Close to the ‘cliff edge’, Credit Suisse is not viewed as a systemic risk

GENEVA (AP) – Credit Suisse’s longstanding troubles came to a head this week with a record share price plunge that spread fears of a banking crisis spilling over from the US to Europe. But the problems at Switzerland’s second-largest bank have been piling up for years, ranging from bad bets on hedge funds to a spy scandal involving rival lender UBS.

Experts say the upheaval is largely a by-product of Credit Suisse’s troubles in recent years — making it appear relatively vulnerable — and investors’ concerns about the health of Western banks in general following the collapse of the United States’ Silicon Valley bank.

Credit Suisse shares fell over 30% on Wednesday after its biggest shareholder – the Saudi National Bank – announced it would not provide any more money to the Swiss lender. Hours later, Switzerland’s central bank agreed to lend Credit Suisse up to 50 billion francs ($54 billion) to shore up its finances. The stock recovered.

Shares fell 8% on Friday to close at 1.86 francs ($2) on the Swiss stock exchange. The share has come a long way: in 2007 it was listed at over 80 francs.

Eswar Prasad, an economist at Cornell University, said Credit Suisse has become “a major alert to fragility in the global banking system” and if it failed it could dampen confidence in the banking system and spur further central bank intervention.

“The Swiss National Bank effectively pulled Credit Suisse off the cliff and may have done enough to stabilize the situation with the massive infusion of liquidity,” said Prasad, who studies the global financial system. “The joker is whether the steps taken so far by the Federal Reserve and the Swiss National Bank will contain the blaze, or whether it will continue to spread, which could create significant additional turbulence.”

The Saudi bank’s chairman admitted he was surprised at the fallout of his comments, but said he was “optimistic” that Credit Suisse “will return to what it is” — a bank with a history that goes beyond goes back a century and a half.

“I think the markets are very nervous and they’re looking for stories or things that validate their concerns,” Bank of Saudi Arabia governor Ammar al-Khudairy told CNBC on Thursday.

He described Credit Suisse’s private wealth management, domestic banking and wealth management businesses as “stable, long-term stable businesses” and that the Swiss bank was “working to divest the other, more volatile business.”

Following the reforms following the 2008 financial crisis, Credit Suisse is among the 30 financial institutions known as global systemically important banks, which have stricter scrutiny and higher capital requirements.

Credit Suisse was founded in 1856 by industrialist Alfred Escher as the “Schweizerische Kreditanstalt” to finance the expansion of Switzerland’s complex railway network that traverses the Alps.

Back then, it was a high-risk, loss-making industry. Historians say that the drive for risk and innovation still pervades corporate culture today.

In 1977, Credit Suisse was at the center of a banking scandal known as the “Chiasso Affair,” which resulted in the bank losing almost CHF1.4 billion to a branch in Italian-speaking Switzerland illicitly dealing with fugitive funds from Italy.

Credit Suisse’s “internationalization” — greater focus on the United States and adoption of an “Anglo-Saxon” culture — created “identity issues” from the 1980s, as it began to rise from a mid-sized European bank to a global player, Tobias Das said Straumann, an economic historian at the University of Zurich, in the Neue Züricher Zeitung on Friday.

“(Swiss bankers) just couldn’t deal with this American investment banking culture with its focus on risk and big profits,” he said. “The combination of Anglo-Saxon investment banking and Swiss asset management didn’t work in the long run.”

The “end of banking secrecy” in Switzerland – which has long helped guarantee large financial reserves for Credit Suisse – has had an important effect in recent years by affecting the wealth management business, he added.

Other western countries pressured Switzerland to tighten their laws to prevent wealthy tax dodgers and others from hiding their money in Swiss banks.

More recently, problems at Credit Suisse have revolved around poor corporate governance, questionable personnel decisions, and overly risky investments.

In 2020, CEO Tidjane Thiam resigned after an external investigation revealed that the bank’s chief operating officer ordered an operation to spy on several former executives, including former wealth management chief Iqbal Khan, who had moved to Zurich rival UBS.

Two years later, his successor – longtime Credit Suisse veteran Thomas Gottstein – resigned after the bank reported a quarterly loss of CHF 1.6 billion.

Credit Suisse even found itself in front of a Swiss court, fined last June for failing to stop money laundering by a Bulgarian crime ring 15 years earlier. The case involved in part an unidentified wrestler who was accused of smuggling tons of cocaine from South America to Europe by “mules” and laundering the profits.

The bank last fall announced hundreds of millions of dollars in settlements with regulators in the US over mortgage-backed securities behind the 2008 financial crisis and in France over a tax fraud case.

Credit Suisse is “in trouble because it’s been in trouble for a very long time. It has a whole bunch of other challenges that everyone is focusing on now because of the banking troubles in the US,” said Megan Greene, chief economist at the Kroll Institute.

That’s unlike Silicon Valley Bank, which was hit by rising interest rates. The Swiss lender is “full of quality assets” but has faced a liquidity crisis and the “playbook” for dealing with it is central bank intervention, she said.

“This isn’t 2008 again,” Greene said. “But the overreaction we’ve seen in the market is eerily reminiscent of 2008. It got every Spidey sense tingling.”

She said she was concerned, “but rationally there is no reason to believe that a banking crisis is inevitable. It’s just that markets aren’t always rational.”

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