Fears about the world banking system spread to Europe on Wednesday as shares in the globally connected Swiss bank Credit Suisse plunged and dragged down other major European lenders in the wake of bank failures in the United States.
At one point, Credit Suisse shares lost more than one-quarter of their value, hitting a record low after the bank’s biggest shareholder — the Saudi National Bank — told news outlets that it would not put more money into the Swiss lender, which was beset by problems long before the U.S. banks collapsed.
The turmoil prompted an automatic pause in trading of Credit Suisse shares on the Swiss market and sent shares of other European banks tumbling, some by double digits. That fanned new fears about the health of financial institutions following the recent collapse of Silicon Valley Bank and Signature Bank in the U.S. in recent days.
Speaking on Wednesday at a financial conference in the Saudi capital of Riyadh, Credit Suisse chairman Axel Lehmann defended his bank when asked about management issues, saying, “We already took the medicine” to reduce risks.
When asked if he would rule out government assistance in the future, he said “that’s not a topic…. We are regulated, we have strong capital ratios, very strong balance sheet, we are all hands on deck, so that’s not a topic whatsoever.”
Central bank prepared to act
But Switzerland’s central bank announced late Wednesday that it was prepared to act, saying it would support Credit Suisse if needed. A statement from the bank did not specify whether the support would come in the form of cash, loans or other assistance. At the moment, regulators said, they believe the bank has enough money to meet its obligations.
Credit Suisse then said early Thursday that it is taking measures to shore up its finances, including exercising an option to borrow up to 50 billion Swiss francs ($73 billion Cdn) from the central bank.
“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.
A day earlier, Credit Suisse reported that managers had identified “material weaknesses” in the bank’s internal controls on financial reporting as of the end of last year. That fanned new doubts about the bank’s ability to weather the recent storm.
Ottawa Morning8:33Canada regulator steps in to head off wider crisis after US bank collapse
The abrupt collapse of the Silicon Valley Bank prompted Canada’s banking regulator to take control of the bank’s operations here. But is it enough to contain a larger crisis? Globe and Mail technology reporter Sean Silcoff explains how the crisis unfolded and what could happen next.
Credit Suisse stock dropped about 30 per cent, to about 1.60 Swiss francs ($2.36 Cdn), before clawing back to a 24 per cent loss at 1.70 francs ($2.51 cdn) at the close of trading on the SIX stock exchange. At its lowest, the price was down more than 85 per cent from February 2021.
After the joint announcement from the Swiss National Bank and the Swiss financial markets regulator, the shares also made up some ground on Wall Street.
The stock has suffered a long, sustained decline: In 2007, the bank’s shares traded at more than 80 francs ($118.07 Cdn) each.
With concerns about the possibility of more hidden trouble in the banking system, investors were quick to sell bank stocks.
France’s Société Générale SA dropped 12 per cent at one point. France’s BNP Paribas fell more than 10 per cent. Germany’s Deutsche Bank tumbled eight per cent, and Britain’s Barclays Bank was down nearly eight per cent. Shares in the two French banks were also briefly suspended.
The STOXX Banks index of 21 leading European lenders sagged 8.4 per cent following relative calm in the markets on Tuesday.
‘A much bigger concern’
The turbulence came a day ahead of a meeting by the European Central Bank.
Bank president Christine Lagarde said last week, before the U.S. failures, that the bank would “very likely” increase interest rates by a half percentage point to fight against inflation. Markets were watching closely to see if the bank carries through despite the latest turmoil.
Credit Suisse is “a much bigger concern for the global economy” than the midsize U.S. banks that collapsed, said Andrew Kenningham, chief Europe economist at Capital Economics in London.
It has multiple subsidiaries outside Switzerland and handles trading for hedge funds.
“Credit Suisse is not just a Swiss problem but a global one,” he said.
The bank failures in the U.S. have sent shockwaves north, rattling the Canadian tech sector. Depositors have rushed to get their money out, but there’s a broader fear it will chill investment.
Kenningham noted, however, that the Swiss bank’s “problems were well known so do not come as a complete shock to either investors or policy-makers.”
The troubles “once more raise the question whether this is the beginning of a global crisis or just another ‘idiosyncratic’ case,” he said in a research note. “Credit Suisse was widely seen as the weakest link among Europe’s large banks, but it is not the only bank which has struggled with weak profitability in recent years.”
The Swiss National Bank declined to comment. The Swiss Financial Market Supervisory Authority did not immediately respond to calls and emails seeking comment.
Investors responded to “a broader structural problem” in banking following a long period of low interest rates and “very, very loose monetary policy,” said Sascha Steffen, professor of finance at the Frankfurt School of Finance & Management in Germany.
In order to earn some yield, banks “needed to take more risks, and some banks did this more prudently than others,” he said.
Investors are now worried that banks “have risks on their balance sheet that they don’t know about and therefore have accumulated significant losses that haven’t been yet realized.”
European finance ministers said this week that their banking system has no direct exposure to the U.S. bank failures.
Analysts say Europe has strengthened safeguards around its banking system since the global financial crisis that followed the collapse of U.S. investment bank Lehman Brothers in 2008.