Credit Suisse, the 166-year-old institution once a symbol of Swiss pride, is fighting for its life after investors feared the bank would run out of cash, dumped shares and deposited insuring its debt against a skyrocketing default.
Following the close of trading in Europe, Switzerland’s central bank, the Swiss National Bank, said it would step in and provide assistance to Credit Suisse “if necessary”.
Early Thursday local time, Credit Suisse said it would borrow up to 50 billion Swiss francs, or about $54 billion, from the Swiss National Bank to avoid concerns about its financial health. The bank also said it would seek to buy back up to 3 billion Swiss francs in debt.
The immediate catalyst for the dangerous drop in bank shares on Wednesday was a comment by Ammar al-Khudairy, the president of the National Bank of Saudi Arabia, the bank’s largest shareholder. In a television interview, al-Khudairy said the state-owned bank would not put more money into Credit Suisse. He then clarified that his bank would not exceed the 9.9% it already owns because of regulatory issues.
That didn’t stop investors from rushing to dump Credit Suisse stock.
The knee-jerk reaction is further proof of how panicked investors are about the stability of the global financial system following the government collapse. Silicon Valley Bank last week. The bank’s rapid collapse awakened investors and depositors to potential risks that could threaten other banks, both in the US and globally, and prompted a sell-off. large-scale divestment of bank stocks and financial markets.
But the troubles at Credit Suisse — whose headquarters are in Zurich more than 5,800 miles from Silicon Valley Bank in California — are unique and largely caused by the bank itself. That didn’t help either, with the Swiss bank saying on Tuesday it had identified “significant weaknesses” related to its financial statements.
Shares of Credit Suisse fell 24% on Wednesday on the SIX Swiss Exchange, hitting a record low, and its bond price also plummeted. The cost of insurance policies in the event of a bank default has skyrocketed to the highest level on record.
Unlike Silicon Valley Bank, Credit Suisse is considered a globally systemically important financial institution, with $569 billion in assets at year-end and much more stringent capital requirements much. Johann Scholtz, a research analyst at Morningstar, said there was no sign of a hole in the bank’s balance sheet and it had tens of billions of dollars in cash stored at central banks across the country. world it can use.
But the cost to fund its operations has risen dramatically in recent weeks.
Banks often borrow from each other in the so-called overnight lending market. The cost of that financing is influenced in part by the price of an instrument known as a credit default swap – essentially, a form of insurance that one party buys to protect against possibility that another party will default. The higher the default risk, the higher the price of the CDS and the higher the cost of financing.
Given Credit Suisse’s difficulties, the risk of default forced banks and other institutions doing business with Credit Suisse to purchase more swaps to offset the increased risk. As the price of Credit Suisse swaps rose throughout Wednesday’s trading day, the likelihood that the bank would have to pay more in the overnight market to fund itself also increased.
“We’ve crossed the line that they can’t do anything about it,” Scholtz said before the Swiss authorities issued a statement.
Shortly after the European markets closed on Wednesday, the Swiss central bank and Finma, the country’s financial regulator, issued a joint statement Credit Suisse financial health certificate.
The two companies said they “meet the higher capital and liquidity requirements applicable to system-critical banks” and are not at direct risk from the banking turmoil in the United States. However, they note that Credit Suisse’s share and debt prices have fallen – and the Swiss National Bank will back the bank if needed.
In a statement announcing that it will borrow from the central bank, Ulrich Körner, chief executive officer of Credit Suisse, said: “These measures represent decisive action to strengthen Credit Suisse as we continue to continuously transform strategies to deliver value to customers and other stakeholders. .”
Credit Suisse has been battered by years of mistakes and controversy that cost two executives within three years. These include the massive trading losses tied to the collapse of investment firm Archegos and lender Greensill Capital. They also cover a wide range of scandals, including related to money laundering and Follow up with former employees.
The company has embarked on a extensive turnaround planincluding thousands of layoffs and withdrawals from the Wall Street investment bank, ending a decades-long dream of competing with American financial giants like JPMorgan Chase and Goldman Sachs.
But investors have questioned whether continued losses and customer departures – the company lost about $147 billion in customer deposits in the last three months of 2022 – jeopardize the effort. that force or not.
The company’s shares were battered on Tuesday upon disclosure of problems in financial reporting controls. That finding came after queries by the Securities and Exchange Commission, which forced the company to delay the release of its annual report. Credit Suisse says it is addressing those weaknesses and it stands firm on its financial statements.
New concerns about Credit Suisse weigh on global banks, as investors worry about their exposure to the Swiss company. Shares of European lenders like BNP Paribas and France’s Société Générale fell double digits, while their US counterparts, including JPMorgan and Citigroup, also fell.
Causing panic on Wednesday were comments by Mr al-Khudairy, of the National Bank of Saudi Arabia, that his institution would not invest further in the Swiss bank for regulatory reasons.
Asked on Bloomberg TV “If the National Bank of Saudi Arabia is to finance additional turnaround efforts, the answer is absolutely no, for many reasons beyond the simplest one, which is that,” said al-Khudairy. rules and regulations.”
If the National Bank of Saudi Arabia increases its stake above 10%, it will be subject to additional Swiss regulations that al-Khudairy said he is not interested in following.
Mr. al-Khudairy added that he satisfied with Credit Suisse’s turnaround plan and he believes the company will not need more capital, according to Reuters.
Joe Rennison contribution report.
