Credit Suisse shares surged Thursday after the Swiss central bank agreed to loan the bank up to 50 billion francs ($54 billion) to bolster confidence in the country’s second-biggest lender and blunt concerns about the international financial system following the collapse of two U.S. banks.
Credit Suisse announced the agreement before the Swiss stock market opened, sending shares up as much as 33% before they settled at a 25% gain, to 2.13 francs, in midday trading. That 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 its shares tumbling 30%, dragging down other European banks.
European banking stocks also rose modestly Thursday.
The Swiss National Bank said Wednesday that it was prepared to back Credit Suisse because it meets the higher capital and liquidity requirements imposed on “systemically important banks,” adding that the problems that have hit some U.S. banks don’t “pose a direct risk of contagion” to Switzerland.
“You need to restore trust as quickly as possible, and that’s what the Swiss National Bank is trying to do,” Carlo Lombardini, an international banking expert at the University of Lausanne, told the BBC. “And we all know that the central bank is a lender of last resort, and it will lend money to a bank which is solvent because central banks do not lend to insolvent banks.”
Credit Suisse, which was beset by problems long before the U.S. 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,” Chief Executive Ulrich Koerner said in a statement.
The banking turmoil has cast a shadow over Thursday’s meeting of the European Central Bank. Before the chaos erupted, ECB head Christine Lagarde had said it was “very likely” that the bank would make a large, half-percentage point rate increase to tackle stubbornly high inflation.
After European bank shares plunged Wednesday, analysts said the meeting outcome was hard to predict, with some saying the central bank might dial back to a quarter-point increase. Higher rates fight inflation, but in recent days have fueled concern that they may have caused hidden losses on bank balance sheets.
Central banks in the U.S. and Europe have moved quickly to restore confidence in the banking system after last week’s collapse of Silicon Valley Bank, the second-biggest bank failure in U.S. history.
U.S. authorities on Sunday said they would guarantee all of the deposits of California-based Silicon Valley Bank and the smaller Signature Bank of New York, making sure people wouldn’t be hurt by the collapse of the banks. The U.S. Federal Reserve also announced additional funding to ensure other banks could meet the needs of depositors.
The British government and Bank of England on Monday said they had facilitated the sale of Silicon Valley Bank’s U.K. arm to HSBC, one of Europe’s biggest banks, ensuring that 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 is different from what happened at the start of the global financial crisis 15 years ago. At that time, U.S. authorities allowed the investment banking giant Lehman Brothers to collapse.
“That was what spooked the markets as a whole, because they didn’t stand behind it,” Gieve told the BBC. “So what we’ve seen overnight is the Swiss central bank saying, ‘No, we will not let this get into a disorderly collapse.’
“I don’t know what the future of a Credit Suisse holds, but so far they’re still standing,” he added. “And it looks like the Swiss central bank will ensure it’s standing long enough to rearrange its affairs for the future.”
Banks are under pressure after interest rates rose rapidly following a prolonged period of historically low rates.
In order to boost the return on their investments, banks needed to take more risks and some “did this more prudently than others,” said Sascha Steffen, professor of finance at the Frankfurt School of Finance & Management.
Shortage of ‘Liquidity’
As a result, some banks are now facing a shortage of “liquidity,” meaning they can’t sell assets quickly enough to meet the demands of depositors.
Credit Suisse shares had dropped to a record low Wednesday after the Saudi National Bank said it wouldn’t 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 Tuesday 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 storm.
Its stock has suffered a long, sustained decline: Now trading for a little 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 an array of troubles, including bad bets on hedge funds, repeated shake-ups of its top management and a spying scandal involving Zurich rival UBS.
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 for Capital Economics. 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 troubles “once more raise the question about whether this is the beginning of a global crisis or just another ‘idiosyncratic’ case,” Kenningham said in a 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.”
European finance ministers said this week that their banking system has no direct exposure to the U.S. bank failures.
Europe strengthened its banking safeguards after the global financial crisis that followed the collapse of U.S. 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 entities in several European countries that are. Credit Suisse is subject to international rules requiring it to maintain financial buffers against losses as one of 30 so-called globally systemically important banks, or G-SIBs.