The governor of one of Saudi Arabia’s sovereign wealth funds has said they will no longer invest in the financial markets in Switzerland as a consequence of the Swiss government’s handling of the Credit Suisse crisis in 2023.
Speaking at the FII Institute conference in Albania, Yasir Al-Rumayyan, Governor of the Public Investment Fund in Saudi Arabia, said the change in laws overnight, which wiped out Credit Suisse investors, had forced his fund to re-assess the risk inherent in Swiss financial markets.
Credit Suisse effectively collapsed in 2023 following a series of scandals and management errors which also led to a withdrawal of client funds. Some $17 billion of AT1 bonds were written off overnight. The write down has become the topic of intense legal challenges, and has created what academics now call ‘the Credit Suisse dilemma.’
The PIF held about 5% of the Credit Suisse bonds which were written off, according to Al-Rumayyan.
Swiss regulators wiped out $17 billion worth of Credit Suisse bonds and pushed the bank into a merger with rival UBS. There was limited – if any – consultation with Credit Suisse shareholders, and the move by the government has left a bitter taste in the mouths of many overseas investors in Swiss assets.
It has also affected perception of Switzerland as a safe haven for Middle East investors: “After decades of investing in the brand of being a global safe haven, Switzerland has dealt a heavy blow to its own reputation,” said Mohammed Al Qahtani, CEO at fund manager Saudi Arabia Holding Company. “The sudden regulatory intervention didn’t just erase billions, it dismantled trust built over generations.”
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Could Swiss regulators have done anything different?
Additional Tier 1 (AT1) bonds are designed to absorb losses during a crisis and are there to prevent the need for the tax payer having to bail out a bank as we saw in 2008-09. The Credit Suisse AT1 bonds were intended to be written down to zero in the event of a stress situation but the speed at which the write down took place surprised investors. There was an expectation in some quarters that the bonds could be converted to equity in the bank, for example.
Without an equity conversion, Credit Suisse ended up in the Swiss government’s in-tray regardless. Credit Suisse had notably not prepared itself sufficiently for the impending crisis despite having years since the banking reforms that followed 2008 to do so. FINMA, Switzerland’s regulator, feared other Swiss banks faced contagion as depositor confidence in Credit Suisse was already evaporating fast.
The Swiss government was also reluctant to nationalise the bank as it faced intense public criticism for bailing out UBS during the financial crisis. Hence, they went with the UBS merger as the least of all the evils they were presented with. As part of this deal, the AT1 bonds were written off, to support the capital position of UBS.
Legacy of weakness for Switzerland
The deal has also left a legacy weakness in the Swiss financial system, which could also be why large Middle East investors are avoiding piling back into Swiss bank bonds. UBS accounts for 200% of Switzerland’s GDP, around the same as the bank liabilities guaranteed by the Irish government in 2008, which forced the Irish government to see its own bail out.
Switzerland is now in a position where it could be difficult or indeed impossible to bail out UBS should it run into trouble. Under these circumstances, foreign investors have to re-evaluate the risks inherent in the Swiss financial system in a new light.
