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.
