Fighting for its life, Credit Suisse

Fighting for its life, Credit Suisse

by 5paisa Research Team Last Updated: Dec 14, 2022 - 08:05 am 14.1k Views
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Switzerland is home to the renowned investment bank Credit Suisse. It is one of the biggest banks in the world and has been around since 1856.

Many people, however, believe that the bank may already be experiencing significant financial difficulties, and some think that the entire global banking system may eventually fail.

For several months, speculation about the future of Credit Suisse, a massive Swiss bank, has been present in the markets, in business and political circles, as well as on social media.

What led us here, are these claims true, and how has the market responded are the key questions.

In the event of a poor result, a shock akin to that brought on by the failure of the US bank Lehman Brothers in September 2008 is likely to occur. One of the worst financial and economic crises since the Great Depression was brought on by this event.

We suppose that a few recent events are concerning. One is that the stock price of the company has been falling fairly quickly. In the first hour of trading on 3rd October 2022, they lost over 10%, and over the previous six months, the price has decreased by about 50%. A year ago, the market value of Credit Suisse was $22.3 billion. Its market value is only $10.4 billion at the moment, and the shares have dropped by 56.2%.

Without going into specifics, let's just say that a bank like Credit Suisse needs to borrow money in order to remain operational. However, lenders don't always think they'll be paid in full. Instead, they could purchase a credit default swap to protect themselves from a rare occurrence of default. Similar to insurance, the provider will only cover the loan in the event of a Credit Suisse default. You can now tell whether a default is actually a possibility by looking at the premiums being offered on these products. You can hold Credit Suisse liable, for instance, if a third party promises to protect you from default only if you pay a hefty fee.

That is the reason they are costing you so much.

Furthermore, Credit Suisse CDS premiums are currently unusual of far more significant than the figures mentioned in 2008, when everyone anticipated that the financial sector would collapse due to the burden of its own debt.

The CEO issued a statement to allay these worries. He stated:

“I know it’s not easy to remain focused amid the many stories you read in the media — in particular, given the many factually inaccurate statements being made. That said, I trust that you are not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank.”
Staff morale has reportedly been low, and the bank has reportedly not yet renewed the contracts of several contractors. One of the bank's top dealmakers, Jens Welter, recently left the organization after 27 years to join Citigroup.

The comment didn't really change much, though. People began noticing how strikingly similar this remark sounded to what Lehman's CFO had said about their capital position fourteen years earlier. Just before the bank failed, in September 2008, this took place.

How crucial is the bank?

Credit Suisse has played a significant role in the history and development of Switzerland since the nation's founding in 1856. Alfred Escher, a politician, and industrialist from Switzerland founded it to promote industrialization and finance the nation's railroads.

It has expanded through a number of mergers and acquisitions to rank among the largest banks in Europe and the second-largest lender in Switzerland. By the end of 2021, it will employ just over 50,000 people and manage 1.62 trillion CHF in assets.

In addition to its wealth management, investment banking, and asset management businesses, Credit Suisse also runs a local Swiss bank.

According to the Swiss National Bank, its failure would "seriously harm the Swiss economy and financial system." It is one of Switzerland's worldwide systemically important banks.


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About the Author

Our research team is composed of some highly qualified research professionals, their expertise range across sectors.


Investment/Trading is subject to market risk, past performance doesn’t guarantee future performance. The risk of trading/investment loss in securities markets can be substantial. Also, the above report is compiled from data available on public platforms.
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