Why the Swiss central bank is saving Credit Suisse
Die crisis-ridden CreditSuisse can borrow up to CHF 50 billion from the Swiss National Bank to support liquidity if needed. This was announced by the loss-plagued major Swiss bank on Thursday night. With the agreement on this credit line, she is taking an option that the Swiss National Bank (SNB) had only granted her the previous evening. The borrowing is fully secured by first class assets.
Also, buy them CS Debentures with a total value of up to $3 billion. With these measures, the bank wants to regain the trust that has been lost, which is reflected in the dramatic crash of CS shares on the stock exchange.
On Wednesday alone, the price fell by up to 31 percent at times after the president of the major shareholder Saudi National Bank ruled out further capital injections for the bank. The prices of the CS bonds also fell dramatically. “These actions demonstrate determined action to strengthen Credit Suisse as we continue our strategic transformation,” Chief Executive Officer Ulrich Körner said in the press release. And: “My team and I are determined to move forward quickly in order to create a simpler bank that is more focused on customer needs.” The rescue maneuver was well received on the stock exchange: At the start of trading, the CS share price shot up 33 percent to 2 .25 francs in height.
Homemade scandals, imbalances and failures
The relief effort by the Swiss central bank, which is acting in tandem with the Swiss Financial Supervisory Authority (Finma), is the largest of its kind for a Swiss bank since the 2008 financial crisis UBS saved from collapse with aid in the tens of billions, some of which came directly from the state. However, this rescue is not directly comparable with the case of CS: At the time, UBS had the problem of insufficient capital resources. Credit Suisse, on the other hand, repeatedly points out that it is solidly financed given a core capital ratio of 14.1 percent most recently.
Admittedly, this has not been able to calm the markets down so far. It can also be assumed that customers reacted to the never-ending negative headlines and price losses and withdrew more money. In the fourth quarter of 2022 alone, the bank, which is one of the largest asset managers in the world, lost customer deposits of 111 billion francs.
The uncertainty was further increased by the recent upheavals in the American banking market. take on it SNB and Finma even referred to it in their statement on Wednesday evening, emphasizing that there was no evidence of a direct risk of infection for Swiss institutions. In Switzerland, all banks must maintain capital and liquidity buffers that meet or exceed the minimum requirements of the Basel standard. In addition, Credit Suisse meets the special capital and liquidity requirements that are placed on systemically important banks. “In this way, negative effects of major crises and shocks can be absorbed.”
At the same time, the SNB announced that it would make liquidity available to Credit Suisse if necessary. Seven hours later, the bank gratefully accepted this offer, which is tantamount to a kind of insurance.
Net loss of 7.3 billion Swiss francs
CS has gotten itself into trouble through numerous home-made scandals, imbalances and failures that can be traced back to inadequate risk management. The cleanup combined with operational setbacks resulted in a net loss of CHF7.3 billion in 2022, while other banks made billions in profits. The loss of confidence is reflected in the stock market valuation of the bank, which is only 7 billion Swiss francs. For comparison: UBS brings almost 60 billion francs to the stock market scales.
According to the financial market expert Peter Viktor Kunz, professor of business law at the University of Bern, the Swiss central bank no alternative than supporting Credit Suisse: “It’s about sending a psychological signal to restore or at least secure customer confidence,” said Kunz in an interview with the FAZ subsequently withdrawing funds on a large scale, this could create a short-term liquidity problem. But now Kunz is cautiously giving the all-clear: “Small bank customers should probably be reassured by the indirect state guarantee from the highly respected central bank.”
With its rescue maneuver, the National Bank certainly also wants to prevent a panic surrounding CS from spreading to other banks and financial centers in Europe and the world. “There is a risk of a conflagration in the financial scene,” said Kunz. Against this background, too, the SNB wanted to set an example for the financial center and emphasized that the Swiss banks were not directly affected by the problems in the American banking sector.