Credit Suisse Collapsed, And Switzerland Went Back to Making Money

Despite widespread calls for reform in the wake of the country’s biggest banking shock, little has changed. Is that stability or complacency? 

(Bloomberg) — In 2022 it was “Schwinger,” or traditional Swiss wrestlers, that were the star attraction. This year it was youth groups. Every Aug. 1 since 1891, patriotic Swiss have gathered on an Alpine meadow overlooking Lake Lucerne to commemorate a rebellion in 1291 that was the foundation of “modern” Switzerland. This is a country that likes tradition. 

It was a very different kind of youth who in March swarmed the headquarters of Credit Suisse on Zurich’s Paradeplatz, in an extraordinary display of anger at the normally staid epicenter of Swiss banking. Young protesters wrote messages like “Cretin Suisse” in chalk outside the bank’s headquarters as demonstrators bellowed their discontent through megaphones. Newspaper editorials were filled with columns about a national humiliation and regulators stressed the need for major change. Some questioned whether Switzerland had a future as a predominant banking center.

Credit Suisse was, after all, an icon of the Swiss economy that financed the country’s railroads. So its government-brokered rescue by UBS Group AG, to prevent it collapsing and wreaking havoc across the global banking sector, was one of the biggest blows to the national psyche since the 2002 demise of national icon Swissair, and was seen by many as something that could, or should, trigger a profound change to the way the country works.

Yet four months on, there are few signs that anyone is readying for major change in Switzerland. It is almost as if most Swiss heaved a collective shrug and the country went back to making money. Unemployment has barely budged and is not expected to move much even after bank layoffs, the country’s annual inflation rate of 1.6% remains the envy of the industrialized world and the almighty Swiss franc has even gained in value since March when the deal was brokered.

The apparent lack of change since March stems from what makes Switzerland what it is — a 13th-century nation which takes pride in its reputation as a bastion of stability on a continent repeatedly torn apart by war. A country that first gave women the right to vote only in 1971, decades after the rest of the western world. It’s a nation where, if change occurs, it happens very, very slowly.

“There is a big risk that nothing happens,” says Michael Hermann, director of Swiss political research institute Sotomo in Zurich, “because you get used to the new situation with a huge bank and if it works, why would you change anything?”

But is Switzerland missing an opportunity to repair and improve its reputation for competence and prudence, so tarnished in the eyes of international investors in the wake of the takeover by UBS? The run-up to federal elections set for Oct. 22 will offer a stage for national debate on that, but some believe it’s already too late. 

There are politicians who want to make the Credit Suisse debacle a catalyst for reform and an election issue, but feel that it has already been swept under the rug, says Jared Bibler, a former regulator at the Swiss Stock Exchange. “We are all surprised by how quickly the issue seems to have dissipated,” he says.

Bibler, who wrote a book about Iceland’s banking crisis, says there are similarities with the Nordic nation in 2006 when it failed to properly address the need for banking reform. “In Switzerland, you have a real culture of circling the wagons among the elites.”

The first step to solving a problem is often acknowledging that you have one. But if you speak to those elites — ranging from the central bank to government and parliament — such forthright admissions are rare. Instead many will say Credit Suisse’s rescue is a testament to the country’s strengths.

“The way Credit Suisse was saved speaks in favor of the stability of our country,” says Thierry Burkart, MP and president of the center-right Free Democratic Party. “We prevented massive damage to the financial system of Switzerland and possibly even to Europe and the whole western world.”

‘Attacked’ From All Sides 

What’s indisputable is that Switzerland is not the country it was a decade ago. First it was Swiss banking secrecy that came under attack from a US Department of Justice bent on making Swiss lenders pay for helping American taxpayers hide their money. Then Russia’s invasion of Ukraine last year prompted Switzerland to abandon its strict neutrality — allowing it to fully embrace EU sanctions against Moscow — amid pressure from Brussels to not ignore a war just one day’s drive away.

Read More: Forget Londongrad. Switzerland in Focus as Sanctions Target Rich

In June, Swiss voters backed raising corporate taxes for multinationals to the OECD-wide agreed minimum level of 15% from an average of 11% in a national referendum after the government persuaded once-skeptical voters that it was better to keep tax revenue inside the country given it wasn’t able to stop the international accord. 

For Burkart, there are malign forces at work. “We are attacked from abroad. And also from within,” he says in a reference to the DoJ, European Union and those inside the country calling for more banking regulation. “Political forces from the left to the center are working to destroy the advantages of Switzerland as a location for business.”

Despite the proposed tax hike the country remains an attractive hub for multinationals, but its long-held primacy in wealth management is slipping. It’s likely to drop to second in the rankings of those who manage the assets of the rich, behind Hong Kong, by 2025, according to the Boston Consulting Group. Singapore, emboldened by outflows of money from China during the pandemic, and Dubai, which has seen billions roll in from wealthy Russians since the invasion of Ukraine, have made inroads too. 

The stakes for Switzerland’s position as a financial center are high. Finma, the country’s banking regulator, and the Swiss National Bank, have called for reform to the way things work, including more powers to punish those who break the rules, in the aftermath of the Credit Suisse crisis. The question is whether it can overcome a Swiss tendency toward inertia to identify what went wrong. And then, do anything to repair the reputational damage.

“The regulatory culture in Switzerland is weak and not based on a meaningful set of rules,” says Kern Alexander, chair of the law and finance program at the University of Zurich, “but instead on a light touch principles regime that leaves the regulator too much discretion not to take action and to allow problems to fester until they reach a breaking point.”

Both Finma and the SNB were intimately involved in the Credit Suisse-UBS takeover. And both have faced heavy scrutiny. 

Finma came in for severe criticism during the crisis, a result partly of its controversial writedown of $17 billion worth of AT1 bonds. The writedown, made possible by a clause in the fine print of the high-risk bonds, has spawned a wave of lawsuits that face an uphill battle in the Swiss courts. 

The light-touch regulation of Credit Suisse in the years leading up to the bank’s collapse has also been the focus of criticism. Urban Angehrn, head of Finma, acknowledged as much in a recent editorial in the Neue Zurcher Zeitung newspaper. 

Switzerland has historically avoided Anglo-Saxon style financial policing, but Angehrn called for Finma to be given similar powers to those of the US Securities and Exchange Commission to fine errant banks or their staff. “This is tried and tested practice in other financial centers and strengthens the precautionary effect of supervision,” wrote Angehrn. 

His earnest appeal was made just as the Swiss parliament headed off on its lengthy summer recess, and has been met with silence from lawmakers. A further indication, say critics, of the lack of urgency around the banking collapse. Crisis averted. Normal service resumed.

What to Do About the Banks 

The glacial, consensus-building pace at which Swiss politics moves should give pause to anyone expecting urgent reforms to restore trust in the banking system or reconcile Switzerland with the fact that the enlarged UBS is now twice the size of the domestic economy. 

Thomas Jordan, the central bank president, said in June that lessons need to be drawn and that in future, “banks should be required to prepare a minimum amount of assets that can be pledged at central banks.” That suggestion might feed into a broader global discussion about whether the liquidity rules pledged after the 2008 financial crisis are still fit for purpose, but any concrete change will likely need to be squared with international peers and take years to materialize.

Following the 2008 financial crisis, politicians from the right-wing Swiss People’s Party and the left pushed a legislative proposal to split big lenders into their constituent parts, to minimize the risk that a loss-making investment bank could jeopardize the entire institution — a scenario that roughly describes what happened with Credit Suisse. But when that bill finally made it to a vote before parliament in 2014, it failed with 64% opposing the measures.

Now, 15 years later, academics and politicians are again chewing over the problem of what to do about the banks. A report produced in May by the University of St. Gallen has created a framework for a finance ministry study on reform that’s due later this month. The report argues that in order to avoid the problem of “too-big-to-fail,” stricter liquidity rules and higher capital requirements as well as a robust framework for nationalization are needed. It dismissed the prospect of splitting up the banks as unworkable. 

The report barely addressed the problem that sank Credit Suisse in the first place, namely that bad risk management was embedded in the culture of the bank over many years. 

Read More: The Triumph of UBS Is Also the Humbling of Swiss Banking

“Culture is a very important thing,” says Andrea Schenker-Wicki, a professor of management and president of the University of Basel. “If we don’t change the culture, we’ll have the same problems again.”

Colm Kelleher, the UBS chairman, has stressed that anyone who joins his bank from Credit Suisse will have to make it through a culture filter to avoid contaminating “our ecosystem.” His message? UBS doesn’t have a culture problem. 

The FDP’s Burkart goes further and says Credit Suisse lost its way because it lost its Swiss-ness.

“Going by its management culture, Credit Suisse wasn’t a Swiss bank anymore, but a global one,” says Burkart. “When corporations abandon classic Swiss values like diligence, precision, modesty and humility, things like this happen.”

It is this kind of Swiss groupthink that ails the country, says Arturo Bris, the director of the Institute for Management Development’s World Competitiveness Center in Lausanne. To illustrate his point, he invokes the photograph of the Swiss finance minister, the heads of the SNB and Finma, and the chairmen of Credit Suisse and UBS all sitting together on March 19 to announce the hastily-agreed takeover.  

“That to me has been the most damaging picture that Switzerland has had in decades,” says Bris, “when everybody gets together like in crony capitalism.” A nationalization of Credit Suisse wasn’t seriously considered seriously enough because selling it to UBS was deemed feasible, he argues. 

Hand-Wringing in a Powerless Parliament 

In the days after the collapse, senior regulators and government ministers gave repeated interviews in which they stressed the same message: that the snap rescue by UBS was the best option given the circumstances. They ruled out the temporary nationalization of Credit Suisse or an orderly wind-down of the bank even though the latter scenario was something expressly planned for, by the government and regulators, in the wake of the 2008 financial crisis.

Elsewhere, there are signs the Swiss establishment wants to move on. Geneva’s top financial crimes prosecutor signaled in May that he plans to drop a multi-year investigation into Credit Suisse’s mishandling of rogue banker Patrice Lescaudron, one of several damaging scandals, many of which are still being fought over in the courts, that undermined investor confidence in the bank. 

Just a year ago, the prosecutor, Yves Bertossa, said there were clear grounds to indict Credit Suisse because it had let eight suspect transactions slide. Now he has done an about face. He concluded that because Lescaudron had been convicted of fraud and forgery but not money-laundering, the bank couldn’t be indicted on those charges either. 

Back in April, well aware of the upcoming elections and the risk that inaction could lead MPs to be punished at the polls, Switzerland’s parliament denied the takeover its blessing in a vote. In a fiery special session of parliament that stretched over two days, the same left-and right-wing parties who a decade earlier had unsuccessfully pushed for a separation of investment and corporate banks voted down the state guarantees for Credit Suisse. 

But the vote was purely symbolic. A designated group of senior lawmakers had already signed off on the deal. A parliamentary Inquiry Commission was formed in May to look at the role played by the government, Finma and the SNB ahead of the takeover by UBS. But its findings are not due for at least a year and it has said that the files used by the committee will not be made public for 50 years — signaling that lawmakers apparently see no need for greater transparency to inform the debate.

Schenker-Wicki of the University of Basel says she is eager to see what conclusions the commission reaches but remains wary about whether much will change. “Does it make sense for such a small country to have such a big bank?” she asks. “Is that a risk a country like Switzerland can take?”


–With assistance from Myriam Balezou.

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