Credit Suisse Group AG was one of the stalwarts of the global financial system. Once deemed too big to fail, the Switzerland-based lender has now gone kaput.
It started off with its shares falling on Wednesday and by Sunday, it was sold to its domestic rival UBS for $3.25 billion. The deal was overseen by the Switzerland government and the country’s central bank, which were desperate to get a buyer in a bid to restore confidence in the country’s banking system.
The Swiss government said it regretted that Credit Suisse “wasn’t able to master its own difficulties — that would have been the best solution.”
“Unfortunately, the loss of confidence from the markets and customers was no longer able to be halted,” Finance Minister Karin Keller-Sutter said at a press conference in Bern on Sunday.
Designated as one of the world’s 30 systemically important banks, the 166-year-old lending institution succumbed to the financial turmoil triggered by the fall of Silicon Valley Bank in the US, which had itself become victim to Fed’s tightening monetary policy and fall in its share value.
Before succumbing to the global financial crisis, Switzerland’s second-biggest bank survived without a bailout, unlike many of its peers. It had more than $ 1 trillion in assets, but years after, they dwindled to about US$580 billion—roughly half of UBS’.
How it did go under the hammer?
For two years, Credit Suisse has been braving turmoil one after the other. It has weathered a period of market crises, executive turnover and financial losses.
Most notably, its difficulty started due to its connection to the separate collapses of now-bankrupt Greensill Capital and Bill Hwang’s Archegos Capital Management.
In 2021, Credit Suisse took a $5 billion hit due to the collapse of Archegos, which was equivalent to more than a year’s worth of profit, according to the Wall Street Journal (WSJ) newspaper.
In October, a report on the bank’s financial health drove out outflows of rich clients, Credit Suisse executives said.
The withdrawals continued through the end of the quarter and prompted the bank to reach out personally to more than 10,000 wealthy customers to reassure them of the bank’s health.
Last year, deposits fell 40 per cent to $252 billion. Whereas, total assets dropped 30 per cent to $571 billion, because the bank was, among other things, scaling back its businesses.
In 2022, Credit Suisse reported a net loss of $7.8 billion, after posting a net loss of $1.8 billion a year before.
In 2022, it had to pay fines related to mortgage-backed securities and to avoid the persecution of money laundering
In October, Credit Suisse said it would pay $495 million to settle a row with the US state of New Jersey over mortgage-backed securities dating back to the 2008 financial crisis.
In the same month in France, the bank agreed to pay $252 million to avoid prosecution on money laundering and tax fraud charges brought in 2016 over undeclared accounts held by French nationals.
‘Material weaknesses’
Credit Suisse had to postpone its annual report, which was scheduled to be published last week, after a last-minute call from the US Securities and Exchange Commission over revisions made to cash-flow statements for 2019 and 2020.
But after it released the report on Tuesday, the bank acknowledged “material weaknesses” in its internal controls.
Following fears of contagion from the collapse of two US banks, comments from Credit Suisse’s main shareholder on Wednesday that it would not invest more money in the bank sparked market panic.
How is Credit Suisse different from SVB?
Unlike Silicon Valley Bank which was a regional institution serving US venture capitalists and technology startups, Credit Suisse mainly managed money for people with millions of dollars to invest.
The Switzerland bank had billionaires and sovereign-wealth funds among its biggest clients. Most of its loan portfolio is in ultraconservative Switzerland, where it was the country’s No. 2 bank by assets, serving savers and companies. It also had large investment-banking and asset-management arms.
It is considered a systemically important bank by global regulators given its size and interconnectedness with the financial system.
What implications does fall of Credit Suisse have on global banking system?
Credit Suisse was deeply integrated into the global financial system. It was working closely with a number of banks and institutional investors. In the past week, European banking stocks fell due in part to investor fears of contagion.
On a broader level, the problems of SVB and Credit Suisse have led investors to think that the Federal Reserve might stall or revert its plans to further raise interest rates to tame inflation.
(With inputs from agencies)
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