Swiss bank officials are offering a lifeline to Credit Suisse amid fears the investment banker could default on its debt as uncertainty grips US financial markets.
The cost of insuring Credit Suisse’s short-term five-year notes with its lender hit its highest level in history on Wednesday morning, following the back-to-back collapses of three US banking giants — Silvergate Bank, Silicon Valley Bank (SVB) and Signature Bank. The bank released a bearish annual report earlier in the week, raising concerns throughout Wednesday that the bank could also collapse.
Regulators tried to allay investor concerns by issuing a statement on Wednesday clarifying that the troubles at these US banks “do not pose a direct risk of contagion to Swiss financial markets.” While the US bond collapse posed a risk to Credit Suisse’s earnings, the government could intervene if necessary.
“The strict capital and liquidity requirements applicable to Swiss financial institutions ensure their stability,” the Swiss National Bank SNB and the Swiss Financial Market Supervisory Authority issued a joint statement on Wednesday afternoon. “Credit Suisse meets the capital and liquidity requirements for systemically important banks. If necessary, the SNB provides liquidity to CS.”
Longstanding concerns about corporate governance, ranging from money laundering to investor fraud, only served to exacerbate Credit Suisse’s problem as some high-profile shareholders announced their intention to exit the company. At its worst on Wednesday, the company’s share prices plummeted as much as 31 percent after officials at the Saudi National Bank – which owns 9.88 percent of Credit Suisse stock – said they would not buy any more shares to buy the company save, as they would be subject to concerns additional regulations from exceeding a 10 percent stake in the company.
Credit default swaps, which are linked to Credit Suisse debt, rose sharply following comments from the Saudi National Bank official, suggesting traders believed Credit Suisse would default on payments. It’s the same tool that some investors successfully used to bet against the real estate market in 2008.
The SNB’s statement comes days after the widely publicized collapse of SVB, a favorite bank of Silicon Valley’s startup crowd, which after management failures and a panic instigated by its wealthiest accountholders caused a “bank run” that threatened to run out of money could withdraw . The US government stepped in with billions of dollars to meet those obligations – most of which were uninsured by the Federal Deposit Insurance Corporation – and announced that it would buy the company’s existing assets, consisting primarily of risky, long-term securities existed.
However, Credit Suisse is unlikely to face similar problems. Swiss regulations, officials noted, require all banks to maintain capital and liquidity buffers that “meet or exceed the minimum requirements of international banking standards,” while systemically important banks like Credit Suisse are subject to even higher capital and liquidity requirements.
“In this way, negative effects of major crises and shocks can be cushioned,” they write.