The Credit Suisse lifeline and its impact

The Credit Suisse-led selloff in bank shares raised the prospect of a spillover of the banking crisis that started in America to the other side of the Atlantic.

The Credit Suisse building in Bern’s Bundesplatz in Switzerland. (Express Photo)

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At the Bundesplatz, the biggest square in Bern’s fabled old town, right opposite two important national institutions – the Swiss Federal Parliament and the Swiss central bank edifice – is the Credit Suisse building, with just a plaza laced with fountains and public chairs separating the Swiss banking regulator and the country’s second-largest bank. So, it was not surprising that the Swiss central bank stepped in with a $54 billion lifeline for Credit Suisse early Thursday after a continuing slide in the lender’s shares triggered growing concerns about a developing bank deposit crisis.

The central bank support

In its statement early Thursday, Credit Suisse said it is “exercising its option to borrow” from the Swiss National Bank up to 50 billion Swiss francs (around $54 billion). Why this is crucial because an enveloping crisis at the Swiss bank’s problems has the potential to shift the focus for investors and regulators from the US, where the crisis of at least three mid-sized banks has led to fears of contagion, to Europe now.

The Credit Suisse-led selloff in bank shares raised the prospect of a spillover of the banking crisis that started in America to the other side of the Atlantic.

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Explained | Credit Suisse shares sink: What is happening

Share slide

On Wednesday, shares of Credit Suisse plunged to a fresh all-time low for the second consecutive day after a top investor in the embattled lender said it would not be in a position to provide more cash due to regulatory red lines.

The Swiss bank’s largest investor, the Saudi National Bank, said yesterday it could not provide the Swiss bank with any further financial assistance, according to a Reuters report. “We cannot because we would go above 10%. It’s a regulatory issue,” Saudi National Bank Chairman Ammar Al Khudairy told Reuters Wednesday.

The Saudi National Bank had taken a 9.9 per cent stake in Credit Suisse last year as part of the Swiss lender’s $4.2 billion capital raise to fund a strategic overhaul amid a sagging investment banking performance and a bevvy of risk and compliance failures.

Support pledge

After European markets closed Wednesday, Swiss regulators said that Credit Suisse “currently meets capital and liquidity requirements” and that the Swiss National Bank will provide additional liquidity, if needed. This came at a time when there was a concern of a spiralling banking sector crisis, with a broader sell-off among European lenders, including France’s Societe Generale, Spain’s Banco de Sabadell and Germany’s Commerzbank Wednesday, according to Bloomberg data.

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Some Italian banks Wednesday were also subject to automatic trading stoppages, including UniCredit, FinecoBank and Monte dei Paschi, it was reported.

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In a joint statement late on Wednesday, the Swiss financial regulator FINMA and the country’s central bank tried to ease investor fears around Credit Suisse, saying it “meets the capital and liquidity requirements imposed on systemically important banks and that the bank could access liquidity from the central bank if needed.

Credit Suisse said it “welcomed” the statement of support from the Swiss National Bank and FINMA. The lifeline is extremely significant as Credit Suisse would be the first major global bank to be given such a credit line since the 2008 financial crisis – even though western central banks have extended liquidity support to banks during times of market stress since the crisis, including during the pandemic-triggered stock rout.

Troubled history

Founded in 1856, Credit Suisse has had a troubled history, having braced multiple scandals in recent years over different issues, including money laundering charges. It reported having lost money in the last two years and had issued a warning of staying in the red at least till 2024. The new crisis could mean a longer road towards profitability, or even solvency, for the embattled bank.

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With the crisis, traders are now expecting that the US Federal Reserve, which just last fortnight was expected to step up its interest-rate-hike plan in the face of stubborn inflation, may be forced to hit pause and even contemplate a cut in rates. Also, the Credit Suisse rout had triggered concerns about the health of Europe’s banking sector and a contagion effect.

Reuters, however, reported Ralph Hammers, CEO of Credit Suisse rival UBS (Switzerland’s largest bank) as saying the market turmoil has seen incoming deposits while Deutsche Bank CEO Christian Sewing maintained that the German lender has also seen fresh funds come its way.

India impact

Established in India in 1997, Credit Suisse has offices in Mumbai, Pune and Gurgaon, with vendor offices in Bangalore, Hyderabad and Kolkata. India, according to the bank, represents “the second-largest footprint for Credit Suisse outside of Switzerland” and that it is “an important recruitment centre” for the bank globally. A lifeline to the bank is, therefore, good news from that perspective, at least in the short term.

Also, there could be a cascading impact of global regulatory action, such as a pause in the ratings hikes, that would have a bearing on the Reserve Bank of India’s stance on market rates and outlook for the markets. But a deepening banking crisis in the US or the EU could mean fresh troubles for lenders in other geographies, including India. A banking crisis could, in turn, have a deleterious effect on the economic recovery that is currently underway.

Anil Sasi

Anil Sasi is National Business Editor with the Indian Express and writes on business and finance issues. He has worked with The Hindu Business Line and Business Standard and is an alumnus of Delhi University. ... Read More