Switzerland has long been regarded as a bastion of legal certainty and stability, particularly for investors in the bond and equity markets. However, the recent collapse of Credit Suisse Group AG has exposed some uncomfortable truths about the country’s financial system.
In an effort to facilitate UBS Group AG’s acquisition of Credit Suisse, the Swiss government resorted to emergency legislation, overriding key aspects of open markets, including competition law and shareholder rights. This move was ostensibly intended to preserve stability and prevent a wider financial crisis, but it has raised concerns about the country’s commitment to free markets and investor protections.
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How the situation going on?
The situation was further complicated by the discovery that $17 billion worth of Additional Tier 1 debt held by Credit Suisse was essentially worthless. This type of debt is considered to be among the riskiest investments in the banking industry and is designed to absorb losses in the event of a financial crisis. The fact that this debt proved to be worthless has underscored the challenges facing investors in the Swiss financial system and has raised questions about the effectiveness of regulatory oversight.
The collapse of Credit Suisse and the subsequent revelations have highlighted the need for greater transparency, accountability, and oversight in the Swiss financial system.
Switzerland’s reputation is in threat!
According to Peter V. Kunz, a professor of economic law at the University of Bern, foreign investors may be wondering whether Switzerland is a “banana republic” where the rule of law does not apply. He warns that while the country may not be in immediate danger, there is a risk of lawsuits because authorities intervened “on very thin ice”. In other words, the emergency measures taken by the Swiss government to salvage the situation have raised questions about the country’s commitment to free markets and investor protections.
Kern Alexander, a professor of law and finance at the University of Zurich, agrees that the crisis management was carried out in a panicked way that undermined the rule of law and Switzerland’s reputation. He warns that this could have serious consequences for the country’s financial system, particularly if foreign investors begin to withdraw their funds.
Overall, the collapse of Credit Suisse and the subsequent emergency measures have highlighted the need for greater transparency, accountability, and oversight in the Swiss banking system. It is essential that the country’s leaders take steps to restore confidence in the system and reassure investors that their money is safe. Failure to do so could have serious implications for the Swiss economy and its standing in the global financial community.
The Swiss government’s intervention in the sale of Credit Suisse to UBS has raised concerns about the country’s commitment to free markets and the rule of law. The government cited an article in its constitution that allows it to issue temporary ordinances in the face of serious disruptions to public order or internal or external security. However, this move also entailed overriding merger laws on shareholder votes, which raised eyebrows among legal experts.
The proposed merger of Credit Suisse and UBS has raised concerns among investors, particularly regarding the decision by Swiss banking regulator Finma to write down to nothing the AT1 bonds issued by Credit Suisse. These bonds were introduced after the global financial crisis to ensure that losses would be borne by investors rather than taxpayers and are intended to act as a capital buffer during times of stress. However, only AT1 bonds issued by Credit Suisse and former Swiss rival UBS have language in their terms that allows for total wipe-out rather than a conversion to equity, which has led to concerns about Swiss exceptionalism and the departure from the general rule that bondholders come before shareholders.
According to a UBS investor presentation, together Credit Suisse and UBS would hold 333 billion Swiss francs ($360 billion) in customer deposits, 115 billion francs more than their nearest rival Raiffeisen. While this would create a dominant force in the Swiss banking sector, it has also raised concerns about competition and the concentration of power.
The situation underscores the importance of transparency and investor protection in the financial sector. While AT1 bonds may have been marketed as a way to shift the burden of losses from taxpayers to investors, it is important that investors are fully aware of the risks involved and that the regulatory system is transparent and accountable.
The decision to write down the AT1 bonds has raised questions about the Swiss regulatory system and the protection of investor rights. The Swiss government and regulators must work to restore confidence in the system and reassure investors that their interests will be protected in the future.
The collapse of Credit Suisse Group AG has also raised concerns about the primacy of Swiss banking law and sowed doubt among foreign investors about investing in the country. The government’s invocation of emergency legislation to override competition law and shareholder rights in order to facilitate UBS Group AG’s purchase of Credit Suisse raises fundamental questions about the rule of law in Switzerland.