A share price plunge of as much as 31 per cent at Credit Suisse on Wednesday and sharp increase in the cost of insuring its debt against default triggered a fresh wave of nervousness across the global banking sector that is still coming to terms with the collapse of three niche US banks in the past nine days, including Silicon Valley Bank (SVB).
So, what’s the problem with Credit Suisse?
The big issue at Credit Suisse is that a new management team installed late last year, led by chief executive Ulrich Koerner and including chief operating officer Francesca McDonagh, the former Bank of Ireland chief executive, is trying to turn an already deeply-troubled business around at a time of heightened volatility in global financial markets – compounded by the US banking crisis.
A three-year recovery plan outlined last October is centred around Credit Suisse shifting away from investment banking and back to its roots as a banker to the world’s uber-wealthy. It includes 9,000 job cuts, the spin-off of its investment banking business under the name First Boston, and sale of parts of a business involved in repackaging financial assets as investment bonds.
While the 167-year-old group raised 4 billion Swiss francs (€4.1 billion) by selling new shares in itself late last year to make sure it had enough capital to push through the restructuring, the fear in some quarters is that it will not be enough.
Saudi National Bank, which anchored the capital raise to become its biggest shareholder, sent the market into panic on Wednesday when its chairman, Ammar Al Khudairy, ruled out increasing its stake from its level of just under 10 per cent.
This prompted Swiss financial authorities that evening to release a statement of support to Credit Suisse, saying it continues to meet strict capital and liquidity requirements imposed on systemically important banks, and that the country’s central bank would provide it with liquidity if necessary.
[ Crisis-hit Credit Suisse taps $54bn from central bankOpens in new window ]
In the early hours of Thursday Credit Suisse took up the offer, saying it will borrow much as ChF50 billion francs from the Swiss National Bank and buy back some of its debt.
This has served to ease concerns in equity markets – for now.
But why did Credit Suisse need to be restructured?
Where to start? Credit Suisse has been something of a slow-motion car crash for some time.
In 2021 the once-venerable bank suffered a ChF4.8 billion hit from its exposure to the collapse of US hedge fund Archegos Capital Management with a murky past; agreed to pay $475 million (€448 million) in fines to US and UK regulators to settle investigations into loans to Mozambique that were misspent on bribes and banker kickbacks; and was forced to freeze $10 billion of client funds that were invested in the collapsed UK supply-chain finance firm Greensill.
In January last year the group’s chairman of nine months, Antonio Horta-Osório, stepped down after he broke Covid-19 quarantine rules and used the bank’s private jet to drop him in the Maldives for a holiday.
Silicon Valley Bank: what is the cost of the collapse?
The following month Credit Suisse found itself fighting a rearguard action against a data leak on thousands of bank accounts going back to the 1940s, exposing how the bank managed accounts for human rights abusers, fraudsters and sanctioned businessmen.
The bank was forced last week to delay the release of its annual report after US regulators raised last-minute queries. When the document was published on Tuesday it said the group had identified “material weaknesses” in its reporting procedures for the financial years 2022 and 2021 and is adopting a remediation plan.
[ Credit Suisse isn’t the next Lehman Brothers. YetOpens in new window ]
What does this mean for the wider banking system?
Credit Suisse’s problems have been known for some time and were generally viewed by banking investors to be specific to the lender which, strangely, was one of the few big banks to emerge from the financial crisis relatively unscathed. It avoided the ignominy of a government bailout thanks to a 2008 investment from a group of shareholders led by Qatar’s sovereign wealth fund.
Its issues are different from those of SVB and two crypto-focused US lenders, Signature Bank and Silvergate Bank, that collapsed in the past nine days. SVB was by far the biggest with $209 billion of assets at the end of last year.
Unlike EU and UK lenders of a similar size, US banks with balance sheets below $250 billion had been deemed by authorities in that country to be too small to have to comply with global standards on capital, liquidity and resolution.
That’s come back to haunt them and forced the Joe Biden’s administration to guarantee the deposits of SVB and Signature Bank above an existing $250,000 deposit backstop threshold. (Silvergate’s wind-down plan includes full repayment of deposits without tapping a guarantee.)
The Federal Reserve is now, belatedly, considering tougher rules for mid-sized lenders.
The US Federal Deposit Insurance Corporation (FDIC), the body responsible for taking over SVB and Signature bank, may now need to seek temporary guarantees for all uninsured US bank deposits to stem a drain of funds from small and regional lenders towards big banks, the organisation’s former chair Sheila Bair has said.
Meanwhile, the Swiss National Bank has made clear overnight, but committing billions of fresh liquidity to Credit Suisse, that it is willing to prop up the group as it goes through its overhaul – even if that ultimately leads, as many speculate, to a merger of the business with arch rival UBS.
It is one of 30 global systemically important banks, whose failure would cause ripples through the entire financial system.
What does all this mean for Irish banks?
Taoiseach Leo Varadkar said in Washington on Wednesday that while Irish officials are closely monitoring events across the global banking system, they are “not concerned about the stability or health of any of our banks”.
Irish banks, as noted by Richard Flood, an investment manager with Brewin Dolphin Ireland, have much higher levels of capital reserves, “sticky” household deposit bases, and stronger loan books – as a result of stricter lending policies and Central Bank mortgage rules introduced in 2015 – than they held at the time of the global financial crisis almost 15 years ago.
[ Problems remain for Irish tech firms despite SVB rescueOpens in new window ]
Still carrying the scars of the last crisis, they are widely seen among European banking analysts to be among the most risk averse and conservative lenders across the Continent.
But with financial markets now betting that the European Central Bank (ECB) and other central banks will have to scale back plans for continuing rate hikes – for fear that a more aggressive path may lead to other unforeseen problems in the financial system – this means that Irish banks’ interest income may not rise in the coming years as much as some in the market had hoped.
Meanwhile, there is also a fear that a policy error by central banks at a time of heightened anxiety in financial markets could trigger a sharp global recession, with negative consequences for banks.
