New York () — Credit Suisse, a 167-year-old bank and Switzerland’s second-largest lender, is in serious trouble.
The bank said it would borrow up to 50 billion Swiss francs ($53.7 billion) from the Swiss National Bank, taking advantage of a lifeline late on Wednesday after its shares plunged as much as 30%. It also said it would buy back some of its own debt.
Its difficulties have sparked anxiety in Europe and world markets, and what happens at Credit Suisse could affect the financial system as a whole.
Why is Credit Suisse important?
Credit Suisse is one of the largest financial institutions in the world.
It is classified by Financial Stability Board, an international body that oversees the financial system, as a “global systemically important bank,” along with 30 others, including JPMorgan Chase, Bank of America, and Bank of China.
“Credit Suisse is, in principle, a much bigger concern for the global economy than the regional US banks that were in the line of fire last week,” Andrew Kenningham of Capital Economics said in a note to clients on Wednesday. . “Credit Suisse is much more interconnected globally…it’s not just a Swiss problem, but a global one.”
Why is Credit Suisse in trouble?
Central banks around the world have raised interest rates to try to curb inflation and cool down the global economy.
But that process has left some banks vulnerable.
Fears about weaker lenders flared last week when Silicon Valley Bank collapsed in the biggest US banking collapse since the 2008 financial crisis. That involved other banks facing big problems, including Credit Suisse, It’s been a mishap waiting to happen for decades.
“Credit Suisse’s problems are very different from those that sank SVB a few days ago,” economists at Capital Economics said in an email sent to their clients on Thursday. “But they serve as a reminder that as interest rates rise, vulnerabilities lurk in the financial system.”
The trigger for Wednesday’s drop in Credit Suisse shares was not the rate hike, but comments from its main investor, the Saudi National Bank, that it was unwilling to put up more money after buying a nearby stake. to 10% for US$1.5 billion last year.
What was wrong with Credit Suisse before this crisis?
Credit Suisse has been struggling for years.
It was considered the weakest link in the big European banks, according to Kenningham.
In recent years, the company has been plagued by a series of errors and compliance failures that have cost the company billions and led to several top management reviews. And over the past decade, the Swiss bank has been plagued by fines and penalties related to tax evasion, wrong betting and other matters.
In 2014, Credit Suisse pleaded guilty to federal charges for illegally allowing some US customers to evade their taxes. The bank paid a total of $2.6 billion to the federal government and New York financial regulators as part of the settlement.
The bank’s reputation was damaged by an accounting scandal at Luckin Coffee. Credit Suisse acted as an underwriter when the company went public on the Nasdaq in 2019. The Chinese firm was delisted from the US stock market after it fraudulently inflated its sales.
In 2020, Credit Suisse CEO Tidjane Thiam resigned after two high-profile spy scandals involving senior bank officials.
A year later, the bankruptcy of US hedge fund Archegos Capital cost Credit Suisse $5.5 billion and left the bank in a bad light. An independent external investigation later found that Credit Suisse allowed Archegos Capital to take “greedy” and “potentially catastrophic” risks that culminated in the US hedge fund’s spectacular collapse.
In 2022, the bank was hit by speculation on social media that it was on the brink of collapse, prompting clients to withdraw billions of dollars. This has made profitability nearly impossible for the bank, which has been losing money for years.
And last month, Credit Suisse shares plunged to record lows after it posted its biggest annual loss since the 2008 financial crisis and a report surfaced that regulators were reviewing comments from the chairman of the bank on the health of its finances.
What awaits Credit Suisse?
The Swiss National Bank lifeline could buy the bank time for Credit Suisse to regain confidence and move forward with its restructuring plans, which include the investment banking division into a separate US-based business and concentration in Switzerland, as well as managing the money of wealthy clients.
But Credit Suisse may not be out of the woods yet.
Banking analysts at JPMorgan say the liquidity support offered by the Swiss central bank will not be enough, given “continued market confidence issues” in Credit Suisse’s investment banking plans and the erosion of the bank’s franchise.
“In our view, the status quo is no longer an option as counterparty concerns are beginning to surface, as reflected in weaker credit and equity markets,” they wrote in a research note on Thursday, adding that a takeover — most likely by biggest Swiss rival UBS — was the most likely endgame.
‘s Mark Thompson and Anna Cooban contributed to this report.