Credit score Suisse is on the centre of market turmoil amid rumours the financial institution could possibly be getting ready to collapse.
Buyers have rushed to promote the Zurich-based financial institution’s shares amid issues about its monetary well being because it prepares to unveil a expensive restructuring plan due later this month.
Hypothesis that the financial institution might fail has invoked comparisons with the 2008 collapse of United States’s funding financial institution Lehman Brothers, which precipitated the worst financial disaster for the reason that Nice Melancholy. However economists are cautioning in opposition to such parallels because of the vital variations between then and now.
Why is Credit score Suisse beneath scrutiny?
Whereas Credit score Suisse’s inventory worth has been declining for months, issues have been heightened since CEO Ulrich Körner final week despatched a memo to workers aimed toward reassuring them in regards to the financial institution’s future.
Within the memo despatched on Friday, Körner cautioned in opposition to conflating the “day-to-day inventory worth” with monetary well being and insisted the upcoming restructuring would make sure the financial institution’s “long-term, sustainable future”.
Somewhat than calm traders, the memo set off renewed nervousness in regards to the financial institution’s standing.
On social media, numerous traders with massive followings, together with Lark Davis and Graham Stephan, posted comparisons to Lehman Brothers that rapidly went viral.
On Monday, Credit score Suisse shares plunged as a lot as 11.5 p.c, hitting a document low of $3.64.
On the similar time, credit score default swaps — a sort of funding that serves as insurance coverage in opposition to an organization defaulting — rose to all-time highs.
One among Europe’s largest banks, Credit score Suisse’s troubles have been a while within the making.
The lender has been embroiled in a raft of scandals lately which have battered its picture and stability sheet.
The controversies embrace buying and selling jobs for enterprise in Hong Kong, hiring non-public detectives to spy on workers, laundering cash for a prison organisation in Bulgaria, and facilitating corrupt loans in Mozambique, over which the financial institution agreed to pay $475m in fines.
The financial institution additionally racked up billions of {dollars} in losses from the collapse in 2021 of hedge fund Archegos and monetary providers agency Greensill.
Amid the turmoil, the lender has misplaced practically 60 p.c of its market worth this yr alone.
“Credit score Suisse has the poor monitor document that options Archegos and Greensill – so there may be not lots of confidence,” Campbell R Harvey, a professor at Duke College’s Fuqua College of Enterprise, advised Al Jazeera.
“They’ve had CEO turnover. Additional, the CEO’s inner letter to workers didn’t reassure – if you need to clarify to workers what’s going on, it’s a unhealthy signal.”
Below the restructuring introduced following Körner’s appointment in July, Credit score Suisse is looking for to shrink its funding financial institution to focus extra on wealth administration.
Analysts have estimated that Credit score Suisse might want to increase $4-6bn to hold out the restructuring, which might show difficult as traders see the financial institution as an more and more dangerous wager.
Might Credit score Suisse trigger a Lehman Brothers-style crash?
Financial analysts usually see that as unlikely.
To begin with, regardless of Credit score Suisse’s woes, the lender has enormous quantities of capital to face up to any losses.
The financial institution’s whole property got here to 727 billion Swiss francs ($732.7bn) on the finish of the second quarter, about one-fifth of which was held in money, in response to a current evaluation by JPMorgan Chase.
On Monday, Citibank analysts dismissed comparisons to 2008, noting that Credit score Suisse’s liquidity protection ratio — the portion of money and different property that may be rapidly accessed in a disaster — was among the many “greatest at school” at 191 p.c.
“I don’t assume it is a Lehman Brothers. Their tier one ratio is 13.5 p.c,” Harvey mentioned, referring to the portion of capital made up of core property, which regulators think about a key marker of economic power.
The worldwide monetary atmosphere has additionally modified considerably since Lehman Brothers went bankrupt.
Banks are extra tightly regulated than in 2008 and have extra capital readily available to handle threat.
“Huge banks usually are much better capitalised than they have been in 2008, and my very own view of Lehman has at all times been {that a} large a part of the issue when Lehman failed stemmed from the truth that everybody was anticipating Lehman to be bailed out,” David Skeel, a professor of company regulation on the College of Pennsylvania Legislation College, advised Al Jazeera.
“US regulators had signalled when Bear Stearns stumbled in March 2008 that they wouldn’t let an enormous financial institution fail, then shocked the markets by letting Lehman fail. I believe the Credit score Suisse state of affairs received’t have knock-on results, each due to usually excessive ranges of capital and the very completely different circumstances of 2008.”
Holger Schmieding, chief economist at Hamburg-based Berenberg Financial institution, mentioned that whereas he couldn’t touch upon the well being of Credit score Suisse, a disaster much like 2008 was extraordinarily unlikely.
“The danger of a Lehman-style occasion is near zero as – no matter the issue with any financial institution might or is probably not – regulators and central banks are much better geared up to nip any such downside within the bud,” Schmieding advised Al Jazeera.