Fears of a banking crisis resurfaced after Credit Suisse said it would borrow up to 50 billion Swiss francs (£45 billion) from the Swiss central bank to shore up its finances.
China’s Hang Seng index fell 2 percent and Japan’s Nikkei 225 fell almost 1 percent after Credit Suisse announced a mammoth loan to boost liquidity and reassure investors, a day after the bank’s share price tumbled.
Shares in Credit Suisse lost more than a quarter of their value at one stage on Wednesday, hitting record lows after the bank’s largest shareholder, the National Bank of Saudi Arabia, said it would not invest more money in the lender. It comes after the Swiss bank said it had found a “weakness” in its financial reporting.
Credit Suisse received a £45bn bailout from the Swiss central bank
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Concerns about contagion in the sector grew, with stock markets falling in the UK, Europe and the US as Credit Suisse followed the collapse of America’s Silicon Valley bank.
London’s FTSE 100 closed down 3.8 percent on Wednesday – its worst one-day performance since the start of the Covid-19 pandemic.
Shares in Credit Suisse jumped more than 30 percent in open trading in Zurich on Thursday after the cash injection, but concerns about the global financial picture remained.
The Bank of England was last night in emergency talks with its global central banking counterparts as the crisis deepened, and was reportedly in contact with Credit Suisse and the Swiss National Bank over emergency loans.
But markets were steady on Thursday on hopes that Credit Suisse’s lifeline would stem the spread.
What’s going on at Credit Suisse?
On Tuesday, Credit Suisse sought help from the Swiss National Bank after discovering a “material weakness” in its financial reporting.
The bank’s main shareholder, the National Bank of Saudi Arabia (SNB), responded to the announcement by saying it would not offer new financing to the bank due to rules limiting its stake in the business. As a result, shares in the Swiss lender plunged more than 30 percent at one point on Wednesday, hitting a record low of around 1.56 Swiss francs (£1.40) per share.
SNB chairman Ammar Al Hudayri said Credit Suisse was a “very strong bank” and would not need more cash after raising 4 billion Swiss francs (3.59 billion pounds) last autumn to fund a major restructuring plan.
Panic around the bank Silicon Valley Bank, the 16th largest US bank, failed last week.
How concerned should we be?
Economist Nouriel Roubini, who predicted the collapse of Lehman Brothers in 2008 after the “bold” announcement by the Central Bank would lead to a global financial crisis, warned that the world could be on the verge of another meltdown.
According to Sir John Give, former deputy governor of the Bank of England, while Credit Suisse and Lehman Brothers have similarities in their importance to the financial sector, there is one big difference.
“Credit Suisse is like Lehman Brothers in scale, complexity and importance, but there’s a big difference when you remember that the Americans didn’t bail out Lehman Brothers,” Sir John told BBC Radio 4.
The collapse of Lehman Brothers in 2008 had a profound effect on many structured investors
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“It scared the markets in general because they didn’t get behind it. What we saw overnight was that the Swiss bank said it would prevent a disorderly collapse. I don’t know what the future holds for Credit Suisse, but they are still standing and the Swiss central bank seems to be making sure it stays around long enough to rebuild its future affairs.”
Sir John said the big difference between the current problems of high interest rates and 2008 was that central banks stepped in to ensure a disorderly collapse.
“If you go back a couple of months, the first kind of problem in the financial markets caused by high interest rates was in the UK with our pension funds,” Sir John said.
“If you remember, our central bank stepped in and gave money so it wouldn’t have repercussions elsewhere, so the message is clear that central banks are behind banks that are in trouble.
Why is Credit Suisse at risk?
Over the past three years, Credit Suisse has been caught with corporate espionage after admitting it hired professional spies to spy on outgoing executives and defrauded investors as part of the Mozambique “tuna bond” loan scandal. This resulted in a fine of over £350m. It has also been linked to the 2021 collapse of lender Greensill Capital and US hedge fund Archegos Capital.
The bank is drawing up a major restructuring plan aimed at stemming large losses, which are expected to reach 7.3 billion Swiss francs (£6.6 billion) by 2022, and revitalizing operations amid a string of scandals over alleged misconduct and sanctions relief over the past decade. , money laundering and tax evasion.
How big is Credit Suisse?
The Swiss bank, considered “too big to fail” by analysts, primarily serves wealthy clients and businesses, not everyday savers. It has been seizing money from the bank for months, leading to more than 111 billion Swiss francs (£99.7 billion) in outflows at the end of last year. It is not clear whether the pace of customer withdrawals has accelerated as a result of the drop in share prices on Wednesday.
Asian stock markets fell on Thursday after Wall Street fell, as a fall in Credit Suisse shares reignited worries about a potential banking crisis.
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As Europe’s 17th largest lender by assets, it is much larger than Silicon Valley Bank and is considered systemically important to the global financial system.
The Bank of England is closely monitoring developments in the financial sector and issued a statement reassuring the UK banking system that it is not at risk and remains “safe, sound and well capitalised”.
