Rescue plan: A Credit Suisse branch illuminated at night in Geneva, Switzerland. The move to support the group, with the pledge of central bank money, is designed to stem a crisis of confidence in Switzerland’s second-biggest lender that stems from years of scandals and losses. — Bloomberg
SWITZERLAND’S radical pledge to bankroll Credit Suisse (CS) Group AG has won the embattled lender the chance to resurrect itself from an almost complete collapse in confidence that rattled global markets.
The move, tantamount to a blank cheque from one of the globe’s leading central banks, is reminiscent of the promise by European Central Bank (ECB) Mario Draghi to do whatever it takes to support the euro during the financial crash more than a decade ago.
In the years that followed, the ECB and other central banks printed billions of euros, a free-money era that spawned a global rally in asset prices.
A reversal of low rates to stem rampant inflation has forced a risk rethink and exposed the vulnerability of firms such as CS.
The Swiss National Bank (SNB) and the country’s financial regulator, Finma, in a joint statement on Wednesday night sought to draw a line under months of speculation about the bank’s future that had culminated in a 30% drop in its stock price on Wednesday.
“If necessary the SNB will provide CS with liquidity,” they said.
They played down any threat to the bank, saying the “current turmoil in the US banking market” would not have any spillover for Switzerland’s banks.
The move to support the group, with the pledge of central bank money, is designed to stem a crisis of confidence in Switzerland’s second-biggest lender that stems from years of scandals and losses.
The collapse of Silicon Valley Bank (SVB) in the United States last Friday prompted a widespread flight to quality that saw the bigger lenders that are deemed more solid, including Swiss rival UBS Group AG, attract deposits, deepening CS woes.
It is one step short of a fully-fledged bailout like those seen during the financial crash more than a decade ago.
But it leaves the central bank, which prints the Swiss franc and underpins the Alpine nation’s economy, firmly on the hook should confidence in the bank resume its spiral. Meanwhile, the bank still needs to push ahead with a radical restructuring it undertook in October to restore profitability.
‘Avoid chaos’
The state rescue followed one of the worst days in the bank’s recent history, an episode that rattled the nerves of politicians and bankers around Europe, even attracting the attention of US Senator Bernie Sanders.
“You can only advise Switzerland to quickly organise a rescue package to restore confidence,” said one European government source, before the announcement.
“The aim has to be to avoid chaos.”
The risk of contagion was so great that at least three major banks in Europe and Britain rushed to ringfence their exposure to the Swiss bank, three senior bankers told Reuters.
“CS has been in our watch-list for a while,” one senior executive told Reuters.
Long troubled, the bank’s problems came to a head last year amid a social media storm of speculation that it could collapse. It has since struggled to recover after customers withdrew about US$120bil (RM541bil) in the fourth quarter.
The radical move by the Swiss central bank is aimed at banishing such doubts. CS would be the first globally systemically important bank to receive a bespoke lifeline.
But while the funding guarantees the bank’s future, it does little to address the strategic disarray at the group nor its inability to convince investors and clients that it can turn the corner.
It has been seeking to restore profitability by pivoting away from investment banking and trading securities to focus on managing money for the wealthy.
That plan rests on CS being able to find backers for the investment banking division it wants to carve out, while being able to grow wealth management. Neither are a given.
The bank saw revenue from trading stocks and bonds slump by 88% in the last three months of 2022 from a year earlier, in part because clients moved their business elsewhere, Reuters reported earlier in March.
Within hours of the rescue, some were expressing scepticism.
“The Swiss authorities will probably want to keep it on life support because of national symbolism,” said Thomas Hayes, chairman and managing member of New York-based Great Hill Capital said Hayes.
“They’re going to prop this thing up and walk it around like its alive, but it will basically be a zombie bank that’s state controlled.”
One UK-based equities manager said that while the backstop may stop the rout in the bank’s shares, the bank could nonetheless be forced to look at the sale of businesses such as its Swiss arm. Other analysts earlier on Wednesday said the bank could need a break-up.
For weary watchers of the bank, the latest episode repeats a familiar pattern.
“This has been a slow-motion train wreck for a decade now,” Hayes said. — Reuters
Stefania Spezzati and John O’Donnell write for Reuters. The views expressed here are the writers’ own.
