Long-simmering troubles at Credit Suisse exploded into a full-blown crisis on March 15 as the bank ’s shares and bonds plunged and some of the world’s biggest banks raced to protect their finances from collapse.
Credit Suisse shares fell nearly 31% to a record low, and the price of its benchmark bond fell to levels that signaled deep financial stress for the Swiss lender, a rare occurrence at a major bank since the global financial crisis of 2008.
After the crisis rocked global financial markets, Swiss authorities sought to stem the damage, pledging to provide emergency financing to Credit Suisse if needed.
The financial world is anxiously awaiting the next developments at the world's eighth largest bank.
“Systemically important”
Credit Suisse is a global organization with approximately 530 billion Swiss francs ($575 billion) in assets on its balance sheet at the end of 2022. The bank operates in investment, asset management and a number of other businesses with more than 50,000 employees across all continents.
With such a large scale, the serious consequences of this bank's collapse are beyond dispute.
Credit Suisse will borrow $54 billion from the Swiss National Bank to reassure investors. Photo: ing.com
Silicon Valley Bank (SVB) and Signature are just two small regional banks, but their bankruptcies have shaken the confidence of investors around the world.
Meanwhile, Credit Suisse is one of the largest lenders in Europe, with global connections through numerous subsidiaries outside Switzerland, including in the US. Therefore, Credit Suisse's problem is not just a Swiss problem, but a global problem.
Credit Suisse has been the sickest member of the European banking industry in recent years. A series of missteps over the years have damaged its reputation, causing investors and customers to lose confidence.
About 123 billion Swiss francs ($133 billion) were withdrawn from Credit Suisse in 2022, mostly in the fourth quarter. The bank also reported an annual net loss of nearly 7.3 billion Swiss francs ($7.9 billion) that year, its biggest since the 2008 global financial crisis.
Even with financial support from the Swiss government, there are still many risks surrounding Credit Suisse, making investors worried.
“I think it would be naive to think that the crisis would be contained by a few regional banks, because there are clearly still shocks that are reverberating through the banking system. This suggests that it has the potential to spread to very large banks,” predicted Arthur Wilmarth, a professor at George Washington Law School.
“The last straw”
The Credit Suisse affair has many asking: How does the failure of SVB, a $212 billion regional bank with a concentrated deposit base, affect Credit Suisse and the global banking system, when the two banks seem to have little in common?
Credit Suisse shares fell nominally after the bank admitted to “significant weaknesses” in its 2021 and 2022 financial statements on March 14, followed by the Saudi Arabian National Bank’s announcement on March 15 that it would not raise additional capital in Credit Suisse and would maintain its stake in the bank below 10%.
However, in reality, Credit Suisse is facing problems that have been simmering for years, and the bankruptcy of SVB or Signature just happened to happen at the right time, making these problems worse than ever.
SVB and Signature are just two small regional banks, but their bankruptcy still shook the confidence of global investors. Photo: cityamcom
Although SVB and Credit Suisse have different problems, both rely on trust to stay afloat, like many other banks.
When confidence in a few banks is shaken, investors will frantically search for the next potential victim, pushing down the bank’s stock across the board. That’s exactly what happened to Credit Suisse after SVB went bust.
SVB's collapse didn't drag Credit Suisse down, but it did bring closer scrutiny to the Swiss bank, and spooked many investors, leading to a sell-off in the bank's shares.
“The problems facing Credit Suisse have investors asking whether this is the start of a global crisis or just another isolated case,” said Andrew Kenningham, chief European economist at Capital Economics.
“This is the third ‘unprecedented’ event in as many months, following the UK gold market crisis in September 2022 and the collapse of US regional banks last week, so only a fool would assume there won’t be another one,” Mr Kenningham said.
Crowd psychology is a powerful force in the ever-changing financial world. Now it is the task of regulators to prevent the crisis of confidence from becoming a full-blown global financial crisis .
Nguyen Tuyet (According to Barron's, CNN, India Times)
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