Tuesday, March 28, 2023

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Credit Suisse Offered Lifeline as Default Risk Grows

Swiss banking officials are offering a lifeline to Credit Suisse amid concerns the investment banker could default on its debts as uncertainty grips US financial markets.

After the consecutive crashes of three US banking giants—Silvergate Bank, Silicon Valley Bank (SVB), and Signature Bank—the cost of insuring Credit Suisse’s short-term, five-year bonds against their lender reached the highest levels in its history Wednesday morning . The bank released a pessimistic annual report earlier in the week, raising concerns throughout the day Wednesday that the bank could also collapse.

Regulators sought to assume investor concerns by issuing a statement Wednesday clarifying that the problems of those US banks “do not pose a direct risk of contagion for the Swiss financial markets.” While the collapse of the US bonds may have posed a risk to Credit Suisse’s bottom line, the government would be able to step in to intervene if necessary.

“The strict capital and liquidity requirements applicable to Swiss financial institutions ensure their stability,” The Swiss National Bank SNB and the Swiss Financial Market Supervisory Authority issued a joint statement Wednesday afternoon. “Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks. If necessary, the SNB will provide CS with liquidity.”

Longstanding concerns with company management ranging from money laundering to defrauding investors only helped exacerbate Credit Suisse’s problem, as some high-profile shareholders announced their intention to step away from the company. At its worst point Wednesday, the company’s stock prices crumbled as much 31 percent after officials from Saudi National Bank—which holds 9.88 percent of Credit Suisse’s stock—said it would not buy more shares to save the company, over concerns it would be subject to additional regulations after surpassing a 10 percent share in the company.

Credit default swaps tied to Credit Suisse’s debt surged after the Saudi National Bank official’s comments, indicating that traders believed Credit Suisse would default on the payments. It’s the same instrument that some investors used successfully to bet against the housing market in 2008.

SNB’s statement comes days after the highly publicized collapse of SVB, a favorite bank of Silicon Valley’s startup crowd that failed after management errors and a panic incited by its wealthiest account holders caused a “bank run” that threatened to leave account holders unable to withdraw money . The US government stepped in with billions of dollars to fulfill those obligations—most of which were uninsured by the Federal Deposit Insurance Corporation—and announced it would be purchasing the company’s existing assets, which consisted primarily of risky, long-term securities.

Credit Suisse, however, would be unlikely to face similar problems. Swiss regulations, officials noted, require all banks to maintain capital and liquidity buffers that “meet or exceed the minimum requirements” of international banking standards, while systemically important banks like Credit Suisse are subject to even higher capital and liquidity requirements.

“This allows negative effects of major crises and shocks to be absorbed,” they wrote.

Swiss banking officials are offering a lifeline to Credit Suisse amid concerns the investment banker could default on its debts as uncertainty grips US financial markets.

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