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Credit Suisse Crisis: How a European Bank's Troubles Threaten Global Markets

By David Li on Friday, 13 April 2023
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Credit Suisse Crisis: How a European Bank’s Troubles Threaten Global Markets

Credit Suisse Group AG, one of Europe’s largest banks, is facing a severe liquidity crisis that has sent its shares plunging to record lows and raised fears of a broader bank deposit crisis.

The Swiss bank has been struggling for years with legal troubles, regulatory fines and poor performance. Its woes were compounded by its exposure to two major scandals: the collapse of Archegos Capital Management, a US hedge fund that defaulted on billions of dollars of margin calls last year; and the fraud case of Greensill Capital, a UK-based supply chain finance company that filed for bankruptcy this month.

Credit Suisse was one of the main lenders to both Archegos and Greensill, and suffered heavy losses when they imploded. The bank has estimated that it will take a $4.7 billion hit from Archegos alone, wiping out its first-quarter profit and forcing it to raise capital.

The bank’s troubles have spooked investors and customers alike, who have been withdrawing their deposits and selling their shares. Credit Suisse’s stock price has fallen by nearly 30% since March 1st, reaching an all-time low on Wednesday.

To calm market fears and shore up its liquidity position, Credit Suisse announced on Thursday that it was taking “decisive action” by borrowing up to $54 billion from the Swiss National Bank (SNB), the country’s central bank. The SNB said it was providing an emergency loan facility to Credit Suisse as part of its mandate to ensure financial stability.

The SNB’s intervention is seen as a last-resort measure to prevent Credit Suisse from collapsing or needing a government bailout. However, some analysts have questioned whether it will be enough to restore confidence in the bank and whether it will come with strings attached.

Meanwhile, Credit Suisse’s crisis has also raised concerns about the health of other banks around the world, especially those with exposure to Archegos or Greensill. Several regional US banks have failed in recent weeks due to customer withdrawals triggered by social media posts and banking apps. Among them was Silicon Valley Bank (SVB), a California-based lender that served startups and technology companies.

The Federal Reserve acted swiftly to seize SVB and other failed banks and promised to make customers whole even if their deposits exceeded the insured limit of $250,000. The Fed said it was acting to ensure that bank customers had access to money without bailing out the banks themselves.

However, some economists have warned that more banks could face liquidity problems as interest rates rise after a decade or more of low or negative rates. Higher interest rates increase borrowing costs for banks and reduce their profitability. They also make their assets less valuable and increase their risk of default.

Credit Suisse’s crisis could be a harbinger of more trouble ahead for global banking system if interest rates continue to rise or if more scandals emerge. The stability of financial markets depends on trust in banks’ ability to meet their obligations and safeguard deposits. If that trust erodes further, it could trigger more panic withdrawals, contagion effects and systemic risks.

Source: Conversation with Bing, 3/15/2023(1) Banks suffer crisis of coincidence | CNN Politics. https://www.cnn.com/2023/03/15/politics/bank-collapse-credit-suisse-what-matters/index.html Accessed 3/15/2023. (2) Credit Suisse Could Be Too Big to Bail Out, Nouriel Roubini Says … https://www.bloomberg.com/news/articles/2023-03-15/nouriel-roubini-credit-suisse-might-be-too-big-to-be-saved Accessed 3/15/2023. (3) Credit Suisse To Borrow Up To $54 Billion In Bid To Calm Investor Fears. https://www.ndtv.com/world-news/credit-suisse-to-borrow-up-to-54-billion-in-bid-to-calm-investor-fears-3865089 Accessed 3/15/2023. (4) Credit Suisse Crisis: CS stock plunges 29%, causing widespread equity … https://www.fxstreet.com/news/credit-suisse-crisis-cs-stock-plunges-29-causing-widespread-equity-market-worries-202303151310 Accessed 3/15/2023.

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