When you think about Switzerland,
what do you think of?
You think of mountains and skiing.
You think of luxury watches.
Beautiful chocolate.
And banking.
Banking is super important in Switzerland
both from a GDP, an economy perspective,
but also just as a national identity.
People are actually proud of their banks
and a lot of people work in finance.
There's just historically a lot of expertise here
when it comes to banking,
particularly around
banking for those who are rich.
That went quite well
up until it didn't.
UBS buying Credit Suisse.
This ends a 166 year run for Credit Suisse.
It was a historic day and a day we hoped would not happen.
UBS now after the takeover,
has provided stability,
but it creates a potentially bigger problem in the future.
Swiss banking has built a reputation
for reliability, stability and discretion.
Underpinning those attributes
are two key policies
secrecy and neutrality.
Secrecy was always a really big selling point for the industry,
and it's part of what helped it
attract so much money and grow so large.
The neutral status of the country
made it a very reliable place for
the rich people all over the world.
All things being equal,
Swiss banks would not have been able actually
to compete with financial centers
such as London or Paris
that were really at the heart
of huge industrial economies.
But it did have one edge
the principle of secrecy
that dated back to the early 18th century.
So at the start of the 20th century,
other European nations started
increasing their taxes.
Swiss bankers sensed an opportunity.
This is an ad published in La Revue Française in 1911
by the Cantonal Bank of Bern.
It says that...
made by a foreigner
who is not resident in Switzerland
is actually exempt from paying all Swiss taxes.
Plenty of other lenders followed a similar tack.
In the years that followed,
the two World Wars
meant that Switzerland's neutrality
made it an even more appealing location
to deposit your cash without anyone knowing about it.
As Switzerland became more
of a player on the international stage,
one of the ways that banking developed was
to take the status of the stability
of the political system
and the neutrality of the country
to offer a safe haven for people.
At the heart of it all
are Credit Suisse and UBS,
two banks headquartered
just a few hundred yards apart in central Zurich.
By the 1970s,
global banking had started to change.
With increased globalization came
more opportunities,
but also increased
competition and scrutiny.
Over time, people started
to demand higher returns.
Money laundering became more of an issue
in the 80’s and into the 90’s.
Terrorist financing became a really big issue in the early 2000’s.
A few major if historical scandals
started not only to chip away at
Switzerland's reputation around this time,
but they also drew the attention of international regulatory authorities.
As attention focused on
Switzerland's banking secrecy
in the 1980s,
a new business model had begun to emerge.
What if the banks could take the
vast wealth they were tending for their clients
and pair it with an investment bank
that could direct the capital into exciting new opportunities
like initial public offerings and dealmaking.
Credit Suisse bought First Boston
and then later on
Donaldson, Lufkin & Jenrette Inc.
and UBS bought Paine Webber.
The combination of Paine Webber and UBS
is a match made in heaven.
that went quite well
up until it didn't, in about 2007.
The banking sector bore the brunt of the collapse,
with shares in Europe's major banks
tanking by as much as 9%.
Major financial institutions have teetered on the edge of collapse
and some have failed.
We've had a historic day on Wall Street.
Lehman Brothers, the 158 year old firm,
filed for Chapter 11 protection
in US bankruptcy court today.
This is when the two banks paths
really diverge.
UBS finds itself in crisis
along with the global financial world,
and it has to take a state bailout.
It decided one, to seriously cut back
pretty much everything it did in the sort of the bond trading.
And two, there was a kind of, you know, a reset of the culture.
It came out of that a much more humble,
much reduced bank.
While UBS was forced to change
and take fewer risks
Credit Suisse was not.
In fact, it made things worse.
Risk control has obviously many, many facets.
One is compliance.
Yet at another level, for the investment bank,
it's about knowing your trading positions.
Now, one thing they did,
they fired a lot of people, senior people
who were watching out for risky trading positions
and instead they hired a lot of young people
who probably did this job for the first time.
And that later backfired.
But at the same time,
they're still living on that old reputation
for stability and responsibility.
What Swiss banks ended up kind of selling
to investors, to their private clients
was this kind of this old idea of
quality and safety and security
that they'd also always kind of trade off of.
And when things started to go wrong,
when banks started to lose more money
on behalf of their clients,
that really undermines
that sort of reputation for safety and soundness.
SVB bank closed
closed by the regulator.
STOXX Europe 600 being dragged down
by the financial services sector,
by the banking sector, down by 2.75%.
for 3 billion CHF.
This is where the government came in
with a lifeline of liquidity.
We were speaking very closely with
key regulators, notably or most importantly,
the ones in the US and the UK.
Deal done, UBS will buy Credit Suisse
their support for the solution.
Credit Suisse will no longer be an independent company.
At the same time, this means a new beginning and huge opportunities ahead
for the combined bank
and for the Swiss financial center as a whole.
While UBS might be a more trusted brand.
A part of the rescue has some questioning
whether Switzerland itself
is a safe place to invest.
This is Switzerland
bailing in the bond holders.
Typically,
bond holders take precedence
over shareholders.
That means the people who loaned the company cash
get their money back before the people that own the business.
What happened with Credit Suisse was that people who owned
the company's shares received a total of about $3 billion,
far less than the company had been worth
just days earlier.
But a class of debt known as additional Tier I bonds
was completely wiped out to the tune
of $17 billion.
They were asking, look, we are losing all our money now.
Why would we give you money in the future?
And that was another big problem of this merger,
because it will make financing for Swiss banks when they want to lend
more expensive going forward.
The deal brokers maintained that this was the best of a bunch of bad solutions.
There's another reason why the new UBS megabank
could be problematic for a small country like Switzerland.
The Swiss state is hoping that by merging these two companies,
you get a bit of the best of both worlds,
so you get the expertise that's been developed at Credit Suisse
and perhaps some of that more innovative stuff.
But then also the stability and this sort of stoic culture that UBS has.
UBS now after takeover,
has provided stability straight away,
but it creates a potentially bigger problem in the future.
UBS’s balance sheet, is now twice the size of the Swiss economy.
That's obviously massive.
And it begs the question,
if UBS were ever to run into trouble,
could Switzerland afford to bail them out?
In the last financial crisis,
we talked about banks being too big to fail,
meaning governments had to bail them out.
The new expanded UBS represents a different risk
that the Swiss government
just doesn't have enough money
to bail it out.