Switzerland, the beautiful land of financial stability and reliability, isn’t so boring anymore, Politico says, as Credit Suisse, Europe’s 19th largest bank, collapses in the biggest banking loss since the 2008 financial crisis.

The concern now is what consequences this situation may have on the economies of the planet.

“And if boring, safe Switzerland can’t save its banks, then who can?” reports Politico and explains:

“To understand what happened, consider a wedding at gunpoint. On Sunday, the stricken Zurich-based bank was forced by Swiss authorities to go to bed with arch-rival UBS. It was historic. A deal of 3 billion Swiss francs which – for a few hours at least – allowed everyone to take a breath.”

The goal was to protect investors and depositors and prevent a full-blown banking crisis. Temporarily at least, this was achieved.

But as usual, the devil is in the details. As the markets picked up the corpse of Credit Suisse, alarm bells began to ring.

“Do not do that”

The way the Swiss handled the rescue may have made matters worse.

Since the previous crisis, regulators have sought to prevent distressed financial institutions from “contaminating” each other with their problems, imposing losses on bondholders (rather than depositors and ultimately the taxpayer).

But even those who held the riskiest type of bonds were confident they would not be affected until shareholders pay first.

In her case Credit SuisseSwiss regulators overturned that rule, putting the burden on bondholders first—and that has caused a system-wide financial panic.

“Some have tried to stop them, precisely for that reason,” a bank liquidity specialist at the International Monetary Fund told POLITICO on condition of anonymity.

It is the classic example of how infection can spread throughout the system. If investors suddenly think their bonds are riskier than before, it can lead to a sell-off, pushing prices down and undermining confidence in the entire system.

Then banks too could see their funding costs rise significantly, exacerbating their problems, bank analysts at JP Morgan warned.

In an attempt to calm spirits after the Swiss ruling, three European supervisory bodies – the Single Resolution Board, the European Banking Authority and the ECB’s supervisory arm – issued a joint statement to reassure investors that in the event of a bank failure in the EU, the shareholders would be burdened first.

But the collapse of Credit Suisse also raises serious questions about whether the system was as stable as we first thought.

By all accounts, the bank was well capitalized and had many assets. This could mean that the rules put in place in the wake of the 2008 crisis are not as strict as we thought.

If anything can bring solace it is the uniqueness of Credit Suisse’s case. Its problems started a long time ago and bear little resemblance to those of Silicon Valley Bank (SVB).

The Swiss authorities confirmed that the bank was not exposed to higher interest rates as SVB was when they decided to provide support.

Spying scandal

Credit Suisse’s troubles start earlier. Under pressure to make its investment bank profitable, it hired former insurance executive Tidjane Thiam as chief executive in 2015 with a mandate to turn things around.

Thiam’s immediate response was to launch a sweeping restructuring program that cut thousands of jobs, cut costs and scaled back the investment banking division.

But the effort struggled when the investment banking division struggled to keep up with rivals and, worse, was embroiled in a series of damaging scandals, including a $5.5 billion loss related to the collapse of hedge fund Archegos.

A “spying scandal,” in which the bank was monitoring its employees, forced the executive out.

Credit Suisse’s board then turned to Thomas Gottstein to become CEO.

He pledged to continue Thiam’s restructuring efforts, but acknowledged that more needs to be done to address deep-rooted problems.

In 2021, she was rocked by her involvement with the failed financial firm Greensill Capital. The bank was once again forced into massive write-downs and Gottstein had to resign.