Credit Suisse, one of the biggest financial institutions in the world, has borrowed CHF50bn ($53.7bn) from the Swiss National Bank to provide “decisive action to pre-emptively strengthen its liquidity”. It also said it had repurchased billions of dollars of its own debt to manage its liabilities and interest payment expenses.
Following this news, shares in the country’s second-largest lender fell by as much as 30% on Wednesday, causing Asian stocks to also fall sharply. However, the markets recovered after Credit Suisse’s action to reassure investors. Credit Suisse has struggled in recent years following a series of missteps and compliance with the Swiss Bank failure, causing customers to withdraw CHF123bn ($133bn) from the bank last year.
The decision to borrow from the Swiss National Bank was part of the financial institution’s efforts to restore confidence in its operations right after the Swiss Bank failure. The Swiss authorities said in a joint statement with the Swiss financial market regulator, FINMA, that Credit Suisse met the “strict capital and liquidity requirements” imposed on banks of importance to the wider financial system. In addition, Credit Suisse repurchased billions of dollars of its own debt to manage its liabilities and interest payment expenses.
The signals of Swissbank failure
Credit Suisse’s biggest shareholder, the Saudi National Bank, has declined to increase its stake in the bank, following a capital increase last autumn. The chairman of the Saudi National Bank, Ammar Al Khudairy, said that the bank would not increase its stake due to regulatory and statutory reasons, citing that “we’re not inclined to get into a new regulatory regime”.
This may lead to concerns that the financial institution may no longer have enough capital to absorb losses in 2023, especially since its funding costs are becoming prohibitive. To stem client outflows and ease the concern of providers of wholesale funding, some believe that the financial institution needs another rights issue. Alternatively, it may need to break up with the healthy businesses being sold off or separately listed.
The Swissbank failure is a global concern
The problems faced by Credit Suisse are well-known, but its size and multiple subsidiaries outside Switzerland, including in the US, could cause a much bigger potential headache. Thus, financial institution’s problems are not just a Swiss issue but a global one.
Following the news, the cost of buying insurance against the risk of a Credit Suisse default hit a new record high, and this resulted in a fall of other European banking shares, such as BNP Paribas, Societe Generale, Commerzbank, and Deutsche Bank. Two supervisory sources told Reuters that the ECB had contacted banks to question them about their exposures to Credit Suisse.
Is this 2008 all over again?
Concerns regarding Credit Suisse have arisen following the recent collapses of other financial institutions such as Silvergate, SVB, and Signature. While Credit Suisse’s problems are not new and have caused unease among investors and led to the departure of clients, the situation is unique to the bank. Wealthy clients and businesses have been withdrawing funds for months, resulting in significant outflows last year.
It is unclear whether the declining share price has led to a further increase in client withdrawals. Some investors are also concerned about unrealized losses in the investment portfolios of European banks. To reassure investors, Credit Suisse’s chair stated that the bank does not require government assistance and has a strong balance sheet, and the bank has reportedly appealed for public support from Finma and the Swiss National Bank to bolster investor confidence.