After its shares dropped, dragging down other major European lenders in the wake of bank failures in the United States, the Swiss bank Credit Suisse announced Thursday that it will move to shore up its finances by borrowing up to $54 billion from the central bank. This comes after its shares dropped, which dragged down other major European lenders.
Credit Suisse has announced that they will take advantage of an option to borrow up to 50 billion francs ($53.7 billion) from the central bank.
According to a statement released by the financial institution, “This additional liquidity would assist Credit Suisse’s core operations and clients while Credit Suisse takes the required steps to create a simpler and more focused bank structured around the needs of its customers.”
More than a quarter of the value of Credit Suisse shares was wiped away at one point on Wednesday, adding fuel to the fire of new concerns regarding the stability of the world’s financial institutions in the wake of the recent failures of Silicon Valley Bank and Signature Bank in the United States.
After the bank’s largest shareholder, the Saudi National Bank, announced to various news outlets that it would not invest any more money in the Swiss lender, the share price dropped to an all-time low. The Swiss lender had been plagued by problems long before the financial crisis in the United States. By investing approximately 1.5 billion Swiss francs to buy a position just below that threshold, the Saudi bank hopes to circumvent laws that become effective when the bank holds a share that is greater than 10%.
The instability caused an immediate halt in the trading of Credit Suisse shares on the Swiss market and caused the shares of other European banks to plummet, with some falling by more than ten percent.
Axel Lehmann, the chairman of Credit Suisse, defended the institution this past Wednesday during his remarks at a financial conference held in Riyadh, the capital of Saudi Arabia. He said, “We already took the medicine” to decrease risks.
When asked if he would rule out the possibility of receiving assistance from the government in the future, he responded by saying, “That’s not an issue…. We are subject to regulation. Our capital ratios are very healthy, and our balance sheet is in excellent shape. Because of this, it is not even remotely relevant to discuss it right now.
At the end of Wednesday’s business day, the Swiss National Bank made an announcement indicating it was prepared to take action and that it would back Credit Suisse if necessary. In a statement, the bank did not make it clear whether the aid will be provided in the form of cash, loans, or some other kind of assistance. The regulatory authorities expressed their confidence that the bank possessed sufficient funds to fulfil its commitments.
A day earlier, Credit Suisse revealed that managers had found “significant flaws” in the bank’s internal controls on financial reporting as of the end of the previous year. These weaknesses were found as of December 31. This sowed further seeds of uncertainty over the bank’s capacity to weather the storm.
The share price of Credit Suisse fell by over 30%, reaching a low of approximately 1.6 Swiss francs ($1.73) before recovering to finish with a loss of 24% at 1.70 francs ($1.83) at the end of trading on the SIX stock exchange. As it reached its all-time low, the price had dropped by more than 85% from February 2021.
Following the joint announcement made by the Swiss National Bank and the Swiss regulator of financial markets, the shares were also able to make some ground on Wall Street.
The stock has been on a long-term downward trend: in 2007, each share of the bank’s equity traded for more than 86.71 dollars (more than 80 Swiss francs).
Investors were ready to dump bank equities due to their concerns that there may be further problems hiding in plain sight within the banking industry.
At one time, the share price of France’s Societe Generale SA fell by 12%. The decline at BNP Paribas in France was greater than 10%. The value of Germany’s Deutsche Bank dropped 8%, and the value of Britain’s Barclays Bank dropped over 8%. At that brief period, trading was halted in both of France’s banks.
After a day of relatively tranquil trading on Tuesday, the STOXX Banks index, which tracks 21 of the most prominent European lenders, had a decline of 8.4%.
On Wednesday, the performance of stocks on the markets in the United States was mixed, with the Nasdaq composite inching up by 0.1% while the S&P 500 sank 0.7%. After posting larger losses earlier in the day, the Dow Jones Industrial Average finished the day with a loss of 0.9%.
The downward trend among Japanese banks continued, with Resona Holdings, the nation’s No. 5 bank, experiencing a decline of 5% while other big banks experienced declines of more than 3%.
The turmoil started one day before a meeting of the European Central Bank was scheduled to take place. Last week, before the breakdowns in the United States, President Christine Lagarde stated that the bank will “very likely” boost interest rates by a half percentage point to combat inflation. This was before the disasters in the United States. The financial markets were keeping a close eye on the bank to see if it could remain stable amid the recent upheaval.
According to Andrew Kenningham, the senior Europe economist for Capital Economics, Credit Suisse is “a lot bigger risk for the global economy” than the failure of the smallish U.S. banks.
It provides trading services for hedge funds and has many subsidiaries located in countries other than Switzerland.
He stated that the issue with Credit Suisse was one that affected the entire world and not just Switzerland.
On the other hand, he pointed out that the bank’s “issues were widely recognised, so they do not come as a complete shock to either investors or policymakers.”
The problems “once again raise the issue about whether this is the beginning of a global catastrophe or just another ‘idiosyncratic’ case,” Kenningham said in a note. “Idiosyncratic” cases are singular occurrences that cannot be attributed to any larger pattern. It was generally believed that Credit Suisse was the weakest link among the great banks of Europe; nevertheless, Credit Suisse is not the only bank that has battled with low profitability in recent years.
Fady Rachid, as he was leaving a Credit Suisse location in Geneva, remarked that he and his wife are concerned about the well-being of the bank. He had the intention of moving some of his money to UBS.
A physician named Rachid, who was 56 years old at the time, was quoted as saying, “I find it hard to imagine that Credit Suisse is going to be able to get rid of these problems and go through it.”
According to Sascha Steffen, a professor of finance at the Frankfurt School of Finance & Management, investors reacted to “a deeper structural problem” in banking during an extended era of low interest rates and “very, very loose monetary policy.”
Banks “ought to take more risks,” and while doing so, some banks acted more cautiously than others. This was necessary in order for the banks to earn any yield.
This week, European finance ministers stated that their banking system does not have any direct exposure to the bank collapses in the United States.
After the global financial crisis that followed the failure of the American investment bank Lehman Brothers in 2008, Europe strengthened its banking safeguards by transferring supervision of the largest banks to the central bank, according to analysts. This move was made in response to the crisis that ensued.
Although the parent bank of Credit Suisse is not subject to EU oversight, the company does have subsidiaries in a number of European countries that are. Being one of the 30 banks that are considered to be “globally systemically important,” or G-SIBs for short, Credit Suisse is subject to international regulations that mandate it keep financial buffers against potential losses.
The Swiss bank has been making efforts to raise money from investors and roll out a new strategy in order to solve a variety of problems. These problems include failed bets on hedge funds, recurrent shake-ups of its top management, and a spying incident involving Zurich’s competitor UBS.
Credit Suisse stated in its annual report that the amount of customer deposits had decreased by 41%, or by 159.6 billion francs ($172.1 billion), as of the end of the previous year as compared with the beginning of the previous year.