The bank will borrow almost $54 billion from the Swiss central bank (SNB) to bolster its liquidity. Credit Suisse shares rallied nearly 23%.
It was urgent to act to avoid disaster.
Four days after US regulators unveiled an emergency plan to prevent contagion from the Silicon Valley Bank collapse, Europe found itself with a massive headache that threatened to rock its financial system.
Credit Suisse, a former European banking flagship that has been embroiled in almost every scandal to hit the banking world in the last three years, was on the brink, under fire from investors who doubted its financial strength.
On March 15, the bank’s shares had fallen nearly 30% to a new all-time low.
Credit Suisse’s credit default swaps (CDS), a form of insurance for bondholders, hit new all-time highs. This meant that investors holding the bank’s debt had to pay much more to insure themselves in case Credit Suisse couldn’t pay them. When the cost of CDS rises sharply, it suggests that investors clearly doubt that the company can service its debts.
Swiss regulators intervene
Investors were reacting to the fact that Saudi National Bank, Credit Suisse’s largest shareholder, had indicated it would no longer increase its stake in the Swiss bank for regulatory reasons. Saudi National Bank does not want to exceed the 10% threshold, which would subject it to stricter supervision by regulators both at home and in Switzerland.
On March 15, Bloomberg TV asked the president of the National Bank of Saudi Arabia, Ammar Al Khudairy, if his company was open to more injections if there were another request for additional liquidity.
“The answer is absolutely no, for many reasons outside of the simplest reason, which is regulatory and statutory,” Al Khudairy said, definitively ruling out the possibility.
Saudi National Bank, owned 37% by Saudi Arabia’s sovereign wealth fund, became Credit Suisse’s first shareholder in a capital increase late last year.
Saudi National Bank had acquired 9.9% of the capital in exchange for an investment of 1.4 billion Swiss francs. But in just a few months, the value of this stake has already been reduced by more than half a billion dollars.
Faced with a situation that threatened to worsen, the Swiss authorities had to intervene. The first gesture came in the form of a joint press release from FINMA, the Swiss Financial Market Supervisory Authority, and the Swiss National Central Bank (SNB).
The two regulators said they would provide liquidity to Credit Suisse if necessary and reaffirmed that the firm, a Swiss national treasure, was a systemic bank for the country. Basically, they couldn’t defraud the bank.
“If necessary, the SNB will provide liquidity to CS,” the two regulators said.
Credit Suisse to borrow $54 billion
A few hours later, in the middle of the night in Switzerland, the SNB took action. Credit Suisse has announced that it will borrow 50 billion Swiss francs, equivalent to almost $54 billion, from the Swiss National Bank in order to strengthen its liquidity. Credit Suisse said the loan was fully collateralized by “high quality assets.”
“This additional liquidity would support Credit Suisse’s core businesses and customers as Credit Suisse takes steps to create a simpler bank focused on customer needs,” the bank said.
CEO Ulrich Koerner also wanted to be reassuring.
“These steps demonstrate decisive action to strengthen Credit Suisse as we continue our strategic transformation to deliver value to our clients and other stakeholders,” Koerner said. “We thank the SNB and FINMA as we execute our strategic transformation. My team and I are determined to move quickly to deliver a simpler, more focused bank built around customer needs.”
Credit Suisse also wanted to differentiate itself from Silicon Valley Bank, which had bet on interest rates without hedging risk.
BLS (BLIMS) – Get a free reportin fact, he had a large portfolio of bonds he bought when interest rates were low, but he hadn’t taken any hedges in case interest rates went up. And that’s what happened, causing the Santa Clara, California-based bank to lose $1.8 billion.
But his clients, mostly cash-burning start-ups, needed to dip into their deposits to finance their operations and stay afloat. SVB was unable to meet multiple withdrawal requests, leading regulators to close the bank.
Credit Suisse “is conservatively positioned against interest rate risks,” the bank said, adding that the “volume of duration fixed income securities is not material” compared to its portfolio of high-risk liquid assets. quality, such as Treasury bonds and German bonds.
The bank also said it is “fully covered for interest rate movements.”
All of these announcements were welcomed by investors, as Credit Suisse shares rallied nearly 23% on the Zurich Stock Exchange at the time of writing.
