The Credit Suisse building is located at the Bundesplatz, the largest square in Bern’s storied old town, directly across from the Swiss Federal Parliament and the Swiss Central Bank building. The Swiss Banking Regulator and the nation’s second-largest bank are only separated by a plaza dotted with fountains and public chairs. Hence, it should not have come as a surprise when the Swiss central bank intervened with a $54 billion lifeline for Credit Suisse early on Thursday as the lender’s shares continued to decline, raising concerns about a potential crisis with bank deposits.
Early on Thursday morning, Credit Suisse released a statement in which it declared that it was “exercising its option to borrow” from the Swiss National Bank up to 50 billion Swiss francs (about $54 billion). Why this is important: If a crisis at the Swiss bank spreads, it might cause investors and authorities to turn their attention away from the US, where the failure of at least three mid-sized banks has raised concerns about a possible contagion, and towards Europe instead.
The possibility of the US banking crisis spreading to Europe was increased by the Credit Suisse-led selloff in bank shares.
When a senior investor in the troubled institution warned it would not be able to offer extra cash due to regulatory red lines, Credit Suisse shares fell to a new all-time low on Wednesday for the second day in a row.
The Saudi National Bank, the Swiss bank’s largest investor, reportedly stated yesterday that it was unable to offer the Swiss bank any additional financial support. “We can’t because our percentage would exceed 10%. Ammar Al Khudairy, the chairman of the Saudi National Bank, told Reuters that there was a regulatory issue.
As part of Credit Suisse’s $4.2 billion capital increase last year, the Saudi National Bank acquired a 9.9% share in the Swiss institution. The move was made in response to Credit Suisse’s declining performance in investment banking and a string of risk and compliance blunders.
Swiss regulators stated that Credit Suisse “currently meets capital and liquidity requirements” and that the Swiss National Bank will provide extra liquidity, as needed, after the European markets closed on Wednesday. This occurred at a time when there were worries about a banking crisis that was out of control. According to Bloomberg statistics, there was a wider sell-off among European lenders on Wednesday, including Societe Generale in France, Banco de Sabadell in Spain, and Commerzbank in Germany.
The Swiss financial watchdog FINMA and the nation’s central bank made a joint statement late on Wednesday in an effort to allay investor concerns about Credit Suisse. They stated that the bank “meets the capital and liquidity requirements imposed on systemically important banks and that the bank could access liquidity from the central bank if needed.
The expression of support from FINMA and the Swiss National Bank was “welcomed,” according to Credit Suisse. Despite the fact that western central banks have provided banks with liquidity support during times of market stress since the 2008 financial crisis, including during the stock market crash caused by the pandemic, the lifeline is extremely significant because Credit Suisse would be the first major global bank to receive such a credit line since that time.
Since its founding in 1856, Credit Suisse has endured a number of scandals involving various subjects, including allegations of money laundering. It stated that it had lost money over the previous two years and had warned that it would continue to do so at least until 2024. The new problem may make the troubled bank’s path to profitability or perhaps solvency more difficult.
The US Federal Reserve, which just a fortnight ago was anticipated to push up its interest-rate-hike plan in the face of relentless inflation, may now be forced to stop and perhaps consider a rate decrease as a result of the crisis, according to traders. Also, there were worries about a contagion effect and the stability of the European banking sector following the Credit Suisse meltdown.
Reuters, meanwhile, quoted Christian Sewing, CEO of Deutsche Bank, as claiming that the German lender has also seen new money come its way. Ralph Hammers, CEO of Credit Suisse rival and Switzerland’s largest bank, UBS, also claimed that the market volatility has resulted in incoming deposits.
Credit Suisse opened offices in Mumbai, Pune, and Gurgaon in 1997. Vendor offices are located in Bangalore, Hyderabad, and Kolkata. The second-largest footprint for Credit Suisse outside of Switzerland, according to the bank, is in India, which it also describes as a “key recruitment hub” for the company worldwide. So, a lifeline to the bank is welcome news from that angle, at least temporarily.
Additionally, the Reserve Bank of India’s position on market rates and prognosis for the markets could be affected by the cascading effects of global regulatory action, such as a halt in the ratings rises. But if the banking crisis in the US or the EU worsens, it might cause new problems for lenders in other countries, like India. The ongoing economic recovery could suffer from a banking crisis, which would then be harmful.