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.
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”.