by Fears of another 2008-style banking crisis resurfaced this week after Credit Suisse secured a €45 billion emergency loan from the Swiss central bank.
Equity markets were nervous amid concerns that single defaults could spread to the global banking system, reviving bad memories of the financial crisis that plunged many western economies into recession in 2008/09.
The news comes after last week’s collapse of the Silicon Valley Bank, the second-biggest banking meltdown in US history.
Shares in the San Francisco-based First Republic tumbled on Thursday as customers started withdrawing their money amid fears it might be next, but shares rallied as reports of the bailout emerged.
A joint statement by the US Treasury said 11 banks have agreed to pump billions into the lender to stabilize it.
The Bank of England is said to be in talks with its global counterparts over the crisis and has reportedly contacted both Credit Suisse and the Swiss National Bank about the emergency loan.
But markets stabilized on Thursday night on hopes that lifelines will limit any “contagion”.
What’s happening at Credit Suisse?
The lender has struggled for many months, but this week it sought help from the Swiss government after announcing it had identified a “material weakness” in its financial situation.
Its main shareholder, the Saudi National Bank (SNB), said it could not provide new funds because of a regulatory cap; News of that limit sent shares of the Swiss lender down more than 30 percent to a record low of about 1.56 Swiss francs (£1.40) per share on Wednesday.
How concerned should we be?
Economist Nouriel Roubini, who predicted the collapse of Lehman Brothers in 2008 that would lead to the global financial crisis, warned the world of another systemic crisis.
But former Bank of England deputy governor Sir John Gieve said the support behind Credit Suisse was a key difference from the Lehman Brothers case.
“Credit Suisse is like Lehman Brothers in terms of size, complexity and importance, but there’s a big difference when you consider that the Americans didn’t save Lehman Brothers,” Sir John said.
“That spooked markets overall because they weren’t behind it. What we saw overnight is the Swiss bank saying they will not let this become a disorderly collapse. I don’t know what the future holds for Credit Suisse, but for now it’s still there and it looks like the Swiss central bank will secure its position long enough to rearrange its affairs for the future.”
Sir John added that the big difference between the current high interest rate woes and 2008 is that central banks are stepping in to ensure there is no disorderly collapse.
“If you go back a couple of months, the first problem the financial market had with higher interest rates was here in the UK with our pension funds,” Sir John said.
“If you remember, our central bank stepped in and provided the money to make sure it didn’t have an impact elsewhere. So the message is absolutely clear that central banks stand behind these banks that get into trouble.”
Why is Credit Suisse at risk?
For the past three years, Credit Suisse has been embroiled in economic espionage, after hiring professional spies to track down outgoing executives and admitting to defrauding investors in the Mozambique “tuna bond” loan scandal. That resulted in a fine of more than £350million. She was also implicated in the 2021 collapse of lender Greensill Capital and US hedge fund Archegos Capital.
The bank is in the midst of a sweeping restructuring plan aimed at stemming huge losses, which soared to 7.3 billion Swiss francs in 2022, and reviving operations hampered by several scandals over the past decade involving alleged wrongdoing, breaking sanctions, money laundering and taxes went evasive.
How big is Credit Suisse?
The Swiss bank, widely considered “too big to fail” by pundits, primarily serves affluent customers and businesses and less everyday savers. It has been withdrawing money from the bank for months, leading to outflows of more than 111 billion Swiss francs at the end of last year. On Wednesday it was not immediately clear whether customer deductions had gained momentum as a result of the fall in prices.
As Europe’s 17th largest lender by assets, it is far larger than Silicon Valley Bank and is considered systemically important to the global financial system.
The Bank of England is reportedly monitoring developments in the financial sector very closely and has issued a statement assuring that the UK banking system is not at risk and “remains safe, sound and well capitalised”.
