Managing National Banking Championships: France 1:0 Switzerland...

While my former girlfriend (now wife) lived in Strasbourg, France, we were invited to a dinner party. There was a nice, but persistent French young man claiming that Raclette was a French cheese. As a Swiss based, I had to defend Swiss cheese pride and due to the end of pop culture, when we used to discuss such matters for hours, I have been proven right within seconds by googling it. Could one believe that French can be wrong with cheese and Swiss with banking?

Let us break down the facts of UBS taking over a collapsing Credit Suisse for CHF 3 billion, a deal backed by the Swiss National Bank (SNB) with a liquidity assistance loan of up to CHF 100 billion (for now) and how the French government delt with the case of Credit Lyonnais.

A Swiss national champion takes over a Swiss national champion

UBS

The largest bank in Switzerland, is often considered a Swiss national champion due to its size, influence, and close ties to the Swiss government and economy. As a global financial institution headquartered in Switzerland, UBS is a major contributor to the Swiss economy and is closely watched by Swiss regulators and policymakers.

UBS is also seen as a symbol of Swiss financial stability and is often used as a benchmark for the health of the Swiss financial system. This has led to UBS receiving support and preferential treatment from the Swiss government in the past, particularly during the 2008 global financial crisis when the Swiss government provided UBS with a large bailout package, since the bank was struggling due to significant losses in the subprime mortgage market. The package included a capital injection of CHF 6 billion ($5.3 billion USD) into UBS and the establishment of a stabilization fund to purchase up to $60 billion USD in toxic assets from UBS.

In addition, the Swiss National Bank (SNB) provided a loan of CHF 54 billion ($48 billion USD) to UBS to help it remove distressed assets from its balance sheet. The total value of the bailout package was around CHF 68 billion ($60 billion USD) in government support and loan guarantees.

Credit Suisse

The second largest bank in Switzerland, is as well often considered a Swiss national champion due to its size, influence, and close ties to the Swiss government and economy. Like UBS, Credit Suisse is a global financial institution headquartered in Switzerland and is a major contributor to the Swiss economy.

Credit Suisse has historically been closely watched by Swiss regulators and policymakers, and the Swiss government has provided support to the bank during times of financial stress, although Credit Suisse did not receive a direct loan from the Swiss government in 2008, unlike its competitor UBS. However, during the global financial crisis, the Swiss government provided Credit Suisse with a package of measures to stabilize the financial system, including a capital injection of CHF 10 billion in the form of mandatory convertible notes that could be converted into shares at a later date. In addition, the Swiss National Bank also provided emergency liquidity measures to Credit Suisse and other banks during the financial crisis.

Overall, Credit Suisse's size, importance to the Swiss economy, and close relationship with the Swiss government and financial system make it a strong contender for the label of a Swiss national champion.

Credit Suisse has approximately CHF 1.3 trillion in assets under management by the end of 2022, which makes it, outside of the US, the second largest wealth management institution globally.

The role of the Swiss National Bank (SNB)

The Swiss National Bank (SNB) is the central bank of Switzerland and is responsible for conducting monetary policy and maintaining price stability in the country. Here are some of the main functions of the SNB:

·       Monetary Policy: The SNB is responsible for setting the interest rates and managing the supply of money in Switzerland. Its primary goal is to ensure price stability, which means keeping inflation under control.

·       Foreign Exchange Policy: The SNB is responsible for managing the country's foreign exchange reserves and ensuring that the Swiss franc remains stable and competitive on the international currency markets.

·       Bank Supervision: The SNB is also responsible for supervising and regulating the country's banking system to ensure its stability and prevent financial crises.

·       Financial Stability: The SNB is responsible for ensuring the overall stability of Switzerland's financial system by monitoring risks and taking action to prevent systemic problems.

·       Issuing Banknotes: The SNB is the only institution in Switzerland that is authorized to issue banknotes. It also maintains the country's gold reserves.

In summary, the Swiss National Bank is responsible for maintaining the stability of Switzerland's monetary system and financial sector, ensuring price stability, managing the country's foreign exchange reserves, and supervising the banking system.

The Swiss National Bank (SNB), The Federal Department of Finance (FDF) and the Swiss Financial Market Supervisory Authority (FINMA) have renewed tripartite MoU on collaboration in December 2019.

 The case of Credit Lyonnais

Credit Lyonnais, a French bank founded in 1863, was one of the largest and most influential banks in France for most of its history. Being a French national champion, meaning a large company that is heavily supported by the French government, had a significant impact on the bank and on the French economy.

One of the major impacts of Credit Lyonnais being a national champion was that it received significant financial support from the French government. This allowed the bank to expand rapidly both domestically and internationally and to take on risks that other banks might not have been able to. Credit Lyonnais also enjoyed significant political influence, which helped it secure access to key markets and favorable treatment from regulators.

However, being a national champion also had its downsides. Credit Lyonnais was seen by some as too big to fail, which meant that the French government was under pressure to bail it out when it ran into financial difficulties. This put a strain on French public finances and contributed to a perception that the bank was not being held accountable for its actions.

There were several risks and challenges that ultimately proved to be unsustainable for Credit Lyonnais as a French national champion.

One major challenge was the bank's rapid expansion both domestically and internationally, which led to a significant increase in its risk exposure. In the 1980s and early 1990s, Credit Lyonnais made a series of aggressive acquisitions and investments, including in real estate and Hollywood film studios. These investments ultimately proved to be unprofitable and exposed the bank to significant losses.

Another challenge was the bank's close ties to French political and economic elites, which created a perception of political interference in the bank's operations. This led to criticism and scrutiny from international regulators, which ultimately forced Credit Lyonnais to restructure and sell off many of its assets.

Additionally, the perception that Credit Lyonnais was too big to fail created an implicit guarantee from the French government that the bank would be bailed out in the event of financial difficulties. This led to a moral hazard problem, where the bank took on excessive risks because it believed that the government would ultimately bail it out.

These risks and challenges ultimately led to a series of financial scandals and losses for Credit Lyonnais in the 1990s, which prompted the French government to intervene and take over the bank. The bank was ultimately privatized in the early 2000s, and the French government sold off its remaining stake of the bank in 2008.

Conclusion

The Swiss economy heavily depends on this deal to work out well. The Swiss tax payer will be kindly asked to join in financing this project. Considering that 99% of all Swiss based companies are SME’s, Switzerland relies on a secure domestic banking system.

Competition is important for several reasons, both for consumers and for the overall economy such as innovation, lower prices, efficiency, consumer choice and finally preventing monopoly power. Swiss authorities and the SNB most obviously did not have any of this in mind, when supporting this acquisition.

The French government prevented further pain by nationalizing a rotten bank and finally selling it. Compared to the French pragmatic solution, Swiss politicians and the SNB seem to have lost their minds at first glance, but there is still a lot of international wealth to profit from, since Credit Suisse played a leading role in the global wealth management industry. The strategy, for now, could make sense and it is too late to follow the French government’s example on Credit Lyonnais.

In case it also fails down the road, the new mega-bank will likely be too large to be rescued. While in the meantime it will profit from international wealth management deals, let’s hope Switzerland will fix the system.

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