Credit Suisse steps back from the brink
March 16, 2023
Contagion. Systemically important. Too big to fail. Words we associate with the 2008 financial crisis which have come roaring back into fashion over the past week or so.
First, there was the collapse of Silicon Valley Bank in the US. Then came Signature Bank. Amid growing market panic around banks everywhere, a severe and worrying crisis emerged at a much bigger, European lender: Credit Suisse.
Credit Suisse shares closed 24.2% down on Wednesday after a huge sell-off. The scale of the losses reflected market panic around the Swiss lender's future amid a wider sell-off of European banking stocks.
When the Saudi National Bank, Credit Suisse's largest investor, said it would not provide the Swiss bank with further financial assistance, the panic intensified and speculation grew about the bank's capacity to pay its depositors.
The situation has calmed considerably since. The Swiss central bank has offered to help shore up Credit Suisses's liquidity by allowing it to borrow up to $54 billion if necessary. In a joint statement with the Swiss financial regulator on Wednesday evening, it said there were "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 over what could happen next.
The whole episode begs the question: Could Credit Suisse go down? And what would it pull down with it?
Credit Suisse: hardly a new crisis
It is important to note that Credit Suisse's problems are not new. It has been battered by a series of scandals in recent years, the worst being the massive trading loss it incurred as a result of the collapse of Archegos Capital, an asset management company. It also suffered significant losses as a result of the closure of finance outfit Greensill.
Last month, the bank reported its biggest annual loss since the financial crisis, a €7.42 billion ($7.86 billion) loss. It warned it would be unprofitable in 2023, prompting a share sell-off which was already significant before this week's chaos.
Customers have been withdrawing significant amounts for months amid widespread rumors over the bank's well-being. It is in the midst of a radical restructuring process aimed at moving on from the crisis-laden period.
However Florian Heider, an analyst from the Leibniz Institute for Financial Research (SAFE), says that while Credit Suisse has problems, the crisis of the last few days could hit any bank were there to be a similarly panicked run on it.
"Any bank will have a liquidity problem if those that have deposits take the money out 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 turn around the business model they should be fine in the future."
A different, more manageable crisis?
There have been other similarly positive noises. Pascal Donohoe, head of the Eurogroup collective of eurozone finance ministers, said on Thursday that he is confident European banks will be able to handle the current market chaos.
"We should have faith in what we've done. But at the same time, none of us are complacent in the face of the economic environment in which we find ourselves," he told the German newspaper Frankfurter Allgemeine Zeitung.
Nonetheless, the scale of market losses and sudden lack of confidence in banking stocks has led to speculation around how similar the current crisis is to the financial crisis of 15 years ago.
Florian Heider says it is fundametally 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.
"Bank regulation has made significant progress," he said. "It is miles better than it used to be." He emphasized that the current crisis had to be seen in the context of the global economy entering a period of high interest rates after a long spell of low interest rates. "That will always upset financial markets," he said.
On that note, the European Central Bank on Thursday announced it would raise interest rates by half a percentage point, sticking to its stated goal of fighting inflation. There had been speculation that the ECB would not increase rates because of the market turmoil but it has stuck to the plan it has signalled for weeks.
The only thing we have to panic about is panic itself
Obvious risks still lie ahead. Heider says it is vital that there are no more coordinated moves by depositors to talk down a bank's performance and collectively withdraw.
"That's the key thing: co-ordination," he said. "Any bank that has engaged in any kind of business risk to make some money will be in trouble. The key is, how can we prevent this panic or management of banks sending signals that would allow the depositors to coordinate.
That raises a key question regarding the current crisis, when compared to the last — namely whether this is primarily a liquidity crisis or a solvency crisis. A liquidity crisis is whether or not a bank has enough cash on hand to meet withdrawal requests. A solvency crisis runs deeper. That is when the loans a bank has issued look like they won't be repaid.
The financial crisis was undoubtedly the latter, whereas this one so far very much bears the hallmarks of a liquidity crisis. That's much easier to manage, analysts say.
"Fortunately, there is a playbook for tackling a liquidity crisis," Ajay Rajadhyaksha from Barclays told news agency Bloomberg. "The central bank has to step in, decisively, to fulfil its role as the lender of last resort. In this case, that is the Swiss National Bank."
With that having already happened, the hope, albeit a very cautious one, is that this banking crisis has already reached its peak.
Edited by: Uwe Hessler