At present, Credit Suisse raises concerns over its financial health, and it can be attributed to the following: I) On 3rd October 2022, Credit Default Swaps (CDS) of the bank surged to 500 basis points, higher than the CDS level of Credit Suisse at the peak of the global financial crisis in 2008. The credit insurance cost rose indicating that investors were paying up for a higher probability of default.; II) On the same day, the company's stock stumbled hitting a new low of USD3.70 per share before rebounded back by less than 1% later in the day. The current market capitalization stands at around USD10bn, which is less than half of what it was in February 2022.; and III) Within the latest 3 quarters, Credit Suisse reported a combined loss of USD4mn when global banks were announcing record profits.
However, the financial pressure came to light about 8 months ago, owing to the bank's excessive risk taking through aggressive investment banking and skewed incentive structures. Precisely, I) Credit Suisse had USD10bn exposure to Greensill, a supply chain financing company which went bankrupt in 2021. The bank had securitized and converted the supply chain receivables to bond and sold as safe assets to its clients, therefore, most likely to end up with losses.; II) Credit Suisse had to bear USD5.5bn loss by Bill Hwang’s Archegos Capital; III) The criminal money laundering charges faced by the bank including the Mozambique tuna bongs scam resulted in a GBP350mn fine and IV) High risk assets funded by the bank for Russian oligarchs now facing difficulties amidst the Ukraine war.
The bank has been reassuring investors and clients despite higher CDS and lower stock prices to reduce the market anxiety. Worst case scenario would be the bank to file for Chapter 11 bankruptcy creating negative ripple effects on the global financial system. Unlike in 2008, the stronger systematic risk management measures create a sound banking system and given Credit Suisse's strong CET1 ratio as of 30th June 2022, a broad-based crisis looks unlikely. However, the bank will have to come up with an effective restructuring plan entailing business divestiture to preserve the value of its core banking and wealth management business. Other options include recapitalization; however, the money will have to be raised at a diluted rate. Further, cost saving measures will be beneficial. The last resort would be for the regulators to implement a government-engineered solution like in 2008, when the Swiss Central bank stepped in with an emergency funding for the Union Bank of Switzerland.
One of the other global banks, Deutsche bank has also experienced a similar set of circumstances in 2016, when the bank faced liquidity pressures. Deutsche bank encountered a federal probe related to mortgage-backed securities and had to undergo a series of restructuring with selling off its risky debt and raising USD8.5bn of capital in early 2017 before stabilizing. Likewise, Credit Suisse appointed Ulrich Körner as the Group Chief Executive Officer from 1st August 2022 and the new management is expected to announce their business update schedule alongside the third quarter earnings release on 27th October 2022. Analysts at KBW and Deutsche bank have recently estimated the restructuring plans to cost around USD4bn. While the company takes necessary steps, authorities in Switzerland may intervene as needed to avoid another Lehman moment in Europe.
