Bankruptcy occurs gradually then suddenly, Ernest Hemingway wrote. Credit Suisse appeared to be losing its reputation in the same way. The shares of the Swiss lender, the European market leader in the field of risk management failure, crashed as much as 30 per cent on Wednesday.
The proximate cause is that the bank’s largest shareholder, the Saudi National Bank, has dismissed suggestions it should inject fresh equity. This was just the latest in a cavalcade of bad news stories, including the Greensill and Archegos scandals.
The onus is now on the Swiss central bank to reassure investors, however nebulously, as Credit Suisse has requested.
Credit Suisse is in a dreadful place. As panic grows, so does the price of the credit default swaps that insure against non-payment of borrowings. The one-year CDS price has soared to more than 1,000 basis points. That, combined with tumbling shares, will spook depositors, particularly in the key wealth management arm.
The more deposits customers withdraw, the pricier default insurance will be. Then the lower the shares will fall — they already trade at just 15 per cent of book value — and the less likely a turnround will become.
Credit Suisse has plenty of capital. Moreover, it has hedged its interest risk on hold-to-maturity securities. On a three-month average, bosses say the bank has a liquidity coverage ratio of 150 per cent of stress test losses. That is plenty, though well down on a peak of 221 per cent in the third quarter of 2021.
The threat to the ringfenced Swiss bank within Credit Suisse, with its sticky domestic deposits, might still seem a distant risk. But its centrality also makes it a vulnerability. Almost all of the pre-tax profit of Credit Suisse last year, and very likely this year, derives from it. This unit, not the Saudi equity stake, is the cornerstone of Credit Suisse.
Panic can overwhelm any bank. The collapse of three US banks in the past week means contagion is in the air. The Swiss National Bank and the local banking regulator Finma need to step in and rally sentiment. That is what French prime minister Élisabeth Borne was hinting at in comments on Wednesday. She was right to do so.
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