Credit Suisse pulls back from brink
Contagion. Systemically important. Too big to fail. Words we associate with the 2008 financial crisis that have come back into vogue in the last week.
First, there was the collapse of the Silicon Valley Bank in the United States. Then came Signature Bank. Amidst the growing market panic surrounding banks everywhere, a serious and worrying crisis has arisen at a much larger European lender: Credit Suisse.
Credit Suisse shares closed down 24.2% on Wednesday after a huge sell-off. The scale of the losses reflected market panic over the Swiss lender’s future amid a broader sell-off in European bank shares.
When the Saudi National Bank, Credit Suisse’s biggest investor, said it would no longer provide financial assistance to the Swiss bank, panic intensified and speculation grew about the bank’s ability to pay its account holders.
The situation has calmed down considerably since then. The Swiss central bank has offered to help bolster Credit Suisses’ liquidity, allowing it to borrow up to $54 billion if needed. In a joint statement with the Swiss financial regulator late on Wednesday, it said “there are no indications of a direct risk of contagion for Swiss institutions due to the current turmoil in the US banking market”.
On Thursday, financial markets remain volatile amid widespread uncertainty about what might happen next.
The whole episode begs the question: could Credit Suisse crash? And what would he pull down with that?
Credit Suisse: hardly a new crisis
It’s important to note that Credit Suisse’s problems are not new. It has been hit by a series of scandals in recent years, the worst being the huge business loss it suffered as a result of the collapse of Archegos Capital, an asset management firm. It also suffered significant losses as a result of the closure of the financial company Greensill.
Last month, the bank posted its biggest annual loss since the financial crisis, a loss of €7.42 billion ($7.86 billion). He warned it would be unprofitable in 2023, leading to a stock sell-off that was already significant before this week’s chaos.
Customers have been withdrawing significant amounts for months amid widespread rumors about the bank’s well-being. It is in the midst of a radical restructuring process with the aim of getting out of the crisis-laden period.
However, Florian Heider, an analyst at the Leibniz Institute for Financial Research (SAFE), says that while Credit Suisse has problems, the crisis of recent days could hit any bank if there were a similar panic run.
“Any bank will have a liquidity problem if those who have deposits withdraw cash all at once,” he told DW. “It has lost 70% of its share price in the last year and so, yes, it is a bank that is in trouble. But it is also a bank that seems to be doing the right things to get out of it. If they can change the model of business, they should be fine in the future.”
A different, more manageable crisis?
There were other equally positive noises. Pascal Donohoe, head of the Eurogroup’s collective of eurozone finance ministers, said on Thursday that he is confident that European banks will be able to handle the current market chaos.
“We must have faith in what we have done. But at the same time, none of us are complacent in the face of the economic environment we find ourselves in,” he told the German newspaper. Frankfurter Allgemeine Zeitung.
However, the scale of the market’s losses and the sudden lack of confidence in bank actions has led to speculation about the similarity of the current crisis to the financial crisis of 15 years ago.
Florian Heider says it is fundamentally different because the basic problems this time are related to interest rates, unlike last time. A more significant difference in his view is improved regulation.
“Banking regulation has made significant progress,” he said. “It’s much better than it used to be.” He emphasized that the current crisis must be seen in the context of the global economy entering a period of high interest rates after a long period of low interest rates. “It will always upset financial markets,” he said.
On the same note, the European Central Bank announced on Thursday that it would raise interest rates by half a percentage point, in keeping with its stated aim of fighting inflation. There was speculation that the ECB would not raise rates because of the market turmoil, but it stuck to the plan it signaled for weeks.
The only thing we have to panic about is panic itself
Obvious risks are yet to come. Heider says it is vital that there are no more coordinated moves by depositors to underperform a bank and collectively withdraw.
“That’s the key: coordination,” he said. “Any bank that has engaged in any kind of commercial risk to make some money is going to be in trouble. The key is how we can avoid this panic or bank management sending signals that would allow depositors to coordinate.
This raises a fundamental question regarding the current crisis as compared to the previous one – namely, whether this is primarily a liquidity crisis or a solvency crisis. A liquidity crunch is whether or not a bank has enough cash on hand to meet withdrawal requests. A solvency crisis runs deeper. It’s when the loans a bank has issued look like they won’t be repaid.
Source: DW
Lori Barajas is an accomplished journalist, known for her insightful and thought-provoking writing on economy. She currently works as a writer at 247 news reel. With a passion for understanding the economy, Lori’s writing delves deep into the financial issues that matter most, providing readers with a unique perspective on current events.