Credit Suisse is one of the biggest beasts in the global financial jungle and was once a name synonymous with Swiss quality. So what went wrong and even more importantly, will it affect you?
What is Credit Suisse?
The 167 year old Swiss bank is a huge entity in the interconnected spider’s web of the global banking system – it’s a G-Sib (global systematically important bank) in the jargon – so it matters.
What has been happening lately?
It has been embroiled in a number of crises in recent years, with a series of investment decisions that went wrong and market concerns over how executive management was running its affairs.
It was this time two years ago that there was an explosion in the financial services sector that would see Credit Suisse sustain some serious wounding. It had invested funds in a supply-chain financing company, which coincidentally was being advised by former British Prime Minister, David Cameron, called Greensill Capital.
In March 2021 Greensill crashed amid contested insurance claims, accusations of fraud and accounting probes. Credit Suisse said clearing up the mess would take five years and cost a cool $291m.
That was bad enough for the bloodied and bandaged bank, but last week later there was another explosion in the banking sector, when Silicon Valley Bank (SVB) collapsed. This time there wasn’t anything specifically linking the two but it startled an already anxious market.
Then on Monday, Credit Suisse’s annual report dropped citing material weaknesses in the bank’s financial controls. Executive bonuses were promptly cancelled and a turnaround plan announced but it wasn’t enough to reassure investors’ shattered nerves. Credit Suisse’s main investor, the Saudi National Bank, ruled out an injection of further funding and a full blown panic attack gripped the markets.
Investors voted with their feet withdrawing money from risky assets, Credit Suisse’s share price plummeted so far and so fast that at one point the Pan European Stoxx index halted trading in its shares.
Saved by the bell
However, this wasn’t the end of the tale. Riding to the rescue came the Swiss central bank, offering to buy up the bank’s debt and giving it a £44.5bn lifeline.
The Swiss central bank has effectively said it will do whatever it takes to prop it up. This has given the troubled bank a lot of breathing room.
There will now be an acceleration of the turnaround plan and Credit Suisse could find itself being broken up. There is speculation that the other Swiss banking behemoth, UBS, could take over part of it, with ultra high net worth customers being hived off into a separate entity.
Are we looking at 2008 all over again?
With financial services companies collapsing into rubble and central banks offering bail outs, a lot of people are feeling a sense of deja vu. This is how the Great Recession started. Are we doomed to go through the same thing all over again? Will the Credit Suisse contagion rip through the financial markets dragging economies down with them?
Phew! That was close!
This time there are reasons to stay calm. There would only be problems for other banks if they experienced outflows because of Credit Suisse’s problems.
Experts say that while banks with weak business models may be affected, banks with good business models should be safe and that it is very unlikely that there will be any contagion in the banking system or that ordinary consumers will be affected.
Rob Burgeman, senior investment manager at wealth manager RBC Brewin Dolphin said: “For Credit Suisse, messy as it looks, it is almost inconceivable that the bank would be allowed to collapse à la Lehman Brothers – the potential fallout would be catastrophic.
“I certainly wouldn’t want to be a shareholder or bondholder, but we think that the latest falls are more to do with sentiment towards the banking sector, in general, and the weaker banks, in particular.”
Credit Suisse’s shares have surged on the news of the central bank’s rescue plan and the banking landscape is a very different one to that of 2008. Most importantly, it has much tougher regulation and most banks have stable capital buffers, with lots of deposits and they could even get more. Some banks have seen inflows into their coffers in their recent days.
Ordinary depositors are also covered up to £85,000 by the Financial Services compensation scheme. Financial experts say people shouldn’t be too concerned.
It remains to be seen what happens next.