Credit Suisse next? Bank fears spread to Europe
Fears about the world banking system spread to Europe on Wednesday as shares in the globally connected Swiss bank Credit Suisse plunged and dragged down other major European lenders in the wake of bank failures in the United States.
At one point, Credit Suisse shares lost more than a quarter of their value, hitting a record low after the bank’s biggest shareholder — the Saudi National Bank — told news outlets that it would not put more money into the Swiss lender, which was beset by problems long before the U.S. banks collapsed.
The turmoil prompted an automatic pause in trading of Credit Suisse shares on the Swiss market and sent shares of other European banks tumbling, some by double digits. That fanned new fears about the health of financial institutions following the recent collapse of Silicon Valley Bank and Signature Bank in the U.S.
Speaking Wednesday at a financial conference in the Saudi capital of Riyadh, Credit Suisse Chairman Axel Lehmann defended the bank, saying, “We already took the medicine” to reduce risks.
When asked if he would rule out government assistance in the future, he said: “That’s not a topic. ... We are regulated. We have strong capital ratios, very strong balance sheet. We are all hands on deck, so that’s not a topic whatsoever.”
A day earlier, Credit Suisse reported that managers had identified “material weaknesses” in the bank’s internal controls on financial reporting as of the end of last year. That fanned new doubts about the bank’s ability to weather the storm.
Credit Suisse stock dropped about 30% before clawing back to a 24% loss. At its lowest, the price was down more than 85% from February 2021.
With concerns about the possibility of more hidden trouble in the banking system, investors were quick to sell bank stocks.
The turbulence came a day ahead of a meeting by the European Central Bank. President Christine Lagarde said last week, before the U.S. failures, that the bank would “very likely” increase interest rates by a half percentage point to fight against inflation. Markets were watching closely to see if the bank carries through despite the latest turmoil.
‘Much bigger concern’
Credit Suisse is “a much bigger concern for the global economy” than the midsize U.S. banks that collapsed, said Andrew Kenningham, chief Europe economist for Capital Economics.
It has multiple subsidiaries outside Switzerland and handles trading for hedge funds.
“Credit Suisse is not just a Swiss problem but a global one,” he said.
He noted, however, that the bank’s “problems were well known so do not come as a complete shock to either investors or policymakers.”
The troubles “once more raise the question about whether this is the beginning of a global crisis or just another ‘idiosyncratic’ case,” Kenningham said in a note. “Credit Suisse was widely seen as the weakest link among Europe’s large banks, but it is not the only bank which has struggled with weak profitability in recent years.”
The Credit Suisse parent bank is not part of EU supervision, but it has entities in several European countries that are. Credit Suisse is subject to international rules requiring it to maintain financial buffers against losses as one of 30 so-called globally systemically important banks, or G-SIBs.
Share prices plunged after Saudi National Bank Chairman Ammar Al Khudairy told Bloomberg and Reuters that the bank has ruled out further investments in Credit Suisse to avoid regulations that kick in with a stake above 10%.
The Saudi National Bank has invested some 1.5 billion Swiss francs to acquire a holding just under that threshold.
The Swiss bank has been pushing to raise money from investors and roll out a new strategy to overcome an array of troubles, including bad bets on hedge funds, repeated shake-ups of its top management and a spying scandal involving Zurich rival UBS.