Credit Suisse: Reputation of Switzerland
Musings About Trust in Banking (IV)
One of the most crucial questions relating to the Credit Suisse case is how it will affect the reputation of Switzerland and Swiss banking, which could arguably be the most important aspect to consider. Concerns have arisen that the perceived lack of control of the struggling bank in the handling of the crisis, as well as the process employed to find a solution, may have a negative impact on Switzerland’s reputation with potential investors, future clients, and the general public. In this article, I will use a trust research lens to explore where trust may have been compromised and what steps can be taken to restore it.
What (Trust) is at Stake?
As I previously discussed in my article on the banking run, the financial sector relies heavily on calculative trust in the technical proficiency of the regulating system. This includes trust in the competence and reliability of the Swiss National Bank, the Swiss Financial Market Supervisory Authority (FINMA), and the Swiss Parliament as the law-giver. Furthermore, for deeply entrenched stakeholders such as long-term investors or smaller credit takers, the importance of (identification-based) trust based on value alignment with key systemic actors is even greater. When examining the values historically associated with Swiss finance, we observe characteristics such as stability, conservatism, neutrality, restraint, and discretion. Finally, for the Swiss public, the expectation of continuity and familiarity with the societal system is also important in providing systemic actors the necessary flexibility to navigate between the requirements of calculative and identification-based trust.
What is the State of Trust in March 2023?
It is of course to early to understand the longer lasting impact of the recent developments on trust. Yet, a quick survey in the wake of the forced merger between UBS and Credit Suisse showed that expectations of the competence and reliability of key actors is low and has presumably taken a blow given that normally these key actors are seen relatively positively:
Primarily, FINMA, the supervisory authority responsible for protecting financial clients, licensing, supervising, enforcing supervisory law, and providing information on the financial actors, has recently been depicted as ineffective and considered by the general public as the least credible of the systemic actors. However, it should be noted that a blaming game usually follows such incidents. A study conducted around the same time with 167 Swiss economists revealed that there were also doubts as to whether the proposed solution by the federal council, SNB, and FINMA, the shotgun wedding between UBS and CS, was adequate. Most of the surveyed economists would have preferred that the Swiss state took over Credit Suisse. Moreover, legal scholars expressed concerns about the implementation of emergency laws that drastically limit shareholder rights. This was viewed as having long-term adverse implications: “Investors in Switzerland can now anticipate being expropriated without a legal basis,” stated Swiss law professor Peter V Kunz to the Tamedia news group.
A call for action for the involved systemic actors also becomes evident by analyzing the answers to the question what people feel when thinking about the recent events:
The prevailing emotion was anger, which is commonly associated with injustice in the literature on moral emotions. Betrayal, harm, or deception are among the factors that trigger this emotion, indicating that trust has been severely ruptured. It is unclear whether this anger is directed solely at Credit Suisse or at the banking system as a whole.
Uncertainty and anxiety are also prevalent emotions, signaling a loss of orientation and vulnerability due to sudden shifts in what was once familiar and clear. Trust research suggests that these emotions require active trust management, as the actors responsible for the breach of trust need to communicate clearly, perhaps even over-communicate, and offer a cognitive bridge to help people navigate the new situation.
In addition, substantive actions are necessary, such as changes to the regulatory framework, and, in response to the anger felt, a sincere commitment to hold those accountable for the situation to account in court.
Substantive Actions for Active Trust Management
In the aforementioned survey, participants were also asked about their expectations regarding the actions of systemic actors. As anticipated, given the “righteous” anger response, individuals demanded those responsible to be held accountable. However, what was unexpected, considering Switzerland’s mainly conservative or liberal stance, was the significant number of people who called for better regulation. The demand for increased regulation and for a parliamentary commission to thoroughly investigate the matter can both be interpreted as efforts to restore a sense of normalcy.
Is Value Alignment Also Lost?
Surveys on the ascribed values of Swiss Banking are not yet available. Currently, speculation is necessary, as the press from countries that view Swiss Banking as a competitor to their own banking sector is unlikely to be neutral. However, it is likely that the value of reliability has been severely damaged. The invocation of emergency laws is not what the outside world expects from Switzerland. Reports of a toxic culture and bonus payments at Credit Suisse during a time of massive losses will damage a perception of solid banking with prudence. Nevertheless, this is pure speculation at this stage.
Learnings from Lesson 4
The state and other systemic actors need to scrutinize their roles and procedures, which should be carried out by independent bodies comprising experts from universities and the finance industry who are no longer active. It is important to conduct the analysis transparently and communicate the findings to the public. The banking sector’s rhetoric, such as the justification for high payments and bonus systems to attract talent and inspire high performance, needs to be critically exposed. Another case of “keeping profits private and making losses public” would be unacceptable to the public.
For the company that acquired Credit Suisse, UBS, it is crucial to understand the values of their deeply entrenched stakeholders, such as wealthy customers in Asia and long-term investors like the Norwegian State Fund. This understanding will allow them to adjust appropriately, through effective communication and, more importantly, by removing some managers and ensuring their incentive system does not lead to the same issues as at Credit Suisse.
Literature
Freitag, M., & Bauer, P. C. (2013). Testing for measurement equivalence in surveys: Dimensions of social trust across cultural contexts. Public opinion quarterly, 77(S1), 24–44.
Kramer, R. M., & Lewicki, R. J. (2010). Repairing and enhancing trust: Approaches to reducing organizational trust deficits. The Academy of Management Annals, 4(1), 245–277.
Pirson, Michael and Malhotra, Deepak K., Unconventional Insights for Managing Stakeholder Trust (January 1, 2008). Harvard Business School NOM Working Paper №08–057, Available at SSRN: https://ssrn.com/abstract=1088111 or http://dx.doi.org/10.2139/ssrn.1088111
Haidt, J. (2003). The moral emotions. In R. J. Davidson, K. R. Scherer, & H. H. Goldsmith (Eds.), Handbook of affective sciences (pp. 852–870). Oxford University Press.
