The Deep Fall of Credit Suisse and the Consequences

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The major Swiss bank Credit Suisse is reaching for the lifeline of the Swiss National Bank. It receives the equivalent of 51 billion euros in loans. The financial markets are initially reacting positively, but remain uncertain.

Credit Suisse building in Zurich

Can the major Swiss bank Credit Suisse, which has been reeling for months, trigger a new financial crisis? Since the collapse of the Silicon Valley Bank, these concerns among investors and stockbrokers have increased. Credit Suisse is one of the 30 institutions worldwide that are considered systemically important, too big to fail. A collapse of a bank that is so closely linked to the global financial system would have corresponding consequences for other financial institutions.

In addition, the credit institutions have to buffer the quick turnaround in interest rates by the central banks worldwide, so it depends on how they have prepared for the risk of interest rate changes, i.e. whether they have built up a sufficient buffer of equity capital that they can now fall back on.

Credit Suisse boss Ulrich Köhler has been in office since August 2022

Investors had also been waiting eagerly for the European Central Bank's interest rate decision in the afternoon. Would it actually raise the key interest rate by 50 basis points as actually planned, or would it only dare to take a small step in interest given the situation? On the other hand, a deviation from its previous line could be seen by the markets as a sign of concern for the stability of the banks, they fear Experts like Clemens Fuest, head of the Munich Ifo Institute. This concern is now unfounded, because the monetary authorities stuck to their announcement and raised the key interest rate by a further 50 basis points. 

Credit Suisse “did not do its homework”

“The good news is that Credit Suisse has become smaller,” said Hans-Peter Burghof, Chair of Banking and Financial Services at the University of Hohenheim. Because their total assets have shrunk to a good 500 billion euros, two-fifths of their previous size, which the other large financial institutions also have on average. Credit Suisse has been involved in a number of major scandals in recent years, such as the bankruptcy of the hedge fund Archegos and the bankruptcy of the financier Greensill Capital, with which it had cooperated. As a result, investors had already withdrawn CHF 123 billion last year, and the bank initially counteracted this with a capital increase.

The Saudi National Bank was also involved in this, but it could not add more for regulatory reasons, its President Ammar Al Khudairy said on Wednesday, causing further uncertainty and a 30 percent drop in the bank's share price. After all, the Swiss central bank was initially able to calm the markets with its CHF 50 billion rescue package announced on Wednesday evening.

Once a proud house: Credit Suisse main building on Paradeplatz in Zurich

The peculiarity of the bank is that, unlike many other institutions, it took too long to restructure, says Burghof: “Others like Deutsche Bank or Commerzbank did their homework earlier.” They are less vulnerable now. The supervisory authorities also ensure this. In any case, Federal Finance Minister Christian Lindner (FDP) reassured on German television that the German credit system with private banks, savings banks and cooperative institutions is stable and that care will continue to be taken.

Investor confidence is crucial

< p>Christoph Schalast, banking expert at the Frankfurt School of Finance and Management, is also convinced that there is no threat of a financial or banking crisis in Germany. He also refers to the “long dormant restructuring” of Credit Suisse. The Silicon Valley Bank, which caused unrest at the beginning of the week, is a special case. It had slipped into bankruptcy because it had difficulties with the turnaround in interest rates: it had invested a large part of its customers' deposits in long-dated government bonds that were actually safe. When investors withdrew large amounts of money, she had to sell bonds, which had lost value due to rising interest rates.

From the point of view of experts, it will now be important for further development whether investors regain confidence into the future viability of the major Swiss bank. Its share price initially recovered on Thursday from the severe slump the previous day. But how sustainable that is has not yet been determined. There is always a problem when investors lose confidence in a bank, says banking expert Schalast. “Germany, on the other hand, is well shielded by the three pillars, which many seem to find old-fashioned. In addition, our large institutions have shrunk after the 2008 crisis and are closely supervised by the ECB and the banking supervisory authority (Bafin) and the Bundesbank.” This could now even be an opportunity for banking made in Germany/EU.

The article was updated after the interest rate decision by the ECB.