Credit Suisse: Why it’s struggling and why this is a big deal

New York

Credit Suisse, the 167-year-old bank and Switzerland’s second-largest lender, is in deep trouble.

The bank said it would borrow up to 50 billion Swiss francs ($53.7 billion) from the Swiss National Bank, taking advantage of the bailout late Wednesday after its stock fell as much as 30 percent. It also said it would buy back some of its own debt.

Its struggles have caused concern in Europe and across global markets, and what happens at Credit Suisse could affect the wider financial system.

Credit Suisse is one of the largest financial institutions in the world.

It is classified by the Financial Stability Board, an international body that monitors the financial system, as a “global systemically important bank”, along with just 30 others, including JPMorgan Chase, Bank of America and Bank of China.

“Credit Suisse is fundamentally a much bigger concern for the global economy than the US regional banks targeted last week,” Andrew Kenningham of Capital Economics said in a note to clients on Wednesday. “Credit Suisse is much more interconnected globally … not just a Swiss problem, but a global one.”

Central banks around the world have raised interest rates to try to slow inflation and cool the global economy.

But this process left some banks vulnerable.

Fears of weaker lenders exploded last week when Silicon Valley Bank collapsed in the biggest U.S. bank failure since the 2008 financial crisis. It dragged down other struggling banks, including Credit Suisse, which was a slow-moving car wreck for decades.

“The problems at Credit Suisse are very different from those that brought down SVB a few days ago,” economists at Capital Economics said in an email to clients on Thursday. “But they serve as a reminder that as interest rates rise, vulnerabilities lurk in the financial system.”

The trigger for Wednesday’s drop in Credit Suisse shares was not interest rate hikes. It followed comments by the bank’s biggest backer – Saudi Arabia’s National Bank – that it was not ready to raise more money after buying a nearly 10% stake for $1.5 billion last year.

Credit Suisse has been struggling for years.

It was widely seen as the weakest link among Europe’s big banks, according to Kenningham.

The company has been plagued by a series of mistakes and compliance failures in recent years that have cost it billions and led to several top management overhauls. And over the past decade, the Swiss bank has been hit with fines and sanctions related to tax evasion, botched betting and other issues.

In 2014, Credit Suisse pleaded guilty to federal charges that it illegally allowed certain US clients to evade taxes. The bank paid a total of $2.6 billion to the federal government and New York financial regulators as part of the settlement.

The bank’s reputation was damaged by an accounting scandal at Luckin Coffee. Credit Suisse acted as an underwriter when the company went public on the Nasdaq in 2019. The Chinese company delisted from the US exchange after fraudulently inflating sales.

In 2020, Credit Suisse CEO Tidjane Thiam resigned following two high-profile spying scandals involving top bank executives.

A year later, the collapse of American hedge fund Archegos Capital cost Credit Suisse $5.5 billion and left the bank in tatters. An independent external investigation later found that Credit Suisse allowed Archegos Capital to take “voracious” and “potentially catastrophic” risks that culminated in the US hedge fund’s spectacular collapse.

In 2022, the bank was hit by social media speculation that it was on the verge of collapse, causing customers to withdraw billions of dollars. This has made profitability almost impossible for the bank, which has been hemorrhaging money for years.

And last month, Credit Suisse’s stock fell to record lows after it posted its biggest annual loss since the 2008 financial crisis and a report emerged that regulators were looking into comments from the lender’s chairman about the health of its finances. .

A rescue by Swiss National Bank could buy time for Credit Suisse to restore confidence and move ahead with restructuring plans that include spinning off its investment banking into an independent US-based business and focusing on Switzerland as well as money management for wealthy clients.

But Credit Suisse may not be out of the woods yet.

Banking analysts at JPMorgan said the liquidity support offered by the Swiss central bank would not be sufficient given “ongoing market confidence issues” with Credit Suisse’s investment banking plans and the erosion of the bank’s franchise.

“In our view, the status quo is no longer an option as counterparty concerns begin to emerge as reflected by weakness in credit/equity markets,” they wrote in a research note on Thursday, adding that a buyout — likely by the largest Swiss rival UBS— was the most likely end game.

CNN’s Mark Thompson and Anna Cooban contributed to this article.

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