Credit Suisse, the 166-year-old institution that was once an emblem of Swiss pride, is fighting for its life after investors, fearing that the bank would run out of money, dumped its stock and sent the price of insuring its debt against a default skyrocketing.
After the close of trading in Europe, Switzerland’s central bank, the Swiss National Bank, said it would step in and provide support to Credit Suisse “if necessary.”
Early Thursday local time, Credit Suisse said it would borrow up to 50 billion Swiss francs (about $54 billion) from the Swiss National Bank to ward off concerns about its financial health. The bank also said it would seek to buy back debt of up to 3 billion Swiss francs.
The immediate catalyst for a perilous drop in the bank’s stock Wednesday was a comment by Ammar Al Khudairy, the chair of the Saudi National Bank, the bank’s largest shareholder. In a televised interview, Al Khudairy said that the state-owned bank would not put more money into Credit Suisse. He later clarified that his bank would not go above the 9.9% it already owned because of regulatory issues.
That did not stop investors from abandoning Credit Suisse shares in a hurry.
The knee-jerk reaction is further evidence of just how panicked investors are about the stability of the global financial system after the collapse of Silicon Valley Bank last week. The bank’s rapid demise woke up investors and depositors to potential risks that could threaten other banks, both in the United States and globally, and has prompted a broad-based sell-off in bank stocks and financial markets.
But the troubles at Credit Suisse — whose colonnaded headquarters in Zurich are more than 5,800 miles from Silicon Valley Bank’s base in California — are separate and largely of its own making. It did not help that on Tuesday, the Swiss bank said it had identified “material weaknesses” related to its financial reporting.
Shares in Credit Suisse tumbled 24% on Wednesday on the SIX Swiss Exchange, hitting a record low, and the price of its bonds dropped sharply as well. The cost of financial contracts that insure against a default by the bank spiked to the highest level on record.
Unlike Silicon Valley Bank, Credit Suisse is considered a global systemically important financial institution, with $569 billion in assets as of year’s end and vastly stricter capital requirements. There is no sign of a gaping hole in the bank’s balance sheet and it has tens of billions of dollars in cash stored at central banks across the world that it can draw upon, said Johann Scholtz, a research analyst at Morningstar.
But the costs to fund its operations have jumped significantly in recent weeks.
Banks often borrow from each other in what are known as overnight lending markets. The cost of that funding is partially influenced by the price of an instrument known as a credit default swap — essentially, a form of insurance that one party buys to protect against the possibility that another party will default. The higher the risk of default, the higher the price of the swap, and the higher the cost of funding.
Given Credit Suisse’s struggles, the danger that it could default drove banks and others that do business with Credit Suisse to buy more swaps to cover their increased risk. As the price of Credit Suisse’s swaps rose throughout the trading day Wednesday, the likelihood that the bank would have to pay a lot more in the overnight market to fund itself also rose.
“We’ve gone past the point where they can do nothing,” Scholtz said before the Swiss authorities issued their statement.
Shortly after European markets closed on Wednesday, Switzerland’s central bank and Finma, the country’s financial regulator, issued a joint statement certifying Credit Suisse’s financial health.
The firm “meets the higher capital and liquidity requirements applicable to systemically important banks” and was not directly at risk from the banking turmoil in the United States, the two said. Still, they noted that Credit Suisse’s stock and debt prices had fallen — and that the Swiss National Bank would backstop the bank if needed.
In a statement announcing that it would borrow from the central bank, Ulrich Körner, the chief executive of Credit Suisse, said: “These measures demonstrate decisive action to strengthen Credit Suisse as we continue our strategic transformation to deliver value to our clients and other stakeholders.”
Credit Suisse has been battered by years of mistakes and controversies that have cost it two chief executives over three years. These include huge trading losses tied to the implosions of the investment firm Archegos and the lender Greensill Capital. They also include a litany of scandals, including involvement in money laundering and spying on former employees.
The firm has embarked on a sweeping turnaround plan, which includes thousands of layoffs and spinning out its Wall Street investment bank, ending a decadeslong dream of competing against American financial giants like JPMorgan Chase and Goldman Sachs.
But investors have questioned whether continuing losses and client departures — the firm lost about $147 billion worth of customer deposits in the last three months of 2022 — have endangered that effort.
The firm’s shares had already been battered on Tuesday by its disclosure about problems in its financial reporting controls. That discovery came after queries by the Securities and Exchange Commission, which forced the company to delay publication of its annual report. Credit Suisse said that it was addressing those weaknesses and that it stood by its financial statements.
The renewed concerns about Credit Suisse weighed heavily on global banks, as investors worried about their exposure to the Swiss firm. Shares of European lenders like BNP Paribas and Société Générale of France fell by double digits, while American counterparts including JPMorgan and Citigroup were also down.
Setting off the panic on Wednesday were the comments by Al Khudairy, of Saudi National Bank, that his institution would not invest further in the Swiss bank for regulatory reasons.
Asked on Bloomberg Television if Saudi National Bank would help finance additional turnaround efforts, Al Khudairy said, “The answer is absolutely not, for many reasons outside the simplest reason, which is regulatory and statutory.”
If Saudi National Bank were to raise its stake above 10%, it would mean additional Swiss regulations that Al Khudairy said he was not interested in becoming subject to.
Al Khudairy added that he was satisfied with Credit Suisse’s turnaround plan and that he believed the firm would not need additional capital, according to Reuters.