Several scenarios discussed for overcoming the CS crisis
Published: Friday, Dec 20th 2024, 12:20
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In 2022, Credit Suisse found itself in increasingly threatening difficulties. The Swiss authorities discussed various solution scenarios for overcoming the crisis, as revealed in the PUK report published on Friday. Between autumn 2022 and March 2023, several of the scenarios were analyzed and in some cases prepared.
THE CS OVERCOMES THE CRISIS ON ITS OWN
CS would have overcome the crisis on its own. The bank would have had the option of using the Emergency Liquidity Assistance (ELA) already provided for by law or the ELA+, which was only created by emergency legislation. This scenario was favored by the authorities for a long time, as they were concerned about intervening too quickly. According to the PUK report, it was not until March 15, 2023 that they came to the conclusion that this solution was definitely no longer realistic.
TAKEOVER OF CREDIT SUISSE BY ANOTHER BANK
This scenario envisaged the following two options: The takeover of CS by a Swiss bank or by a foreign bank. Liquidity injections such as ELA, ELA+ or Public Liquidity Backstop (PLB) were considered. This required the application of emergency law for ELA+ and PLB as well as the write-off of the AT1 bonds. The takeover by a foreign bank was discussed. However, the PUK report states that such a transaction would have been highly complex due to its cross-border nature and would most likely have required more time both in terms of preparation and implementation. Over the weekend of the crisis, the authorities decided to pursue the merger with UBS.
RESTRUCTURING OF THE BANK AND CAPITAL MEASURES
This scenario envisaged that CS would be wound up in accordance with Finma's restructuring plan. This instrument is provided for in the "too big to fail" legislation (TBTF). The shares and AT1 capital would have been written off, which would have meant a total loss for shareholders and bondholders. As part of a restructuring procedure, FINMA would have ordered the conversion of debt into equity and the reduction of receivables, which would have recapitalized CS. This measure was already introduced and discussed at the beginning of the deliberations.
BANKRUPTCY OF THE BANK AND TRIGGERING OF THE EMERGENCY PLAN
This scenario envisaged the bankruptcy of CS (Credit Suisse Group and Credit Suisse AG). By triggering the emergency plan provided for in the law, the systemically important functions in Switzerland would have continued to operate. This scenario was not discussed until November 2022. A temporary nationalization was mentioned as an alternative until a private solution could be found for the bank's Swiss unit. Although this is not a classic instrument of TBTF legislation, the authorities had already given it initial consideration in 2020. This option should not be confused with the nationalization of the entire Credit Suisse Group (see scenario below).
(TEMPORARY) NATIONALIZATION OF CS
This scenario envisaged the Confederation temporarily taking over the entire Credit Suisse Group as part of a temporary nationalization. In this scenario, which was not discussed until March 2023, the application of emergency law would have been necessary for several aspects: ELA+, PLB, creation of a legal basis for the takeover by the federal government and expropriation of shareholders. This scenario would also have resulted in a write-down of the AT1 bonds.
OTHER MEASURES DISCUSSED BUT NOT DEALT WITH IN DEPTH
Strengthening of own funds by the federal government: The federal government would have made a capital contribution to CS for the purpose of increasing capital and stabilization. This would have resulted in a write-off of the AT1 bonds. This measure could be seen as a kind of temporary nationalization, writes the PUK. It was discussed by the Financial Crises Committee (FCC) on October 15, 2022, but was rejected after the initial analysis and only briefly considered again in March 2023.
Public Liquidity Backstop PLB as a pure liquidity measure: The Federal Council would have introduced the PLB by emergency law and outside of a restructuring or merger in order to ensure CS's liquidity. At the Federal Council meeting on November 4, 2022, the possibility of adopting the mere legal basis for a PLB (but without activating the PLB) by emergency law should have been discussed. However, this meeting was canceled at short notice due to the assessments of CS's liquidity situation and the impact of the instrument.
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