Credit Suisse was losing the faith of investors long before the SVB debacle. Here's why the situation came to a head this week.
AP Photo/Schalk van Zuydam
- Credit Suisse shares tumbled more than 25% on Wednesday as fears grew of a banking crisis.
- The scandal-hit lender is feeling the pain after three US banks collapsed last week.
- Here's a closer look at why Credit Suisse is worrying investors.
Credit Suisse shares tumbled more than 25% to a record low on Wednesday as investors feared mounting pressures on banks could herald another financial crisis. Here's a closer look at the European lender's troubles, and why it's now fending off questions about its stability.
A slew of scandals
Here's a quick summary of the controversies that have plagued Credit Suisse in recent years:
- The bank hired private detectives to spy on former executives, leading to the departure of its CEO in February 2020.
- It lost nearly $6 billion in March 2021 after Archeges Capital Management imploded and defaulted on its loans from the Swiss lender.
- It's still working to recover about $2 billion of the roughly $10 billion it had tied up in supply chain finance funds linked to Greensill, which collapsed amid allegations of fraud in March 2021.
- It was fined for making fraudulent loans dubbed "tuna bonds" to Mozambique's government between 2012 and 2016.
- Its chairman was forced to resign in January after an internal investigation found he violated COVID-19 quarantine rules to attend Wimbledon.
- Credit Suisse's previous CEO resigned for personal and health reasons last July.
Is a banking crisis brewing?
The latest slump in Credit Suisse stock can partly be explained by recent events in the US banking industry.
Silvergate, a key lender to the cryptocurrency industry, announced it was winding down its operations and liquidating its assets last Wednesday.
Silicon Valley Bank, a major player in the venture-capital ecosystem, was overwhelmed by a wave of withdrawals and taken over by the Federal Deposit Insurance Corporation (FDIC) on Friday.
The FDIC revealed on Sunday it had taken control of Signature Bank as well. Moreover, it announced that under a "systemic risk exception," it would fully guarantee both banks' deposits, beyond the usual limit of $250,000 per account.
SVB ran into trouble because it invested some of its clients' deposits in long-duration bonds. Those plunged in price as the Federal Reserve hiked interest rates from nearly zero to upwards of 4.5% over the past 12 months in response to inflation hitting a 40-year high.
The lender sold its bond portfolio at a nearly $2 billion loss last week, and launched a capital raise to reinforce its finances. Its scramble for cash stoked concerns about SVB's stability among VCs and their portfolio companies, sparking a wave of withdrawals that overwhelmed the bank and spurred the FDIC to intervene.
SVB's collapse has fueled worries that other banks are carrying heavy losses on their bond portfolios, as rates have jumped in both the US and Europe.
Investors may also be bracing for further bank runs that could topple lenders, especially as a one-two punch of historic inflation and soaring rates squeezes consumers and businesses, and companies brace for a potential global recession.
Why is Credit Suisse under fire?
Credit Suisse shares tanked Wednesday after its biggest shareholder, Saudi National Bank, warned it wouldn't be able to invest more cash without raising its stake above the regulatory limit of 10%.
SNB's chair, Ammar al-Khudairy, told Reuters that he didn't see that as a problem.
"I don't think they will need extra money; if you look at their ratios, they're fine," he said, referring to standard measures of a bank's financial health.
However, the prospect of limited help from the Saudis appears to have hammered Credit Suisse's stock price, and hit the shares of Deutsche Bank, UBS, and its other European peers. Credit Suisse CEO Ulrich Koerner has also faced questions about his plans to cut costs, staunch losses, and turn around his company.
Harris Associates, Credit Suisse's No. 1 investor as recently as last year, exited its entire stake in the embattled Swiss bank over the past few months. The Chicago-based investment management firm owned about 10% of the Swiss bank's stock as of August last year, but slashed its exposure to 5% in January. More recently, Harris reportedly cut its holdings in the lender to zero.
"There is a question about the future of the franchise. There have been large outflows from wealth management," David Herro, Harris Associates' deputy chairman and chief investment officer, was cited by the Financial Times as saying, in a March 5 report.
Credit Suisse bond risk is rising
There appears to be growing concern that Credit Suisse might default on its debts, based on the soaring cost of insuring the bank's bonds. Traders saw prices on one-year senior credit-default swaps as high as 1,200 basis points on Wednesday, making them several times more expensive than other banks' CDS, Bloomberg reported.
Both Michael Burry of "The Big Short" fame, and billionaire investor John Paulson, used CDS to short the mid-2000s housing bubble that preceded the financial crisis. Moreover, a key moment at the start of the Great Recession was the collapse of Lehman Brothers, one of the largest US investment banks.
There's no clear reason to believe Credit Suisse is at risk of failure. But its checkered past, plunging stock, soaring CDS prices, the recent string of bank failures, and previous cases of lenders collapsing with massive repercussions, appear to be worrying some investors greatly.
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