Credit Suisse: Why it's struggling and why that's a big deal
CNN/Stylemagazine.com Newswire | 3/16/2023, 1:33 p.m.
Originally Published: 16 MAR 23 13:12 ET
By Nathaniel Meyersohn, CNN
(CNN) -- Credit Suisse, the 167-year-old bank and the second-largest lender in Switzerland, is in deep trouble.
The bank said it would borrow up to 50 billion Swiss francs ($53.7 billion) from the Swiss National Bank, taking advantage of a lifeline late Wednesday after its stock crashed as much as 30%. It also said it would buy back some of its own debt.
Its struggles set off anxiety in Europe and across global markets, and what happens at Credit Suisse could impact the broader financial system.
Why does Credit Suisse matter?
Credit Suisse is one of the biggest financial institutions in the world.
It is categorized by the Financial Stability Board, an international body that monitors the financial system, as a "global systemically important bank," along with just 30 others, including JPMorgan Chase, Bank of America and the Bank of China.
"Credit Suisse is in principle a much bigger concern for the global economy than the regional US banks which were in the firing line last week," Andrew Kenningham at Capital Economics said in a note to clients Wednesday. "Credit Suisse is much more globally interconnected ... not just a Swiss problem but a global one."
Why is Credit Suisse struggling now?
Central banks around the world have been raising interest rates to try to slow down inflation and cool the global economy.
But that process has left some banks vulnerable.
Fears about weaker lenders exploded last week when Silicon Valley Bank collapsed in the biggest US banking failure since the 2008 financial crisis. That engulfed other banks facing big problems, including Credit Suisse, which has been a slow-moving car wreck for decades.
"The problems at Credit Suisse are very different to those that brought down SVB a few days ago," economists at Capital Economics said in an email to clients Thursday. "But they serve as a reminder that as interest rates rise, vulnerabilities are lurking in the financial system."
The trigger for Wednesday's rout in Credit Suisse shares wasn't rising rates. It came from comments by the bank's biggest backer — the Saudi National Bank — that it wasn't prepared to put up more money after buying a near-10% stake for $1.5 billion last year.
What was going on Credit Suisse before this meltdown?
Credit Suisse has been struggling for years.
It was widely seen as the weakest link among Europe's large banks, according to Kenningham.
The company has been plagued by a series of missteps and compliance failures in recent years that cost it billions and led to several overhauls of top management. And over the past decade, the Swiss bank has been hit with fines and penalties related to tax evasion, misplaced bets and other issues.
In 2014, Credit Suisse pleaded guilty to federal charges that it illegally allowed some U.S. clients to evade their taxes. The bank paid a total of $2.6 billion to the federal government and New York financial regulators as part of the settlement.
The bank's reputation was damaged by an accounting scandal at Luckin Coffee. Credit Suisse acted as an underwriter when the company went public on the Nasdaq in 2019. The Chinese firm was pulled off the US exchange after it fraudulently inflated sales.
In 2020, Credit Suisse CEO Tidjane Thiam resigned after two high-profile spying scandals involving top bank officials.
A year later, the collapse of the US hedge fund Archegos Capital cost Credit Suisse $5.5 billion and damaged the bank. An independent external investigation later found that Credit Suisse allowed Archegos Capital to take "voracious" and "potentially catastrophic" risks that culminated in the US hedge fund's spectacular collapse.
In 2022, the bank was hit by social media speculation that it was on the brink of collapse, leading customers to withdraw billions of dollars. That has made profitability a near impossibility for the bank, which has been hemorrhaging money for years.
And last month, Credit Suisse's stock plunged to record lows after it posted its biggest annual loss since the financial crisis in 2008 and a report surfaced that regulators were reviewing comments the lender's chairman made about the health of its finances.
What's next for Credit Suisse?
The lifeline from the Swiss National Bank could buy time for Credit Suisse to restore confidence and push on with restructuring plans that include carving out investment banking into an independent US-based business and focusing on Switzerland as well as on managing money for wealthy clients.
But Credit Suisse may not be out of the woods yet.
JPMorgan's banking analysts said the liquidity support offered by the Swiss central bank would not be sufficient, given "ongoing market confidence issues" with Credit Suisse's investment banking plans and the erosion of the bank's franchise.
"In our view, status quo is no longer an option as counterparty concerns are starting to emerge as reflected by credit/equity markets weakness," they wrote in a research note Thursday, adding that a takeover — most likely by bigger Swiss rival UBS — was the most likely endgame.
CNN's Mark Thompson and Anna Cooban contributed to this article.