Credit Suisse shares rise after the central bank offers a lifeline
GENEVA (AP) – Credit Suisse shares rose Thursday after the Swiss central bank agreed to lend the bank up to 50 billion francs ($54 billion) to bolster confidence in the country’s second-biggest lender and broad concerns about the international financial system after the collapse of two American banks.
Credit Suisse announced the deal before the Swiss stock market opened, sending shares up as much as 33% before settling with a 25% gain to 2.13 francs in midday trading. It was a massive turnaround from a day earlier, when news that the bank’s biggest shareholder will not inject more money into Credit Suisse sent shares tumbling 30%, dragging down other European banks.
European bank shares also rose modestly on Thursday.
The Swiss National Bank said on Wednesday it was willing to support Credit Suisse because it meets the higher capital and liquidity requirements imposed on “systemically important banks,”[ads1]; adding that the problems that have hit some U.S. banks do not “pose a direct risk of infection” to Switzerland.
In short, it is an attempt to build trust.
“Regulators will certainly hope in Switzerland that this is enough,” Russ Mould, investment director at AJ Bell, an online investment platform. “They don’t want someone to be the person sitting in a darkened room or darkened theater yelling fire, because that’s what gets a rush for the exits.”
“So what they’re trying to do is say to depositors, ‘Your money is safe, we’ll stop you, we’ll stop the bank, give it liquidity,'” he said. “They’re trying to say, move on. Nothing to see here.”
Credit Suisse, which was beset by problems long before the US bank failures, said Thursday that the loans from the central bank would give it time to complete a reorganization designed to create a “simpler and more focused bank.”
“These measures demonstrate decisive action to strengthen Credit Suisse as we continue our strategic transformation to deliver value to our clients and other stakeholders,” CEO Ulrich Koerner said in a statement.
Despite the banking crisis, the European Central Bank went ahead with a big half-percentage-point rate hike to tackle stubbornly high inflation, saying Europe’s banking sector is “resilient” with strong finances.
Higher interest rates fight inflation but recent days have led to concerns that they may have caused hidden losses to bank balance sheets.
Central banks in the US and Europe have moved quickly 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 said on Sunday they would guarantee all deposits at California-based Silicon Valley Bank and the smaller Signature Bank of New York, ensuring that people would not be hurt by the banks’ collapse. The US Federal Reserve also announced additional funding to ensure other banks could meet depositors’ needs.
The British government and the Bank of England said on Monday they had facilitated the sale of Silicon Valley Bank’s UK arm to HSBC, one of Europe’s biggest banks, to ensure the bank’s customers would have access to their money.
John Gieve, a former deputy governor of the Bank of England, said the rapid response was different to what happened at the start of the global financial crisis 15 years ago. Back then, US authorities allowed the investment banking giant Lehman Brothers to collapse.
“That’s what spooked the markets as a whole, because they weren’t behind it,” Gieve told the BBC. “So what we’ve seen overnight is the Swiss central bank saying, ‘No, we’re not going to let this have a messy collapse.’
“I don’t know what the future of a Credit Suisse holds, but so far they are still standing,” he added. “And it looks like the Swiss central bank wants to make sure it stays around long enough to reorganize its affairs for the future.”
The banks are under pressure after interest rates rose rapidly following an extended period of historically low interest rates.
To increase returns on their investments, banks had to take on more risk, and some “did this more cautiously than others,” said Sascha Steffen, professor of finance at the Frankfurt School of Finance & Management.
As a result, some banks now face a lack of “liquidity”, meaning they cannot sell assets quickly enough to meet the demands of depositors.
Credit Suisse shares had fallen to a record low on Wednesday after the Saudi National Bank said it would not put more money into the Swiss lender to avoid regulations that kick in if an investor’s stake rises above 10%.
Credit Suisse also reported on Tuesday that executives had identified “material weaknesses” in the bank’s internal controls over financial reporting at the end of last year. It raised new doubts about the bank’s ability to cope with the storm.
The stock has undergone a long, sustained decline: Now trading at just over 2 francs, the stock was valued at more than 80 francs ($86.71) in 2007.
The Swiss bank has been pushing to raise money from investors and roll out a new strategy to overcome a range of problems, including bad bets at hedge fundsrepeated shake-ups of top management and a spy scandal involving Zurich competitor UBS.
Credit Suisse is “a much bigger concern for the global economy” than the mid-sized US banks that collapsed, said Andrew Kenningham, chief European economist for Capital Economics.
It has several subsidiaries outside Switzerland and handles trading for hedge funds.
The problems “once again raise the question of whether this is the beginning of a global crisis or just another ‘idiosyncratic’ case,” Kenningham said in a note. “Credit Suisse was considered the weakest link among Europe’s big banks, but it is not the only bank that has struggled with weak profitability in recent years.”
European finance ministers said this week that their banking system has no direct exposure to US bank failures.
Europe strengthened its banking safeguards after the global financial crisis that followed the collapse of US investment bank Lehman Brothers in 2008 by transferring supervision of the biggest banks to the central bank, analysts said.
The Credit Suisse parent bank is not part of EU supervision, but it has units in several European countries that are. Credit Suisse is subject to international rules that require it to maintain financial buffers against losses as one of 30 so-called globally systemically important banks, or G-SIBs.
The Church reported from London. AP reporters David McHugh in Frankfurt, Germany, Colleen Barry in Milan and Joseph Krauss in Ottawa, Ontario contributed.