By now you probably all have read about the collapse of Silicon Valley Bank (SVB), our communication about that here, and the consequences this situation has for the U.S. financial system. On top of that, negative headlines about the Swiss universal bank Credit Suisse (CS) started to pile up. Last Thursday news about the need for a government rescue of Credit Suisse were made public. And over the weekend it was announced that the other Swiss banking giant UBS will take over Credit Suisse. As you know, it is important to us to communicate clearly and frequently, this is why we would like to shed some light on what‘s going on. The most important thing right away: WHVP has never used Credit Suisse as a custodian bank and has never recommended the bank to clients. Thus, none of our clients have any relations with Credit Suisse and are not affected by what is going on. Now let‘s dive into the issue a bit more deeply and shed some light on what has been happening.
Firstly, it is important to note that while the problems of CS have been following the collapse of SVB quite closely, the situations are very different. SVB's balance sheet did not hold up because the bank has neglected the risk of rising intererst rates. CS' balance sheet is stable and the liquidity ratios have been kept at all times. On March 15 the Swiss Financial Market Supervisory Authority FINMA and the Swiss National Bank SNB asserted that:
The problems of certain banks in the USA do not pose a direct risk of contagion for the Swiss financial markets. The strict capital and liquidity requirements applicable to Swiss financial institutions ensure their stability. Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks. If necessary, the SNB will provide CS with liquidity.
We are not downplaying the severity of CS' problems but they stem from a different issue than the ones from SVB. Since the financial crisis the bank has moved away more and more from its traditional Swiss set-up and has become increasingly involved in high risk investment banking activities. On top of that the bank has neglected proper risk management and has shown terrible corporate governance. The bank has slowly lost its credibility and took major hits to its reputation as a consequence to several sever PR crisis. Back in October the bank hit a particularly rough patch and while they were able to move forward, they have lost about a quarter of their local assets since. The uncertainty of various bank collapses in the U.S. has made investors even more nervous. When the main investor, Saudi National Bank, announced that it would not increase its stake in the bank last week, this led to a share price decrease of almost 30% in an extremely short period of time. Leading to even more loss of confidence from investors. Eventually the situation became so dire that the bank could not find a way forward by itself anymore. Several options were discussed and then on the weekend a merger with its main competitor UBS was announced.
On March 19, the Swiss Financial Market Supervisory Authority FINMA has approved the takeover of Credit Suisse by UBS. The transaction and the measures taken will ensure stability for the bank’s customers and for the financial centre. On this basis, it will be possible to continue all the business activities of both banks with no restrictions or interruptions.
The full press release on the deal can be found here. The history of Credit Suisse goes back more than 160 years and has been a source of pride for many Swiss people for decades. The bank is one of the biggest employers in Zurich and a huge tax payer. While it is a sad day for the Swiss financial industry, we welcome that there was a solution found in the private sector and that the government has been quick and supportive in approving this solution. Most importantly, there will not be any financial losses to the bank's clients.
How do our preferred custodian banks differ from Credit Suisse?
We are very careful in the selection of our preferred custodian banks. While Switzerland is one of the safest jurisdictions when it comes to wealth management, this is only half of the formula. The other half is the safety of the chosen custodian bank. We have three main criterias that we look out for when starting new banking relationships:
- What is the bank's expertise and experience when it comes to U.S. clients. Is the U.S. market strategically relevant to them. Is the bank able to prepare U.S. Tax Statements, is the bank's website available in English etc.
- If affirmative, WHVP checks the balance sheet to make sure that the bank has enough liquidity/solvency, does not take high risks and has good corporate governance. Furthermore, CET1 Ratio (Common Equity Tier 1 Capital / Risk-Weighted Assets) is part of the assessment, with which a new custodian bank to be developed is preferably comfortably above the legal minimum. WHVP's preference is clearly for family-run banks that are at least partially still owned by the founding family. WHVP is of the opinion that this represents good conditions for a long-term and stable management of the bank with good risk management.
- The last point is a soft factor: WHVP checks if the employees fit our own values and those of the client. WHVP conducts initial personal interviews with the relevant teams and decision makers to ensure that the business philosophy, work attitude, core values, ethics, etc. are in line.
As you can see based on those criteria, the reason we never worked with CS as a custodian bank for our clients is because they did not meet our standards of the second critieria in terms of having a low tolerance for risky activities and an exceptional corporate governance. While it is never possible to completely reduce all risk, with the standard we have for our partners, we never once had an issue with any one of our custodian banks in our over thirty years history.
What would an extremely unlikely collapse of one of our custodian banks mean for our clients?
Deposit protection is designed to guarantee clients’ bank deposits in the event of the insolvency of licensed banks or securities firms. Deposit protection protects deposits up to a maximum of CHF 100,000 per client and per bank or securities firm.
If a bank or securities firm is declared bankrupt or a protective measure is imposed under Article 26 para. 1 lets. e-h of the Banking Act, depositors lose access to the money they have deposited. The deposits fall into the bankruptcy assets and without the deposit protection scheme would at best be repaid only partially when the proceeds of the bankruptcy are distributed. The deposit protection scheme, however, is designed to ensure that deposits are paid out quickly up to the maximum amount of CHF 100,000 per depositor. What's important to note here is that this deposit protection is for cash held at the bank. Stocks, bonds and physical precious metals are always held in your own name and are thus not part of the bankrupcy proceedings but rather paid out to you directly.
How depositor protection works: The Swiss depositor protection scheme is based on a three-tier system.
- Deposits at Swiss and foreign branches of Swiss banks and securities firms up a maximum of CHF 100,000 per depositor are classed as privileged deposits (Art. 37a Banking Act). These privileged deposits are first paid out from the available liquid assets of the bankrupt institution and outside of the schedule of claims under bankruptcy law.
- If the liquid assets are insufficient to cover these deposits, esisuisse, the agency of the deposit protection scheme, funds the disbursement of deposits in Swiss branches up to a maximum of CHF 100,000 per depositor. esisuisse’s payment liability is limited by law to CHF 6 billion.
- If the privileged deposits have not already been paid out to the depositors (tier 1 or 2), they are placed among the second class of bankruptcy claims up to a maximum amount of CHF 100,000. The privileged deposits are at best paid out only partially when the proceeds of the bankruptcy are distributed. Claims on occupational pension schemes (pillar 3a assets) and vested benefits foundations also have preferred status (a total amount of CHF 100,000 per pension fund member is classed as privileged).
Further information on this can also be found on the website of FINMA: Depositor protection at banks and securities firms.