The collapse of Silicon Valley Bank and other regional financial institutions is already old news. How about the fall of one of the major banks? Credit Suisse shares tanked to a fresh all-time low on Wednesday, March 15, after investors panicked and hit the sell button on fears that the 166-year-old entity would face a liquidity crisis and potentially fail, requiring a bailout from a central bank. Indeed, it had been a compelling 24-hour span that left the stock market in tatters. But does this mean Credit Suisse is on the brink of failure? An early morning strengthening of the bank's stock may be keeping the wolf from the door, but it is hardly out of the forest yet. The stench is enormous, but a crisis might have been temporarily averted.
High Noon for Credit Suisse
On the morning of March 15, investors popped open their Bloomberg terminals and turned on CNBC to find out that Credit Suisse shares had cratered another 26% to an all-time low of below two francs. Markets were in an uproar after the Saudi National Bank confirmed that it would not offer any more financial assistance, citing some regulatory hurdles that would make it impossible. This matters because the Saudis, who seem intent on redefining their relationship with the Western world as of late, are the largest Credit Suisse shareholder at 9.9%.
The Riyadh bank did try to instill confidence in the global financial markets by telling Reuters that it was still "happy" with the company's turnaround, noting that Credit Suisse would not require more money. However, investors ostensibly did not share this level of enthusiasm, especially after CS reported that it found "material weaknesses" in controls over financial reporting and had failed to stem customer deposit outflows in the fourth quarter.
CEO Ulrich Koerner told Channel News Asia’s Asia Tonight program that the bank's "liquidity basis is very, very strong," adding that "we fulfill and overshoot basically all regulatory requirements." But even as he made this statement, investors were betting through credit default swaps (CDS) that the business would default on its debt.
For now, it appears that these bets will not pay off. The Swiss National Bank – Switzerland's central bank – announced it would present CS with a liquidity injection if needed. If the bank were in great shape, Koerner would reject the offer. However, only hours after the central bank presented this generous offer, CS accepted the money. It will borrow up to $54 billion from the institution.
“This additional liquidity would support Credit Suisse’s core businesses and clients as Credit Suisse takes the necessary steps to create a simpler and more focused bank built around client needs,” the bank said in a statement.
(Photo by Nikolas Kokovlis/NurPhoto via Getty Images)
But while the two organizations noted in a joint statement that there are "no indications of a direct risk of contagion for Swiss institutions due to the current turmoil in the US banking market,” Andrew Kenningham of Capital Economics wrote what everyone is thinking: “The problems in Credit Suisse once more raise the question whether this is the beginning of a global crisis or just another 'idiosyncratic' case."
For now, the remedy appears to have worked as Credit Suisse enjoys at least a temporary reprieve with a market bounce back. A mid-morning rally of more than 20% indicates that investors believe the added liquidity will help navigate any wider market downturns.
A Boon for Healthy Banks
It is no secret that Credit Suisse has had its fair share of problems for the last 20 years, paying out more than $11 billion in fines and penalties. So, if there is a global banking collapse, it would stand to reason that CS would be one of the biggest failures. That said, this entire saga has been a boon for healthy and competent banks, be it JPMorgan Chase or Bank of America. These institutions have reportedly experienced significant deposit inflows in recent days as depositors seek shelter in more dependable banks. But will this be enough to prevent a crisis? With the Federal Reserve essentially launching quantitative easing (QE) infinity for the banking system, you can rest assured that Chair Jerome Powell has the printing press armed and ready to avoid a meltdown.
