Swiss central bank ready for support from Credit Suisse

Swiss regulators have said they are ready to help troubled banking giant Credit Suisse “if necessary” as the collapse of US Silicon Valley Bank raises fears of a wider crisis.

The comments from the Swiss National Bank came after shares in Credit Suisse fell 24% to a record low.

Investors are concerned about the state of the troubled company and are already shocked by the US bank failures.

Concerns spread across equity markets, with all major indices falling sharply.

The Swiss National Bank (SNB) and the Swiss financial market regulator tried to allay the fears.

“There is no evidence of an immediate risk of contagion for Swiss institutions from the current turmoil in the US banking market,” they said in a joint statement.

Strict rules apply to Swiss financial institutions to “ensure their stability” and Credit Suisse meets the requirements for banks considered systemically important, the regulators said.

“If necessary, the SNB will take care of it [Credit Suisse] with liquidity,” they added.

Previously, fears of weakness in such a major international player had weighed on banking stocks around the world, with the Stoxx Europe banking stock index plummeting 7%.

In the UK, the FTSE 100 fell 3.8% or 293 points – the biggest one-day drop since the early days of the 2020 pandemic.

The German Dax fell more than 3% and the French Cac 40 index closed about 3.5% lower. In Spain, the Ibex 35 ended more than 4% lower.

In the US, stocks of both small and large banks were hit, sending the Dow down nearly 0.9%, while the S&P 500 fell 0.7%. The Nasdaq closed more or less flat today.

“Credit Suisse’s troubles once again raise the question of whether this is the start of a global crisis or just another ‘idiosyncratic’ case,” wrote Andrew Kenningham of Capital Economics.

Problems in the banking sector began in the US last week with the collapse of Silicon Valley Bank, the country’s 16th largest bank.

The bank – which specialized in lending to technology companies – was shut down by US regulators on Friday in what was the largest bankruptcy of a US bank since 2008. SVB’s UK arm was snapped up by HSBC for £1.

In the wake of the collapse of the SVB, New York-based Signature Bank also filed for bankruptcy, with US regulators underwriting all deposits at both.

But fears remained that other banks could face similar problems, and trading in bank stocks was volatile this week.

“It is too early to know the extent of the damage,” Laurence Fink, CEO of investment giant BlackRock, wrote in an annual letter to investors. “The regulatory response has been swift so far and decisive action has helped prevent contagion risks. But markets remain tense.”

Founded in 1856, Credit Suisse has faced a series of scandals in recent years, including allegations of money laundering and other issues.

It lost money in 2021 and again in 2022 – its worst year since the 2008 financial crisis – and has warned it won’t be profitable until 2024.

Shares in the company were already hit hard this week — their value fell by about two-thirds last year — as customers raised funds in the last three months of 2022, including 110 billion Swiss francs ($120 billion).

The bank’s revelation on Tuesday of “material weakness” in its financial reporting controls reignited concerns, prompting the major investor, the Saudi National Bank, to say it would not inject any further funds into the Swiss lender.

Credit Suisse insisted its financial position was not a problem, with the CEO saying its cash reserves were “still very, very strong”.

But shares in the bank ended the day down 24% as other banks scrambled to reduce their exposure to the company and prime ministers in Spain and France spoke out in an attempt to allay fears.

Bloomberg reported that BNP Paribas had stopped accepting certain deals when Credit Suisse was the counterparty.

“This banking crisis came from America. And now people are watching how the whole thing can also cause problems in Europe,” says Robert Halver, head of capital markets at Germany’s Baader Bank.

“If a bank has had even the slightest problem in the past, if big investors say we don’t want to invest anymore and we don’t want to let new money flow into this bank, then of course a story is told where a lot of investors say we’re out of it want.”

One of the problems that hit SVB was that it was forced to sell US Treasury bonds it owned to raise money.

But the value of these bonds had fallen over the past year as the US Federal Reserve increased borrowing costs to curb inflation.

Many other central banks – including the Bank of England – have also raised interest rates. As interest rates rise, the value of bond portfolios falls.

The declines could leave many banks with significant potential losses. However, the change in value would normally not be a problem unless other pressures – such as a significant outflow of client funds – force the companies to sell the holdings.

“The concern is that banks sitting with large unrealized losses in their bond portfolios may not have sufficient buffers if deposits are withdrawn quickly,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

“Although the biggest players are supposed to be risk-free, the nervousness is palpable thanks to the thick layer of capital they sit on and the stable nature of their deposits.”