March 21, 2023

Great Indian Mutiny

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The Swiss Central Bank is ready to support Credit Suisse

  • Written by Simon Reed and Natalie Sherman
  • Business Journalists, BBC News

photo caption,

Credit Suisse shares hit a record low

Swiss regulators said they were ready to help ailing banking giant Credit Suisse “if necessary”, as the collapse of a Silicon Valley bank in the US raises fears of a broader crisis.

The SNB’s comments came after shares in Credit Suisse plunged 24% to a record low.

Investors are worried about the company’s ailing condition and have already been spooked by the failures of US banks.

Fears ran across stock markets with sharp declines across all major indices.

The Swiss National Bank (SNB) and the Swiss Financial Market Supervisory Authority sought to allay concerns.

“There are no indications of an immediate risk of contagion for Swiss institutions due to the current turmoil in the US banking market,” they said in a joint statement.

Regulators said that strict rules apply to Swiss financial institutions to “ensure their stability” and that Credit Suisse meets the requirements of banks considered to be systemically important.

If necessary, the Swiss National Bank will provide [Credit Suisse] with liquidity.

Earlier, fear of vulnerability in such a large international player weighed on banking stocks around the world, with the Stoxx Europe banking stock index down 7%.

In the UK, the FTSE 100 fell 3.8%, or 293 points – the largest single-day decline since the early days of the pandemic in 2020.

In the US, stocks in both small and large banks took a hit, which helped push the Dow down nearly 0.9%, while the S&P 500 fell 0.7%. The Nasdaq closed almost unchanged for the day.

Andrew Kenningham of Capital Economics writes: “The problems at Credit Suisse once again raise the question of whether this is the beginning of a global crisis or just another ‘private’ issue.

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

The bank – which specializes in lending to technology companies – was shut down by US regulators on Friday in what was the biggest failure of a US bank since 2008. SVB’s UK arm was bought for £1 by HSBC.

In the aftermath of the collapse of SVB, Signature Bank of New York also went bankrupt, with US regulators guaranteeing all deposits in both.

But fears persisted that other banks could face similar problems, and bank stocks have been volatile this week.

image source, Getty Images

photo caption,

A bank run on a Silicon Valley bank ended in its collapse last week

“It is too early to tell how widespread the damage will be,” Lawrence Fink, CEO of investment giant BlackRock, wrote in an annual letter to investors. “The regulatory response has so far been swift, and decisive action has helped stave off contagion risks. But markets remain on edge.”

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

It lost money in 2021 and again in 2022 — its worst year since the 2008 financial crisis — and warned it doesn’t expect to be profitable until 2024.

Shares in the company had already taken a hit before this week — dropping nearly two-thirds in value last year — as customers withdrew funds, including 110 billion Swiss francs ($120 billion) in the last three months of 2022.

The bank’s disclosure on Tuesday of a “material weakness” in its financial reporting controls renewed concerns, prompting a major investor, National Bank of Saudi Arabia, to say it would not inject more money into the Swiss bank.

Credit Suisse insisted its financial condition was not a concern, with the CEO saying its cash reserves “remain 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 to try to ease concerns.

Bloomberg reported that BNP Paribas has stopped accepting certain deals, if Credit Suisse is the counterparty.

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

“If a bank has had even the biggest problem in the past, if the big investors say we don’t want to invest more and we don’t want to let new money flow into that bank, then of course a story is being told where many investors say we want out.”

One of the problems that befell SVB was that it was forced to sell the US government bonds it was holding in order to raise funds.

But the value of these bond holdings has fallen over the past year as the Federal Reserve raised borrowing costs in an effort to rein in inflation.

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

The declines mean that many banks could be exposed to potentially large losses. However, a change in value would not usually be an issue unless other pressures — such as large inflows of client money — force companies to sell the property.

“The concern is that banks with large unrealized losses in their bond portfolios may not have adequate reserves if there is a rapid withdrawal of deposits,” said Susannah Streeter, head of money and markets at Hargreaves Lansdowne.

“Although the largest players are judged not to be at risk, thanks to the huge layer of capital they sit on and the stable nature of their deposits, the tension is palpable.”