Following the collapse of the Silicon Valley Bank, difficulties overtook the Swiss Credit Suisse
Following the collapse of the Californian Silicon Valley Bank (SVB) in the United States, panic gripped the global banking circles for the second time in a week: now there are new concerns about the stability of the largest European bank Credit Suisse. The fall in the value of the bank's shares reinforces concerns about the weakness of the banking sector after the collapse of the SVB.
Shares in the Swiss lender fell more than 30% at some point on Wednesday to a record low of around 1.56 Swiss francs (£1.40) a share after its main shareholder, the Saudi Arabian National Bank (SNB) ), ruled out giving him new funding due to rules limiting his share — now 9.9% — at 10%, writes The Guardian.
SNB chairman Ammar Al Hudayri told Reuters that Credit Suisse was «a very strong bank»; and was unlikely to need additional cash after raising CHF4bn (£3.59bn) to fund a major restructuring plan last fall. However, his comments on the funding cut have spooked investors who fear it could limit emergency cash inflows from investors in the Middle East.
This, The Guardian continues, added to the panic over potential weaknesses in the global banking sector, still reeling from the collapse of the SVB, as well as worries about the continued problems of the Swiss lender, which, as the 17th largest lender in Europe by assets, is much larger than SVB and is considered systemically important to the global financial system.
Shares of many other European banks also fell on Wednesday as traders got scared. However, it's important to remember that stock prices reflect investor sentiment, not the actual strength of balance sheets, notes The Guardian.
Market fluctuations can cause customers to panic and withdraw cash from their accounts, creating a deficit in deposits, which is risky for smaller banks that rely more on customer cash. However, larger banks such as Credit Suisse are expected to be in a much better position, thanks in part to government regulations and annual regulatory stress testing introduced in the wake of the financial crisis.
After the chaos of 2008, regulators around the world imposed tighter restrictions – especially for banks that were considered important to the global financial system. Most central banks and national regulators have introduced annual stress testing to test whether banks can withstand severe economic and market shocks while continuing to support their customers.
The worst-case scenario assumes that systemically important banks should have sufficient capital and so-called living wills in place to ensure they can go bankrupt in a relatively orderly manner. However, these «testaments» yet to be tested in a real banking crash, notes The Guardian.
Swiss regulator Finma approved Credit Suisse's emergency winddown plans last year but said some of its plans are «still inadequate».
Credit Suisse's panic arose following the collapse of crypto lender Silvergate last Thursday. SVB on Friday and New York Signature Bank on Sunday. However, Credit Suisse's troubles are also relatively unique and not new, with a string of major financial losses and scandals that have worried investors and caused recent customer churn.
Credit Suisse's clients — primarily wealthy clients and businesses, not ordinary depositors — spent months withdrawing money from the bank, resulting in an outflow of more than CHF 111 billion (£99.7 billion) at the end of last year.
Some investors are also concerned about potential unrealized losses lurking in the investment portfolios of European banks. SVB's troubles intensified after it suffered losses on bonds it was trying to sell as clients withdrew cash.
In an attempt to assuage concerns, Credit Suisse chairman Axel Lehmann said on Wednesday morning that government bailouts were out of the question to the lender, adding: “We have a strong capital adequacy ratio, a strong balance sheet. We have already taken the medicine.”
The bank is in the midst of a major restructuring plan to stem massive losses, which surged to CHF 7.3bn (£6.6bn) in 2022, and to restart operations that have been thwarted by multiple scandals over the past decade related to alleged misconduct, violation of sanctions, money laundering and tax evasion.
In the last three years alone, Credit Suisse has been exposed as a corporate spy after hiring professional spies to track down departing executives; confessed to defrauding investors in the Mozambique tuna bond scandal, resulting in a fine of over £350m; and was involved in the collapse of lender Greensill Capital and US hedge fund Archegos Capital in 2021, writes The Guardian.
The company also came under fire after being published in 2022 by international media outlets including The Guardian. an investigation that revealed that for decades it had served clients involved in torture, drug trafficking, money laundering, corruption and other serious crimes.
The same year, Swiss prosecutors found the bank guilty of facilitating money laundering on behalf of the Bulgarian mafia, although the bank denied its guilt and intends to appeal this decision.
But the problems have not yet disappeared. Earlier this week, the lender acknowledged that there were significant weaknesses in its financial reporting-related internal controls, but assured that management was working on a plan to strengthen risk management systems.