Shares of Credit Suisse saw a significant increase on Thursday after the Swiss National Bank agreed to lend the financial institution up to 50 billion francs ($54 billion) to reinforce confidence in Switzerland’s second-largest bank following the collapse of two American banks.
The agreement announcement was made before the Swiss stock market opened, causing Credit Suisse shares to rise as much as 33% before stabilizing with a 17% gain at 2 francs ($2.15) in late afternoon trading. This rebound starkly contrasted with the previous day, when the bank’s largest shareholder declined to provide additional funding, resulting in a 30% drop in shares. This decline affected other European banks and heightened concerns about the global financial system.
European banking stocks experienced modest gains on Thursday as well.
The Swiss National Bank expressed willingness to support Credit Suisse, as it fulfills the stricter financial requirements for systemically important banks. The central bank added that the issues facing some U.S. banks do not pose a direct threat of contagion to Switzerland.
Regulators aim to assure depositors that their money is secure. Russ Mould, investment director at online investment platform AJ Bell, emphasized the importance of preventing panic-driven rushes for withdrawal.
Credit Suisse, which has been grappling with problems predating the recent U.S. bank failures, stated that the central bank’s loans would allow it time to finalize a reorganization to create a more straightforward, more focused institution. CEO Ulrich Koerner expressed confidence in the bank’s strategic transformation.
Despite the turmoil in the banking sector, the European Central Bank raised interest rates by a significant half-percentage point to combat persistent high inflation, asserting that Europe’s banking sector is resilient and financially robust.
The exposure of European banks to Credit Suisse is limited, according to Vice President Luis de Guindos of the European Central Bank.
Recent interest rate increases have prompted concerns about hidden bank balance sheet losses. Following Silicon Valley Bank’s failure, the second-largest failure in U.S. history, central banks in the U.S. and Europe have taken swift steps to restore confidence.
During this time, the Federal Reserve announced additional funding for other banks to assure that the California-based bank and the smaller Signature Bank of New York would meet deposits. Similarly, the British government and Bank of England facilitated the sale of Silicon Valley Bank’s UK branch to HSBC, one of Europe’s largest banks, ensuring customer access to funds.
This rapid response contrasts with the global financial crisis 15 years ago when Lehman Brothers were allowed to collapse. Victoria Scholar, head of investment at Interactive Investor, stated that the loans to Credit Suisse would likely prevent a similar situation, noting the bank’s historic role in supporting the Swiss economy.
ECB President Christine Lagarde highlighted improvements in the banking system since the 2008 crisis, including more robust safeguards and increased supervision.
Banks face pressure as interest rates rise after a prolonged period of low rates. Several banks have taken higher risks than others to increase investment returns, resulting in liquidity shortages for some institutions, according to Sascha Steffen, a professor of finance at the Frankfurt School of Finance & Management.
Credit Suisse’s shares reached a record low on Wednesday after the Saudi National Bank declined to invest more in the Swiss lender due to regulatory restrictions. The bank also revealed material weaknesses in its internal controls on financial reporting, raising further doubts about its ability to withstand the crisis.
The Swiss bank has been attempting to raise funds and implement a new strategy to overcome various challenges, including poor hedge fund investments, management changes, and a spying scandal involving rival UBS.
Outside a Credit Suisse branch, accountant David Glaus expressed confidence that the Swiss government would support the bank to prevent its failure, primarily to protect the country’s banking industry. “I don’t think it’s in our best interests for the bank to go bankrupt. In the background, some people will support and protect it,” he said.
Glaus believes Switzerland has a contingency plan to maintain its reputation in a worst-case scenario. “We still have chocolate and cheese to uphold our image,” he added.
The overall response to the recent banking challenges demonstrates a shift in strategy from the global financial crisis 15 years ago, with central banks and governments taking swift and decisive action to maintain stability and protect depositors. The situation at Credit Suisse highlights the importance of adequate oversight, proper risk management, and increased transparency in the financial sector to prevent similar crises in the future.
