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Shares in Credit Suisse rose 30 percent on Thursday after it announced it would raise its finances by borrowing up to US$54 billion from the Swiss central bank, boosting confidence amid fears of a banking system being moved from the US to Europe.
That was a big change from the previous day, when news that the bank’s biggest shareholder would not inject more money into Credit Suisse sent its shares down 30 percent, dragging other European banks down.
European banking stocks also rose modestly Thursday.
The Swiss National Bank said on Wednesday it was ready to support Credit Suisse as it meets higher capital and liquidity requirements imposed on “systemically important banks,” and said problems at some U.S. banks did not “indicate an immediate risk . of contagion” to Switzerland.
“You have to restore confidence quickly, and that’s what the Swiss National Bank is doing,” Carlo Lombardini, an international banking expert at the University of Lausanne, told the BBC. “And we all know that the central bank is the lender of last resort.”
Credit Suisse, which was troubled before the US bank failed, said Thursday that a loan from the central bank would give it time to complete its reorganization.
“These steps represent important actions to strengthen Credit Suisse as we continue our strategic transformation to deliver value to our clients and other stakeholders,” chief executive Ulrich Koerner said in a statement.
The banking turmoil has cast a shadow over Thursday’s meeting of the European Central Bank. Before the chaos erupted, ECB chief Christine Lagarde had said it was “highly likely” the bank would raise rates by half a percent to tackle sky-high inflation.
After European bank shares fell on Wednesday, analysts said the outcome of the meeting was difficult to predict, with some saying the central bank could dial back to a quarterly hike. Higher rates fight inflation, but in recent days have fueled concerns that they could lead to hidden losses on bank balance sheets.
Collapse of US banks
Central banks in the US and Europe have rushed to restore confidence in the banking system after last week’s collapse of Silicon Valley Bank, the second largest bank failure in US history.
US authorities on Sunday said they would guarantee all deposits of California-based Silicon Valley Bank and the smaller New York-based Bank of America, making sure that people will not be hurt by the collapse of the banks.
The British government and the Bank of England said it has facilitated the sale of the Silicon Valley Bank UK arm to HSBC, one of the largest banks in Europe, taking that bank customers will have access to money.
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John Gieve, former deputy governor of the Bank of England, said the rapid response was different from what happened at the start of the global financial crisis 15 years ago. At that time, the US authorities allowed the investment banking giant Lehman Brothers to collapse.
“That’s what’s shaking the market as a whole, because it’s not behind it,” Gieve told the BBC. “So what we saw overnight was the Swiss central bank saying, ‘No, we’re not going to let this collapse.'”
Refusal of government assistance
Banks are under pressure after interest rates rose sharply after a long period of historically low levels.
To boost investment returns, banks need to take more risks and some “do it more wisely than others,” said Sascha Steffen, professor of finance at the Frankfurt School of Finance & Management.
As a result, some banks are now experiencing a “liquidity” shortage, meaning they cannot sell their assets quickly enough to meet the demands of depositors.
Shares of Credit Suisse have dropped to a record low on Wednesday after the Saudi National Bank told news outlets that it will not inject more money into the Swiss lender so that regulations kick in if the investor’s shares rise above 10 percent.
Credit Suisse also reported Tuesday that managers had identified “material weaknesses” in the bank’s internal controls over financial reporting late last year. That has raised new doubts about the bank’s ability to weather the storm.
Its stock has been in a long and continuous decline: It is currently trading at 2.10 Swiss francs (3.11 Cdn), while in 2007, it was more than 80 francs ($118.6 Cdn).
‘Seen as the weakest link’
Credit Suisse is a “bigger concern for the global economy” than the collapse of mid-sized US banks, said Andrew Kenningham, chief European economist for Capital Economics. It has several subsidiaries outside of Switzerland and handles trading for hedge funds.
“Credit Suisse is not just a Swiss problem but a global problem,” he said. The issue “once again raises the question of whether this is the start of a global crisis or just another ‘idiosyncratic’ case,” Kenningham said in a note.
Edmonton AM4:40 a.mThe collapse of Silicon Valley Bank was felt throughout the tech industry
The collapse of Silicon Valley Bank, and efforts to contain the fallout, have dominated headlines in recent days. But what does this US bank failure mean for tech companies in general? Edmonton AM tech columnist Dana DiTomaso has been watching this story and joins us today.
“Credit Suisse is considered the weakest link among the big banks in Europe, but it is not the only bank that has struggled with extreme profitability in recent years.”
European finance ministers said this week that the banking system has no direct exposure to US bank failures.
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