Credit Suisse Reports Biggest Annual Loss Since 2008: What Happens if Credit Suisse Collapses?

Management at Swiss bank Credit Suisse announced that in 2022 the bank had its worst performance since the financial crisis. Losses due to the ongoing restructuring of the banking group and falling revenues amounted to 7.29 billion Swiss francs. The last time Credit Suisse lost more money was amid the international financial crisis, with a loss of $8.2 billion in 2008.

Rumors are currently circulating that Credit Suisse may go bankrupt. Let’s figure out what happens if Credit Suisse collapse. Our experts will tell you what scenarios and consequences for clients and the country can be expected in the event of the bank’s collapse.

Current state of affairs at Credit Suisse

Due to concerns over Credit Suisse’s sound financial condition, clients withdrew 110.5 billion Swiss francs in the last quarter of 2022. At the end of the year, the bank’s assets fell to 1.29 trillion.

The bank continues to take measures to attract back customers’ funds. However, the decline in client deposits and assets under management is expected to lead to lower net interest income and recurring fees and charges. This will cause losses for the core business of billionaires in the first quarter of 2023. Credit Suisse also warned that the negative earnings impact of the announced restructuring could result in significant pre-tax losses for the bank in 2023.

This is the fifth consecutive quarter in the red for the second largest bank in Switzerland. Before that, there were a series of risk management scandals and mistakes. For example, in October, rumors and speculation about the bank’s future were circulating on social media. The situation has calmed down somewhat since then, but default insurance on Credit Suisse bonds still includes a significant risk premium and makes funding a banking institution more expensive.

The bank’s investment arm has also suffered heavy losses in recent years. In this division, losses amounted to 2.8 billion francs in 2022. Accordingly, the new boss of Credit Suisse, Ulrich Körner, began reforms. By the end of October, the bank finally said goodbye to its leading position in the investment banking segment. Former McKinsey consultant Körner announced a radical treatment – cutting 9,000 jobs.

Much of the business of advising on takeovers and bond offerings is to be outsourced to its subsidiary Credit Suisse First Boston (CSFB). According to insiders, it will go public as an independent company in 2024 or 2025. Wall Street veteran and former Credit Suisse board member Michael Klein is set to lead CSFB.

Chronology of unfortunate events for the Swiss bank

Former Credit Suisse CEO Oswald Grübel notes that negative developments began when he was replaced in 2007 by the American head of the investment banking department, Brady Dougan. Private banking and business focused on Switzerland were not his priorities.

Credit Suisse darted from one scandal to another:

•  spying on a former employee
•  a criminal conviction for allowing drug dealers to launder money
• involvement in a corruption case in Mozambique
• chairman who violated Covid-19 lockdown rules
• massive leak of customer data in the media.

The bank’s credibility was further hurt by misguided investments in British financial company Greensill Capital and US fund Archegos Capital Management, which went bankrupt in 2021.

The following series of adverse events took place:

• October 2021: Bank fined $475 million for involvement in Mozambique corruption case dubbed the ‘tuna bond’ scandal.
•  January 2022: Credit Suisse chairman Antonio Horta-Osorio is forced to resign for violating Covid-19 lockdown rules while attending the Wimbledon tennis tournament.
•  February 2022: The so-called Suisse Secrets leak exposed 18,000 customer accounts leaked to the media by a whistleblower.
• June 2022: Credit Suisse became the first major bank convicted of money laundering in Switzerland in connection with the Bulgarian drug smuggling ring.
• July 2022: CEO Thomas Gottstein is fired and replaced by Ulrich Körner.
• October 2022: Körner and chairman Axel Lehmann announce 9,000 job cuts and a CHF 4 billion capital injection.

How likely is Credit Suisse to fail?

It’s hard to pinpoint exactly how bad things really are at Credit Suisse. The institution has already announced a restructuring plan. One thing is clear: many market watchers see the possibility of bankruptcy now as much more likely than it was at the beginning of 2022. Investors are using credit default swaps (CDS) to bet on a bank’s future creditworthiness, and Credit Suisse CDS prices are the highest since the last decade’s financial crisis.

Current CDS prices do not indicate a bank failure but show that the market considers the possibility of its occurrence within the next five years as 25 percent likely. So, in general, bankruptcy still does not threaten the bank directly.

Marc Chesney, Professor of Mathematical Finance at the University of Zurich and author of A Permanent Crisis, said that Credit Suisse is in a catastrophic state. The expert believes that without a government guarantee, the bank would probably already be bankrupt. But will Credit Suisse really be able to file for bankruptcy? After all, this is ultimately a political decision impossible to predict in advance.

What happens to clients’ money in the event of bankruptcy?

Like UBS, Postfinance, Raiffeisen, and Zürcher Kantonalbank, Credit Suisse is considered too big to fail. According to Esisuisse, an organization responsible for protecting bank depositors, all these structures took precautionary measures and prepared contingency plans. This should ensure the smooth operation of Switzerland’s domestic banking services, even if one of these banks finds itself in a precarious position. In addition, the Swiss federal government will likely support Credit Suisse with liquidity injections.

In the unlikely event of bankruptcy, despite these measures, customer account balances at Credit Suisse would be subject to government depositor protection. Guaranteed coverage is up to 100,000 francs. Here is detailed information about what happens to the money in the accounts in case of a bank failure.

Customers do not need to take any proactive action themselves. They will be contacted by the bankruptcy liquidator and receive a form that they can use to request payment of insured account balances. According to Esisuisse, waiting at least several weeks will be necessary before depositors receive the money.

Which accounts are protected from bank mistakes?

Depositor protection applies to Swiss bank account balances and the principal amount of Swiss medium-term bills (MTBs), whether they are denominated in francs or other national currencies. But the upper limit for reimbursement is 100,000 francs per customer. The number of individual Credit Suisse accounts and medium-term bills between which one person’s money is divided does not matter.

Guaranteed payout and 3A level accounts are not covered by depositor protection. But pension savings of up to 100,000 francs are considered a preferred asset. They are paid as soon as possible if the bank’s liquid assets are sufficient to cover them.

Will depositor protection be sufficient if Credit Suisse goes bankrupt?

Depositor protection of Swiss financial institutions is limited to a maximum total sum insured of 6 billion francs. This means that if a bank that manages more than 6 billion eligible deposits collapses, the depositor protection program can only pay benefits for the total sum insured.

The volume of deposits managed by Credit Suisse significantly exceeds the 6 billion covered by the protection program. Thus, in the worst case, clients will be able to recover only a small part of the total insured assets.

It is unclear how much of the eligible deposits held by Credit Suisse are effectively protected by the program. It is safe to assume that many depositors hold more than 100,000 francs in Credit Suisse.

The depositor protection program is activated only after the bank’s liquid assets have been used to redeem privileged assets. Thus, it is likely that more money will be directed to reimbursement than the 6 billion francs envisaged to protect depositors.

It is also worth noting that from 2023, the maximum insured sum will be increased to approximately 8 billion. The Swiss Federal Council has the right to additionally increase the sum insured to protect depositors if exceptional circumstances require so.

Check out the top 10 Swiss banks for non-residents.

What happens to Credit Suisse clients’ accounts, securities, and mortgages in case of collapse?

If a bank declares bankruptcy, customer accounts will no longer be used. This means making outgoing transfers or receiving money into these accounts will no longer be possible. If, for example, the salary was previously transferred to an account in this bank, you will have to provide the employer with another account for payments. Standing orders, such as rent payments, will also no longer be fulfilled. Online banking and payment cards of an insolvent bank will stop working.

The securities are not covered by the depositor protection program, but the rightful owners retain ownership, even if they are in the depositary bank. Clients will not lose their securities if Credit Suisse goes bankrupt. Instead, they will be able to transfer them to a deposit account in another bank. Shares in ETFs and other investment funds, including shares in funds issued by Credit Suisse, will also remain the property of clients and will be transferred to them in the event of a banking institution collapse.

Credit Suisse shares could be completely worthless if the bank goes bankrupt. Structured products issued by Credit Suisse may also lose their entire value.

When a bank goes bankrupt, it usually sells its mortgages to other lenders. Thus, clients continue to pay the outstanding debt in accordance with the mortgage agreement.

How will the possible bankruptcy of Credit Suisse affect the Swiss economy?

If a bank as big as Credit Suisse fails, the consequences will go far beyond its client base. The University of Zurich notes that such a bankruptcy will negatively affect many financial institutions in the country. Thus, it will endanger other companies as well.

An example is the story of the investment bank Lehman Brothers, whose failure in 2008 triggered a worldwide recession and led to the collapse of many other structures. The question is how much Swiss taxpayers will have to pay to cover the costs associated with the possible bankruptcy of Credit Suisse.

Looking at the total workforce of Credit Suisse, at the end of 2021, the number of employees worldwide was 66,540, which is 7.4% more than at the end of 2020.

Credit Suisse recorded the highest growth in the number of outsourcing employees, contractors, and consultants in the period from 2020 to 2021 at 24.4%, from 13,210 to 16,430 people. This indicates that the bank is hiring fewer permanent employees, preferring contracts with lower commitments instead.

If a collapse occurs, a total of 66,540 employees could lose their jobs, of which 50,110 are regular staff.

Credit Suisse is considered too big to fail as a systemically important Swiss financial institution and an integral part of the economy it serves. A large number of employees, subsidiaries, and FDI projects depend on the recovery of this bank.

What should Credit Suisse clients do?

The bankruptcy of Credit Suisse is still considered unlikely. But regardless of the bank’s financial position, it is always wise to split your assets among many different banks. It is also helpful to regularly compare the banking products you use with competitors’ offers. In some cases, the difference in costs and interest can be significant. So, depending on the services you use, switching to another bank can be an excellent financial move.

For advice on opening foreign bank accounts, please contact us at info@offshore-pro.info.