The Swiss National Bank offers a lifeline to Credit Suisse. Financial markets initially react positively, but uncertainty remains.
Could Credit Suisse, the big Swiss bank that has been floundering for months, trigger another financial crisis? After the collapse of Silicon Valley Bank, the concerns of investors and stock market players have intensified.
Credit Suisse is one of 30 global systemically important institutions that are too big to fail. Therefore, the collapse of such a bank would have corresponding consequences for other financial institutions.
Credit institutions have to absorb the rise in interest rates from central banks worldwide. It is therefore critical how they have prepared for interest rate changes, i.e. whether they have built up sufficient equity reserves that they can now draw on.
Investors eagerly awaited the ECB’s interest rate decision this afternoon. Will it actually raise the key rate by 50 basis points, as actually planned, or will it only take a small step given the circumstances?
On the other hand, a deviation from its previous line could be interpreted by the markets as a sign of concern about the stability of the banks, fear experts such as Clemens Fuest, head of the Ifo institute in Munich. That concern is now unfounded as the monetary watchdogs followed through on their announcement and raised key interest rates by an additional 50 basis points.
Credit Suisse ‘didn’t do its homework’
“The good news is that Credit Suisse has now shrunk,” said Hans-Peter Burghoff, chairman of the Department of Banking and Financial Services at the University of Hohenheim. This is because its total balance sheet has shrunk to €500 billion, which is 2/5 of its previous size, which is also the average size of other major financial institutions.
Credit Suisse has been embroiled in several major scandals in recent years, including the bankruptcy of hedge fund Archegos and the bankruptcy of financier Greensill Capital, with which it had worked. As a result, investors had already withdrawn 123 billion francs last year, and the bank had initially responded to this with a capital increase.
Saudi Arabia’s National Bank had also participated but could not pay more for regulatory reasons, prompting further uncertainty and a 30% drop in Credit Suisse’s share price. At least the Swiss National Bank managed to calm the markets for now with the 50 billion franc rescue package it announced on Wednesday night.
What’s special about the bank is that, unlike many other institutions, it took a long time to restructure, says Burghoff: “Other institutions, like Deutsche Bank or Commerzbank, did their lessons earlier” and are now less vulnerable, with assistance of the supervisory authorities. Federal Finance Minister Christian Lindner assured that there is and will continue to be stability in the German credit system.
Investor confidence is vital
Banking expert Christoph Salast is also convinced that there is no risk of a financial or banking crisis in Germany. He also refers to Credit Suisse’s “long-term restructuring”. Silicon Valley Bank, which had caused a stir earlier in the week, was a special case.
The bank had become insolvent because it had difficulties with changing interest rates: it had invested much of its customers’ deposits in safe long-term government bonds. When investors withdrew capital in large amounts, he had to sell bonds, which had lost their value due to rising interest rates.
Experts believe developments depend on whether investors regain confidence in the Swiss bank’s future viability. Its share price recovered on Thursday, but whether this is sustainable is yet to be seen. There is always a problem when investors lose confidence in a bank, Salast says. “Germany, on the other hand, is well shielded by the three pillars, which seem old-fashioned to many. To this end, our major institutions have shrunk after the 2008 crisis and are closely supervised by the E.K.T. and the Banking Supervision Authority (Bafin) and the Bundesbank”.
DW, Brigitte Soltes (Frankfurt)
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