Simon Fawell discusses the collapse of Credit Suisse in International and The Banker

By Simon Fawell

Partner Simon Fawell examines at the legal and regulatory fallout of the collapse of Credit Suisse.

Simon’s article was published in International, on 12 April 2023, and can be found here. A shorter version was published in The Banker, on 13 April 2023, and can be found here

Although Credit Suisse’s likely need for a rescue package at some point was, perhaps, foreseeable, the speed of its demise, together with the form of rescue package were more surprising. Put together over a weekend, the legal and regulatory fall-out from the merger with UBS will take much longer. While seen by many (not least Credit Suisse’s own chairman) as the only option to stave off bankruptcy and even by some as a success to boost confidence in the banking market, many stakeholders disagree and are already seeking to bring claims to claw back losses. Investors for whom the implications currently remain less clear are now seeking advice on potential legal escape routes should their positions move against them. Meanwhile, the Swiss federal prosecutor has already opened an investigation into the legality of the merger under Swiss law.

Initial attention has focused primarily on the CHF16 billion (US$17.7 billion) additional tier 1 (AT1) bonds that were written down to zero under the direction of FINMA, the Swiss regulator. This subverted the generally accepted order of priority, leaving AT1 bondholders with nothing while equity holders recouped approximately CHF3 billion (US$3.3 billion). The move led both the Bank of England and the EU quickly to confirm that this would not have happened under their regimes. 

Having mobilised swiftly, holders of AT1 bonds are seeking to bring claims under Swiss law (“the steps taken by the Swiss regulator, FINMA, exceeded its authority”), under the terms of the bonds (“the term of the bonds used to justify the write down had not been triggered”) and under bilateral investment treaties (BITs) between certain nation states and Switzerland which would potentially allow investors from those states to seek compensation direct from the Swiss government on the basis that they have been treated unfairly. 

Investors in the AT1 bonds also have in their sights the professionals who provided them with advice and made representations when they entered into the bonds. Some investors were advised that, notwithstanding risk factors in some of the offering documents suggesting that the AT1 bonds could be written down in circumstances where the equity was not, this was not the way things would ever work in practice.

Credit Suisse and UBS shareholders have also expressed concern at the use of emergency powers to remove the need on either side for a shareholder vote approving the merger. Views among UBS shareholders are mixed as to whether this is a good deal. On the Credit Suisse side, while there appears more of an acceptance that the merger was, ultimately necessary, shareholders are left asking themselves how it came to this and are taking advice on potential claims against senior management, similar to those seen in the US following the collapse of Silicon Valley Bank.

After all, Credit Suisse has not been unfamiliar with high profile, scandal, investigations and litigation in recent years and much of that has led to direct criticism of management and control mechanisms. 2022 saw the bank’s biggest annual loss since the global financial crisis and, only last month, management was forced to admit “material weaknesses” has been identified in the bank’s internal controls over financial reporting. 

Increased post-merger scrutiny will also mean that more information on the internal workings of Credit Suisse will emerge. Further findings of systemic failure will no doubt lead to more claims from aggrieved investors. A recent FINMA investigation into the bank’s involvement in the Greensill collapse concluded that there had been serious deficiencies in its organisational structures.  Although the full FINMA report remains confidential for now, it will no doubt become public in due course. This is most likely to happen via the disclosure process in litigation brought by investors to recover their losses from direct investments in Credit Suisse funds linked to Greensill, and from derivative products issued to investors on the back of those funds. 

Wider market ripples will also continue on both sides of the Atlantic. In the US, Silicon Valley Bank and Signature Bank swiftly disappeared in March while Deutsche Bank recently experienced a significant share price drop following a spike in credit default swaps, as concerns about the stability of European banks persist.

Some market commentators predict that a significant number of banks will not exist in their current form two years hence – as a result of mergers, bail-ins or collapses. If those predictions are accurate, there will be losers. The size and scale of consequent litigation will heavily depend on how regulators calibrate their response in each case. 

Although the Credit Suisse/UBS merger has been welcomed by some as providing certainty in a sector where confidence has been at a premium, the raft of legal and regulatory issues that have so far emerged will mean that market turmoil is unlikely to end any time soon. The litigation is only just beginning. 

Latest news

All news