Credit Suisse is at the center of market turbulence, with rumors that the bank is on the verge of failing. Investors have hurried to liquidate the Zurich-based bank’s stock as it prepares to publish a pricey restructuring plan later this month, raising fears about its financial health.
The possibility of the bank failing has prompted analogies to the 2008 fall of the United States’ investment firm Lehman Brothers, which triggered the worst economic crisis since the Great Depression. However, economists warn against drawing such similarities because of the considerable contrasts between then and now.
While Credit Suisse’s stock price has been falling for months, fears have grown since CEO Ulrich Körner delivered a note to staff last week reassuring them about the bank’s future. In the memo, Körner warned against equating the bank’s “day-to-day stock price” with its “strong capital basis and liquidity position,” and emphasized that the planned reorganization would safeguard the lender’s “long-term, sustainable future.”
Körner also criticized the media for making “many factually incorrect claims” about the 166-year-old financial company. Rather than calming investors, the memo heightened concerns about the bank’s future. A number of investors with huge followings, like Lark Davis and Graham Stephan, tweeted similarities to Lehman Brothers on social media, which immediately went viral.
Credit Suisse shares
Credit Suisse shares fell as much as 11.5 percent on Monday, reaching a record low of $3.64. At the same time, credit default swaps, a sort of investment that acts as insurance against a company defaulting, reached new highs. Credit Suisse, one of Europe’s largest banks, has been in turmoil for some time.
In recent years, the lender has been entangled in a slew of scandals that have harmed its reputation and financial sheet. The problems include paying private investigators to spy on staff in Hong Kong, laundering money for a criminal organization in Bulgaria, and arranging crooked loans in Mozambique, for which the bank agreed to pay $475 million in fines.
The bank also suffered billions of dollars in losses as a result of the bankruptcy of hedge fund Archegos and financial services firm Greensill in 2021. In the midst of the turbulence, the lender has lost roughly 60% of its market value this year alone. “Credit Suisse has a dismal track record that includes Archegos and Greensill, so there isn’t a lot of confidence,” said Campbell R Harvey, a professor at Duke University’s Fuqua School of Business.
“There has been CEO turnover. Furthermore, the CEO’s internal message to staff did not reassure – “if you have to explain what is going on to people, it is a terrible indicator.” Credit Suisse plans to reduce its investment bank to focus more on wealth management under the restructuring announced following Körner’s hiring in July.
Analysts anticipate that Credit Suisse will need to raise $4-6 billion to complete the reorganization, which could be difficult given that investors perceive the bank as an increasingly risky gamble.
Economic analysts view
To begin with, despite Credit Suisse’s troubles, the lender has ample cash to absorb any losses. According to a recent JPMorgan Chase research, the bank’s total assets were 727 billion Swiss francs ($732.7 billion) at the end of the second quarter, with around one-fifth kept in cash.
Citibank analysts downplayed analogies to 2008 on Monday, saying that Credit Suisse’s liquidity coverage ratio — the share of cash and other assets that can be promptly accessed in a crisis — was 191 percent, among the “best in class.”
“I don’t believe this is a Lehman Brothers.” “Tier one ratio is 13.5 percent,” Harvey added, referring to the share of capital comprised of core assets, which regulators regard as a significant indicator of financial soundness.
Since Lehman Brothers went bankrupt, the global financial climate has also shifted dramatically. Banks are more tightly regulated than they were in 2008, and they have more capital to manage risk.
“Big banks are far better capitalized than they were in 2008, and my own view of Lehman has always been that a big part of the problem when Lehman failed stemmed from the fact that everyone expected Lehman to be bailed out,” said David Skeel, a professor of corporate law at the University of Pennsylvania Law School.
“When Bear Stearns stumbled in March 2008, US regulators signaled that they would not allow a large bank to fail, then stunned the markets by allowing Lehman to fail.” I believe the Credit Suisse crisis will have minimal repercussions, owing to usually high levels of capital and the extremely different conditions of 2008.”
According to Holger Schmieding, chief economist at Hamburg-based Berenberg Bank, while he could not comment on Credit Suisse’s health, a crisis similar to 2008 was exceedingly unlikely. “The probability of a Lehman-style incident is close to zero because regulators and central banks are far better suited to nip any such crisis in the bud,” Schmieding said, according to sources.
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