Swiss Regulators Offer Financial Lifeline to Credit Suisse

Prior to the regulator’s announcement, Swiss Bank’s share price had fallen 24% to new lows. Bond prices plunged to unprecedented levels, suggesting that investors were pricing in the possibility of banks defaulting. Credit Suisse’s U.S.-listed stock surged within minutes of the announcement, recouping some of those losses in after-hours trading after closing 14% lower.

The Swiss National Bank and Switzerland’s top financial regulator Finma said Credit Suisse “meets the higher capital and liquidity requirements applicable to systemically important banks”. The regulator has not provided details on what kind of liquidity it will offer, but said it is in very close contact with banks.

The Credit Suisse plunge quickly spread to European banks, sparking a furious and volatile move for the safety of sovereign bonds. The trader just reported that buying and selling government bonds has become difficult in the worst episode of market dysfunction since Covid-19 hit the global economy three years ago.

Shares of Societe Generale, France’s two largest international banks SA, BNP Paribas SA, shares slid more than 10% on fears of expanding financial ties with Credit Suisse. Deutsche Bank stock in Germany AG was 9% down.

The decline in Credit Suisse bonds and stocks shows that “investors have decided that this bank needs to be bailed out,” said Joost Beaumont, head of bank research at Dutch bank ABN Amro. “If regulators do not handle the Credit Suisse situation well, it will shock the entire industry,” he said. “Worse still, we have banking problems on both sides of the Atlantic.”

Credit Suisse’s troubles intensify just days after two major US banks failed, as institutions at the heart of business and commerce grapple with the past year’s steep rise in interest rates. There is growing concern that we are struggling with

Credit Suisse has been the problem child of European banks for several years. Repeated scandals and financial losses have hit his 166-year-old bank, a combined Wall Street investment bank and wealth management business serving the world’s elite wealthy individuals.

Lenders have repeatedly tried to cycle management and stabilize their reputation among investors. His $4 billion stake sale in the fall attracted wealthy investors from the Middle East, giving the bank more time to sort things out. But nevertheless, it faces an outflow of customer withdrawals.

The stock’s share price is expected to rise after the chairman of Saudi National Bank, the largest shareholder of Credit Suisse, said in an interview with Bloomberg Television that Credit Suisse was not considering making additional investments citing regulatory rules. A plunge has occurred. Saudi National Bank owns 9.9% of Credit Suisse.

The comment irritated investors’ nerves. Credit Suisse shareholders have been concerned for months about the profitability of Credit Suisse Bank and feared they would have to use them again to raise money. That could be made more difficult if the bank’s largest shareholder says it won’t participate in further fundraising.

Credit Suisse chairman Axel Lehmann said at a conference in Saudi Arabia on Wednesday that the bank’s capital and balance sheet were strong and “we are doing everything in our power” to tackle the problem. He said the prospect of government support was “absolutely not a problem”.

But the bank’s troubles are accumulating like a drumbeat, leaving cautious Credit Suisse investors with little respite. On Tuesday, the bank said it had found material flaws in its financial reports. Although the error did not change the company’s financial results, the failure only heightened concerns about whether the bank could stay out of trouble.

Credit Suisse is the second largest bank in Switzerland after the UBS Group. It is a major player in the international financial markets, with operations in Europe and Asia, as well as a sizeable operation in the United States. By the end of 2022, he will have around $580 billion in assets, more than double the size of Silicon Valley Bank, which collapsed last week.

photograph:

Holly Adams/Bloomberg News

The bank is classified as a “systemically important financial institution” under the international banking regulations created after the collapse of Lehman Brothers. Such designations require banks to hold more capital and maintain a plan to keep their operations in order in case problems arise.

Like Silicon Valley banks, Credit Suisse has suffered massive deposit outflows in recent quarters. Some regional units briefly breached regulatory liquidity coverage ratios last fall. This meant that they didn’t have enough easy-to-sell assets, such as bonds, to safely cover their customers’ withdrawals.

Unlike Silicon Valley banks, Credit Suisse does not have a pile of “held to maturity” assets. But the bank’s own estimates are straining its business model, which it expects to be unprofitable this year, as it seeks to restructure its workforce and sell off non-core assets.

Credit Suisse’s funding costs – the amount it has to pay depositors and debt providers – are skyrocketing, further squeezing the banks’ ability to generate profits.

The problem with Credit Suisse casts a heavy shadow over Switzerland’s financially-oriented economy. Banking sector wealth is about 500% of her 2020 Gross Domestic Product, about five times that of the United States.

Credit Suisse’s US divisions are overseen by the Federal Reserve and other financial regulators. Under the Swiss bank resolution process, financial regulator Finma can take over the failing bank’s global operations, convert debt into equity, and write off securities recorded in regulatory capital. Regulators say their approach avoids complex and nasty jurisdictional disputes between authorities.

The U.S. Treasury Department is monitoring Credit Suisse’s developments and is in contact with its foreign counterparts, a spokesman said.

Officials at the European Central Bank (ECB) contacted lenders under their supervision Wednesday to inquire about their financial exposure to Credit Suisse, according to people familiar with the matter. An ECB spokeswoman declined to comment.

Credit Suisse has been plagued by customers withdrawing deposits and other assets managed on behalf of wealthy customers. Banks said on Tuesday that outflows had slowed but not reversed, he said. David Callahan, head of cash solutions at Lombard Odier, a small rival to Switzerland’s Credit Suisse, said his own customers were nervous. Market nervousness has prompted bank executives to petition ECB officials to postpone Thursday’s planned 0.5% rate hike.