of those errors.

“There are a lot of open questions: the use of emergency law overriding the views of shareholders or the treatment of bond holders,” said Stefan Legge, director of tax and trade policy at the University of St. Gallen’s IFF Institute of Financial Studies. “There are a lot of open questions: the use of emergency law overriding the views of shareholders or the treatment of bond holders.”

It’s possible that some people have a healthy dose of self-delusion and genuinely believe that they’re producing excellent work.

Since the public liquidity backstop (PLB) was not yet a part of Swiss law, Switzerland invoked emergency legislation in order to enable it. The PLB will provide Credit Suisse with up to 100 billion Swiss francs in liquidity.

However, and perhaps most contentiously, the emergency legislation made it possible for the takeover to proceed without the approval of the shareholders.

According to Legge, the failure of the company should act as a wake-up call, and it is possible that new laws will be implemented to improve corporate governance.

In contrast to other centers, such as Britain, where senior managers can face criminal sanctions for mismanagement, Switzerland has few mechanisms for holding top bankers specifically responsible for the institution’s poor management.

Unions and politicians have both voiced their displeasure with the rescue plan, which has the potential to force taxpayers to foot the cost for losses of up to 9 billion Swiss francs.

LONG DECLINE

Following a decline in banking confidentiality that occurred as a result of other countries’ efforts to crack down on tax evasion by their citizens, Switzerland’s massive banking sector has been under pressure for a number of years.

The contribution of the financial sector to the Swiss economy has also decreased, dropping from 9.9% of Swiss GDP in 2002 to 8.9% of Swiss GDP in 2022 as industries such as pharmaceuticals have become more important in a country with the third highest GDP per inhabitant in the world, according to data provided by the IMF.

The Swiss research organization BAK Economics predicted that the fallout from the scandal would be limited to the financial sector. It was predicted that up to 12,000 jobs would be lost in Switzerland, although the effect on the economy as a whole would be relatively minor.

Jan-Egbert Sturm, director of the KOF Swiss Economic Institute at the university ETH Zurich, projected that the economic impact of the failure of Credit Suisse would amount to a loss of approximately 0.05% of GDP each year.

He predicted that Switzerland would continue to be strongly involved in banking in the future due to the country’s long banking tradition as well as its structural advantages. Investors would still choose Switzerland due to its stability and the strength of its Swiss franc currency.

Still, the level of competition was getting much more intense, and IMD’s Bris predicted that recent developments would ultimately lead to Singapore passing Switzerland.

“In my opinion, it’s just a matter of time before it happens.”