Longstanding issues at Credit Suisse culminated in an unprecedented stock decline this week, igniting concerns of a banking crisis spreading from the U.S. to Europe. The Swiss bank has faced several problems over the years, from poor hedge fund bets to a spying scandal involving competitor UBS.
Analysts attribute the turmoil to Credit Suisse’s recent difficulties, which have made it appear relatively fragile, and broader investor concerns about Western banks after Silicon Valley Bank’s collapse in the U.S.
Credit Suisse’s shares plummeted over 30% on Wednesday when its largest shareholder, the Saudi National Bank, declared it would not provide additional funds. The Swiss central bank stepped in, agreeing to lend Credit Suisse up to 50 billion francs ($54 billion) to bolster its finances, leading to a stock rebound. On Friday, shares fell another 8% to close at 1.86 francs ($2) on the Swiss exchange, continuing a long downward trend since their 2007 peak at over 80 francs.
Eswar Prasad, a Cornell University economist, noted that Credit Suisse serves as “an important bellwether of fragilities in the global banking system.” If it fails, it could undermine confidence in the banking system and prompt further central bank intervention. However, Prasad believes the Swiss National Bank’s significant liquidity injection will likely stabilize the situation.
Saudi National Bank Chairman Ammar al-Khudairy expressed optimism that Credit Suisse would regain its former status, praising its private wealth management, domestic Swiss banking, and asset management divisions as “stable, long-term consistent businesses.” He noted that the bank is working on divesting its more volatile business.
Credit Suisse is among the 30 globally systemically important banks subjected to heightened scrutiny and capital requirements following reforms after the 2008 financial crisis. Its issues have stemmed from poor corporate governance, risky investments, and questionable staffing decisions in recent years.
Megan Greene, a chief economist at the Kroll Institute, said that while Credit Suisse has faced numerous challenges, it differs from Silicon Valley Bank, which was impacted by rising interest rates. The Swiss bank holds high-quality assets but experienced a liquidity crisis, which can be addressed through central bank intervention. Greene emphasized that the situation is not a repeat of 2008, and although market overreactions may be reminiscent of the crisis, a banking crisis is not inevitable.
Greene pointed out that the current concerns about Credit Suisse and its role in the global banking system are primarily driven by market sentiment rather than actual systemic risk. While the bank’s ongoing challenges have made it appear more vulnerable, the central bank intervention and the bank’s efforts to address its issues should help stabilize the situation in the near term.
In recent years, Credit Suisse has faced a series of scandals and setbacks, impacting its reputation and performance. To regain investor confidence and return to its former status, the bank must address its corporate governance issues, improve risk management, and refocus on its core strengths.
Market participants are understandably cautious, given the memory of the 2008 financial crisis. However, the regulatory environment has evolved since then, with stricter oversight and capital requirements for systemically important banks. This provides an additional layer of protection against systemic risk and should help prevent a repeat of the 2008 crisis.
It is essential for Credit Suisse to learn from its past mistakes and adopt a more sustainable and risk-averse strategy moving forward. Strengthening its core businesses, divesting from volatile operations, and prioritizing transparency and accountability can help the bank restore its reputation and instill confidence among investors.
While Credit Suisse has faced significant challenges in recent years, central bank intervention and ongoing efforts to address its issues have helped to stabilize the situation. The bank’s troubles, though concerning, are unlikely to pose a systemic threat to the global banking system. By focusing on its core strengths and improving governance and risk management, Credit Suisse can work towards regaining investor confidence and returning to its former status as a leading financial institution.
