It is only right that investors bear the losses of a failing bank

The collapse of the Californian Silicon Valley Bank sent shockwaves all the way across the Atlantic. UBS’s acquisition of Credit Suisse lends faith that EU crisis resolution regulation functions as it is meant to: the losses of a failing bank are borne by its investors, not by taxpayers. Although Switzerland is not an EU member, its banking regulation is very similar to EU regulation.

Credit Suisse’s capital totalled about €50 billion, with roughly €35 billion coming from shareholders and €15 billion from bondholders. It is currently estimated that together, these investors lost nearly 95% of their investments’ balance sheet value. And this is only right – investment is fundamentally all about risk-taking, which sometimes yields profit, sometimes becomes realised as loss. The losses were covered through investor bail-in, and the money of Swiss taxpayers was not needed.

To be fair, having to perform a controlled takedown or forced sale of a bank is in no way a desirable scenario. According to some estimates, Credit Suisse’s merger with UBS may lead to the termination of up to 10,000 employees.

The losses were covered through investor bail-in,
and Swiss taxpayer money was not needed.

What brought down Credit Suisse? One of the main factors was the same as in Silicon Valley Bank: a crisis of confidence triggered a bank run on deposits. Credit Suisse has been moving from crisis to crisis for many decades. In 2022, the bank’s losses grew bigger than during the 2008 financial crisis, which indicated major problems.

The most important question remains: has the crisis now run its course, or should we be concerned? Can the same happen in Finland?

Finnish banks are financially sound, and their reputation is top notch. Customers and investors’ trust and confidence in Finnish banks is not shadowed by any of the factors that triggered the downward spiral of Credit Suisse. On the contrary: the Finnish Financial Supervisory Authority and the Bank of Finland both only recently reported that the Finnish financial sector’s capital position is strong.

Broadly speaking, Credit Suisse’s resolution proceeded exactly as the legislator has intended. The markets are nevertheless in a sensitive state due to the central bank’s interest rate hikes, and investors who have invested in the kinds of instruments that lost their value at Credit Suisse may still be a bit nervous. It is now important to keep a cool head. The US and Swiss authorities have both done much to solve the crises and lay down the necessary prerequisites for calming the situation.

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Financial and Prudential Regulation

Olli Salmi

Head of Banking Regulation