Credit Suisse to borrow up to $54bn amid banking crisis fears

Announcement comes after Zurich-based bank’s shares lost more than one-quarter of their value in a day.

The price of Credit Suisse shares hit a record low after its biggest shareholder, the Saudi National Bank, said it would not inject more money [File: Brendan McDermid/Reuters]

Published On 15 Mar 202315 Mar 2023

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Updated: 

16 Mar 2023

09:52 AM (GMT)

Credit Suisse will borrow up to 50 billion Swiss francs ($54bn) from Switzerland’s central bank to shore up confidence in the troubled lender amid concerns about the health of the global banking system after the collapse of Silicon Valley Bank (SVB).

Credit Suisse said on Thursday the loan from the Swiss National Bank (SNB) would support the bank’s core businesses as it took the “necessary steps to create a simpler and more focused bank built around client needs”.

The Zurich-based lender said it would also buy back about $3bn of its debt.

“This additional liquidity would support Credit Suisse’s core businesses and clients as Credit Suisse takes the necessary steps to create a simpler and more focused bank built around client needs,” the bank said.

Credit Suisse’s shares soared 30 percent on Thursday after the announcement, bolstering confidence as fears about the banking system moved from the United States to Europe.

The announcement comes after Credit Suisse shares lost more than one-quarter of their value amid persistent market jitters in the wake of SVB’s collapse – the biggest bank failure in the United States since 2008.

The stock rout came after the chair of Saudi National Bank, Credit Suisse’s biggest shareholder, said in a television interview on Wednesday the lender would “absolutely not” increase its stake in the bank.

The banking turmoil has cast a shadow over Thursday’s meeting of the European Central Bank. Before the chaos erupted, ECB head Christine Lagarde had said it was “very likely” the bank would make a large, half-percentage point rate increase to tackle stubbornly high inflation.

In a statement on Thursday, Credit Suisse Chief Executive Ulrich Körner said the measures “demonstrate decisive action to strengthen Credit Suisse as we continue our strategic transformation to deliver value to our clients and other stakeholders”.

“We thank the SNB and FINMA [Swiss Financial Market Supervisory Authority] as we execute our strategic transformation,” Körner said. “My team and I are resolved to move forward rapidly to deliver a simpler and more focused bank built around client needs.”

The SNB and FINMA on Wednesday said they stood ready to make liquidity available to Credit Suisse if needed, although the bank’s capital and liquidity levels met regulatory requirements.

“The Swiss Central Bank statement was a good statement, very nuanced and carefully worded, showing support for the bank and a willingness to do ‘whatever it takes’,” Professor Barbara Casu, of Bayes Business School, told Al Jazeera.

Credit Suisse’s woes have added to a selloff of bank stocks in the US, Europe and Asia, sparked by the implosion of SVB and subsequent failures of cryptocurrency-focused lenders Signature Bank and Silvergate Capital.

‘More troubles than surmised’

Credit Suisse was beset by problems long before the US bank failures. The announcement on Thursday was the latest effort to restore the bank’s tarnished image following a raft of scandals in recent years, including the hiring of private detectives to spy on employees and facilitating corrupt loans in Mozambique.

In October, Credit Suisse’s stock price hit a record low after a memo from Körner, which sought to assure employees about the bank’s future, inadvertently sparked rumours the lender could be on the brink of collapse.

William Lee, chief economist at the Milken Institute in the US, said Saudi Arabia’s decision was indicative of deeper troubles at Credit Suisse.

“The Saudis think Credit Suisse may have more troubles than was surmised and their decision has put an emphasis on investors having to investigate the soundness of large global banks,” he told Al Jazeera.

Casu also said Credit Suisse “is not” SVB.

“It is a large, diversified bank. It has been troubled in recent months, but the problems are more varied,” she added.

SOURCE: AL JAZEERA AND NEWS AGENCIES

 Explainer

Credit Suisse: what is happening at Swiss bank and should we be worried?

Plunge in bank’s share price adds to fears over weaknesses in banking sector following collapse of SVB

• Credit Suisse shares fall to record low as top investor rules out more funding

Panic has gripped global banking stocks for the second time in a week: the wave of fear prompted by the collapse of California’s Silicon Valley Bank (SVB) has been followed by fresh jitters over the stability of major European bank Credit Suisse.

What’s happening at Credit Suisse?

Shares in the Swiss lender plunged more than 30% at one point on Wednesday to a record low of about 1.56 Swiss francs (£1.40) a share, after its top shareholder, the Saudi National Bank (SNB), ruled out providing it with fresh funding because of regulations that cap its stake – now 9.9% – at 10%.

SNB’s chairman, Ammar Al Khudairy, told Reuters that Credit Suisse was “a very strong bank” and was unlikely to need more cash after raising 4bn Swiss francs (£3.59bn) to fund a major restructuring plan in autumn last year. However, his funding cap comments spooked investors, who feared it could limit emergency cash from investors in the Middle East.

That compounded panic about potential weaknesses across a global banking sector still reeling from SVB’s collapse as well as fears over continuing problems at the Swiss lender, which as Europe’s 17th largest lender by assets is far larger than SVB and deemed systemically important to the global financial system.

How worried should we be?

The Bank of England reiterated its statement that the UK banking system is not at risk and “remains safe, sound, and well-capitalised”. The Guardian understands that staff at the Bank are continuing to monitor developments in the financial sector closely.

Stocks in many other European banks also plunged on Wednesday as traders took fright. However, it is important to remember that share prices reflect investor sentiment rather than the real strength of balance sheets.

Market movements can cause customers to panic and pull cash, creating a run on deposits that is risky for smaller banks that rely more heavily on client cash. However, larger banks such as Credit Suisse are meant to be in a much stronger position, in part due to government rules and regulators’ annual stress testing brought in after the financial crisis.

So are post-financial crisis rules not working?

After the chaos of 2008, regulators around the world introduced tighter restrictions – particularly for banks deemed to be important to the global financial system. Most central banks and national regulators have introduced annual stress testing to check whether banks can withstand severe economic shocks and market turmoil, while still supporting their customers.

In the worst case scenario, systemically important banks are meant to have enough capital, and so-called “living wills” in place, to ensure they can fail in a relatively orderly way. However, these living wills have yet to be tested by a real-life banking failure.

Switzerland’s regulator, Finma, approved Credit Suisse emergency wind-down plans last year, but said some of its plans were “still not adequate”.

But US banks are collapsing too: is this is a re-run of 2008?

Panic over Credit Suisse comes after the collapse of crypto lender Silvergate last Thursday, SVB on Friday and New York-based Signature on Sunday. However, Credit Suisse’s problems are also relatively unique and not new, with a string of major financial losses and scandals that have worried investors and fuelled a recent client exodus.

Credit Suisse customers – primarily wealthy clients and businesses rather than everyday savers – have been pulling money from the bank for months, leading to more than 111bn Swiss francs (£99.7bn) of outflows late last year. It was not immediately clear on Wednesday whether client withdrawals had gathered pace as a result of its plunging share price.

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Some investors are also worried about potential unrealised losses lurking in the investment portfolios of European banks. SVB’s troubles accelerated after it suffered losses on the bonds it tried to sell as customers pulled cash.

In an attempt to calm fears, Credit Suisse chair Axel Lehmann said on Wednesday morning that government assistance “isn’t a topic” for the lender, adding: “We have strong capital ratios, a strong balance sheet. We already took the medicine.” The Financial Times reported unnamed sources suggesting the lender had appealed to both Finma and the Swiss National Bank for a public show of support in an apparent bid to shore up investor confidence.

How far back do Credit Suisse’s problems go?

The bank is in the process of a major restructuring plan, meant to stem major losses, which ballooned to 7.3bn Swiss francs (£6.6bn) in 2022, and revive operations hampered by multiple scandals over the past decade involving alleged misconduct, sanctions busting, money laundering and tax evasion.

In the past three years alone, Credit Suisse has been caught in corporate espionage after hiring professional spies to track outgoing executives; admitted to defrauding investors as part of the Mozambique “tuna bonds” loan scandal, resulting in a fine worth more than £350m; and been embroiled in the collapse of the lender Greensill Capital and the US hedge fund Archegos Capital in 2021.

It also came under fire after the release of the Suisse secrets investigation by global reporting outlets including the Guardian in 2022, which showed it had served clients involved in torture, drug trafficking, money laundering, corruption and other serious crimes over decades.

That same year, Swiss prosecutors found the bank guilty of helping to launder money on behalf of the Bulgarian mafia, although the bank has denied wrongdoing and intends to appeal against the ruling.

But problems have not yet gone away. Earlier this week, the lender admitted there had been “material weaknesses” in its internal controls linked to financial reporting, but assured bosses were working on a plan to “strengthening the risk and control frameworks”.

Kalyeena Makortoff

Banking correspondent

Wed 15 Mar 2023

https://www.theguardian.com/business/2023/mar/15/credit-suisse-what-is-happening-at-swiss-bank-and-should-we-be-worried

 

What has gone wrong at Credit Suisse - explained

Updated: 15 Mar 2023,Edited By Sayantani Biswas

Credit Suisse's Chief Executive Officer Ulrich Koerner told Bloomberg that the reshaped bank will be more focused and less risky. (AFP)

The annual bonus pool has Credit Suisse hanging their hopes on a 70% jump in stock prices

Credit Suisse Group AG's annual bonus pool plunged 50% to 1 billion francs after 2022 brought a loss that wiped out a decade’s worth of profit. Reasons? 

• A plunging share price, 
• an exodus of wealthy clients and 
• erosion of bank’s credibility.

Currently, the annual bonus pool has them hanging their hopes on a 70% jump in stock prices. At such a time Credit Suisse's Chief Executive Officer Ulrich Koerner told Bloomberg that the reshaped bank will be more focused and less risky. “We will be very profitable and we will reward shareholders."

Meanwhile, Credit Suisse Group AG’s top executive said he expects to take the firm’s carved-out investment bank, First Boston, public by 2025, Bloomberg reported.

What went wrong with credit Suisse?

On Tuesday, 14 March, Credit Suisse said in its 2022 annual report the bank 

• has identified "material weaknesses" in internal controls over financial reporting and 
• not yet stemmed customer outflows.

The reporting weaknesses come as Credit Suisse is seeking to recover from a string of scandals that have undermined the confidence of investors and clients. Customer outflows in the fourth quarter rose to more than 110 billion Swiss francs ($120 billion).

Where did it all begin?

In the 1980s and 1990s, Credit Suisse merged with First Boston to create Credit Suisse First Boston, which was its investment banking division till 2006.

At the end of 2021, Credit Suisse reported over 1.6 trillion Swiss francs in assets and over 50,000 employees in the institution.

Credit Suisse has a domestic Swiss bank plus wealth management, investment banking, and asset management operations.

Credit Suisse's Troubles

In 2019, the Chief Operating Officer, Pierre-Olivier Bouée was discovered to have hired private investigators to spy on high-level employees and was fired shortly after. The private investigator also mysteriously "took his own life," the bank reported, while announcing Bouée's removal.

In March 2021, a month before the Archegos scandal went public, Credit Suisse also announced that it was closing and liquidating several investor funds, worth $10 billion, provided to another financial services company, Greensill capital. Greensill declared insolvency in March 2021.

Investors reportedly lost close to $3 billion because of this.

In February 2022, a massive leak of over 30,000 of Credit Suisse's clients revealed over $100 billion in wealth held by people who had profited from "torture, drug trafficking, money laundering, corruption and other serious crimes," according to The Guardian.

This revelation also hurt the bank's reputability further, amplifying investor concerns.

The bank has also changed top leadership multiple times since 2019, with the most recent changes coming in July 2022, with the group getting a new CEO.

The group's Chairman Axel Lehmann only took over from previous chairman Antonio Horta-Osorio in January 2022, after Horta-Osorio resigned for breaking quarantine rules during the pandemic.

Will the 2025 IPO be their salvation?

Ulrich Koerner, the chief executive officer of Credit Suisse, on Tuesday informed that the bank plans to take Credit Suisse's carved-out investment bank First Boston public by 2025. 

This comes amid a search for investors. 

While the First Boston spinoff is a centerpiece of Koerner’s restructuring plan, the CEO seeks to protect the best-performing investment bank parts, such as advising on mergers and acquisitions, while pivoting the parent company further toward wealth management.

Credit Suisse announced earlier today that senior leaders in the carved-out unit are expected to receive up to 20% of shares. Employees would receive restricted share units after an IPO, which would vest three years later and be subject to a further holding requirement.

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