The idea of “too big to fail” (TBTF) in banking isn’t a myth, but it’s a contentious concept with real flaws and limitations exposed by cases like Credit Suisse’s collapse in 2023. Credit Suisse collapsed in March 2023 due to a combination of long-term mismanagement, financial scandals, and a sudden loss of investor and client confidence, culminating in a liquidity crisis. Credit Suisse was plagued by multiple high-profile scandals over the years, eroding trust. These included a 2019 spying scandal where the bank surveilled a departing executive, a 2021 loss of $5.5 billion from the collapse of Archegos Capital due to poor risk management, and significant losses from the Greensill Capital collapse.

The bank was also involved in corruption cases, such as a Mozambique “tuna bonds” scandal, resulting in fines of over $350 million, and money laundering allegations linked to a Bulgarian criminal organization. A culture of inadequate risk management and lack of accountability was noted by regulators, with FINMA’s chair highlighting a “cultural problem” at the bank

Credit Suisse reported its largest annual loss since the 2008 financial crisis, amounting to 7.3 billion Swiss francs in 2022, driven by massive client deposit withdrawals (110 billion Swiss francs in Q4 2022 alone). The bank’s 2022 annual report revealed “material weaknesses” in financial reporting, further undermining . A social media rumour in October 2022 about the bank’s impending failure triggered a depositor run, with clients pulling funds rapidly, exacerbating liquidity issues.

On March 15, 2023, the Saudi National Bank, Credit Suisse’s largest shareholder, announced it could not provide further funding due to regulatory constraints, causing a sharp 20%+ drop in the bank’s share price. This followed the collapse of U.S. banks like Silicon Valley Bank, which heightened global market panic and put additional pressure on Credit Suisse, despite its issues being unrelated to U.S. bank failures.

Despite meeting capital and liquidity requirements for a systemically important bank, Credit Suisse faced a liquidity crisis that the Swiss National Bank (SNB) and regulator FINMA could not stem. A 50 billion Swiss franc ($54 billion) loan from the SNB in March 2023 failed to restore confidence. FINMA was criticized for being too lenient, notably allowing an accounting maneuver in 2017 that reduced capital requirements, and for inadequate supervision.

Facing imminent bankruptcy, Swiss authorities orchestrated an emergency takeover by UBS for 3 billion Swiss francs ($3.25 billion) on March 19, 2023, a fraction of Credit Suisse’s value. The deal included wiping out 16 billion Swiss francs in Additional Tier 1 (AT1) bonds, angering bondholders, and bypassing shareholder approval through emergency laws. The takeover was deemed necessary to prevent a global financial crisis, as Credit Suisse was a globally systemically important bank whose failure could have disrupted the financial system.

Credit Suisse’s collapse was the result of years of mismanagement, compounded by scandals, financial losses, and a failure to adapt to changing market conditions, leading to a fatal loss of confidence. The crisis was exacerbated by a global banking scare and inadequate regulatory oversight, necessitating a government-brokered rescue by UBS to avert a broader financial meltdown.

The collapse exposed flaws in Switzerland’s “too big to fail” regulations, with the parliamentary report noting that a public liquidity backstop, introduced via emergency law in 2023, could have mitigated the crisis if available earlier. The bank’s size, complexity, and risky investments made it vulnerable to rapid loss of trust, which regulators failed to address preemptively.

During the 2008 financial crisis, banks like Lehman Brothers’ collapse showed the ripple effects of failure, prompting bailouts for others (e.g., AIG, Citigroup). Similarly, Credit Suisse’s 2023 takeover by UBS, backed by Swiss authorities and a $54 billion Swiss National Bank loan, reflects TBTF logic especially when  governments step in to prevent chaos. Post-2008 reforms (e.g., Basel III, Dodd-Frank) aimed to reduce TBTF risks with higher capital requirements and stress tests. Yet, Credit Suisse met these standards but still collapsed due to mismanagement and liquidity issues, showing regulations don’t guarantee safety. The wipeout of 16 billion Swiss francs in Credit Suisse’s AT1 bonds during the UBS takeover broke the TBTF expectation that all stakeholders would be protected, angering investors and exposing the limits of implicit bailouts.

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