Switzerland, a country that, in addition to natural beauty and cleanliness, is known for financial stability and security. But with the latest developments in the banking world, it seems that country is no longer like that. As Credit Suisse, Europe's 19th largest bank, collapses, becoming the most dramatic banking casualty since the 2008 financial crisis, there are concerns that it will only be the first domino in a chain that stretches around the world, reports the Brussels media "Politico".

On Sunday, Swiss authorities forced the Zurich-based bank to settle with its longtime domestic rival UBS. It was a historic deal. A contract worth three billion Swiss francs that – at least for a few hours – allowed everyone to catch their breath.

The goal was to protect investors and savers and stop a full-blown banking crisis. At least temporarily, that was accomplished. As the markets investigated the Credit Suisse case, the alarm went off again. The way the country organized the rescue could have made things worse.

After the crisis a decade and a half ago, regulators tried to prevent troubled financial institutions from infecting each other with their problems by imposing losses on bondholders (instead of savers and ultimately taxpayers).

But even those who held the riskiest type of bonds were assured they would not be affected as long as shareholders paid the bill first.

Can the crisis spread?

In the case of Credit Suisse, Swiss regulators turned this normal modus operandi upside down, first wiping out the bondholders – and this caused a system-wide financial panic.

"The few who had ties to the regulators tried to stop them from doing these things, for that very reason," a bank liquidity expert at the International Monetary Fund, who spoke on condition of anonymity because of the sensitivity of the situation, told Politico.

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

If the unexpected write-down in the value of bonds leads to a wide swing in prices, banks could see a significant increase in their funding costs, adding to their problems, analysts at JP Morgan warned.

In an attempt to calm nerves after the Swiss decision, the Single Resolution Board, the European Banking Authority and the ECB's supervisory service - issued a joint statement to reassure investors and said that if EU banks fail, shareholders will be the first to suffer.

The Bank of England said that "holders of such instruments should expect to be exposed to losses on resolution or insolvency in the order of their positions in this hierarchy." In other words, they urged not to panic.

Open serious questions

But the collapse of Credit Suisse also raises serious questions about whether the system is as tight as the banking police thought.

By all regulatory measures, the bank was well capitalized and had plenty of earnings. This could mean that the rules introduced after the 2008 crisis are not as strict as people have been led to believe. And if so, then things are more serious.

If solace can be found anywhere, it is in the unique case of Credit Suisse. Its problems started a long time ago and bear little resemblance to the problems that brought down California's Silicon Valley Bank (SVB) two weeks ago.

Swiss authorities confirmed that the bank was not exposed to higher interest rates in the way SVB was when they decided last Thursday to support the bank with a 50 billion Swiss franc loan. When that reassurance failed to quell panic over the bank's share value, markets turned to broader questions about the bank's reputation, culture and profitability.

A highlight from last week

Matters came to a head last week when Saudi National Bank, one of the last investors in Credit Suisse, which is partly owned by Saudi Arabia's sovereign wealth fund, signaled that it was unwilling to put more capital into the Swiss bank.

Credit Suisse's difficulties widen even further. Under pressure to make her investment bank profitable as increased regulation made her task more difficult, in 2015 she hired former insurance executive Tijane Thiam as CEO to turn things around.

Thiam has embarked on a sweeping restructuring program cutting thousands of jobs, cutting costs and shrinking the investment banking division. The problem arose as the investment banking division struggled to keep pace with its rivals and, worse, became embroiled in a series of loss scandals, including a $5,5 billion loss linked to the collapse of hedge fund Archegos.

The spying scandal, in which the bank monitored its own employees, forced the director to leave. The Board of Directors of Credit Suisse has approached Thomas Gottstein for the position of Chief Executive Officer. He pledged to continue Thiam's efforts to restructure the bank, but acknowledged that more needs to be done to address deep-rooted cultural issues.

In 2021, he was rocked by his involvement in the failed financial firm Greensil Capital. The bank was once again forced to take a large write-down and Gottstein had to resign.

The collapse was only a matter of time

A new plan was unveiled in 2022 under the bank's last chief executive, Ulrich Koerner, which included further cuts to the investment banking division as well as a renewed focus on asset management and other core businesses. The bank also pledged to take steps to address its culture and risk management practices in a bid to prevent future scandals.

But the start of the war in Ukraine and the imposition of sanctions have stifled the bank's ability to manage the assets of some of its wealthiest clients.

Plans to spin off the group's investment arm under the revived New York-based Credit Suisse First Boston brand hit a snag in February when it became clear the bank would have trouble finding investors to fund the operation amid concerns about how creditors would be ranked. in case of failure.

With no more room to manoeuvre, the collapse seemed only a matter of time.