Nervous weekend ahead at the Credit Suisse offices and in the markets. Doubts about the viability of the entity on its own persist despite the 54,000 million euros of liquidity that it received from the Swiss National Bank last Thursday. In fact, late this Friday it was known that Société Générale, Deutsche Bank and two other large banks have decided not to maintain operations with the Swiss bank.
According to the Financial Times, the talks forced by Swiss regulators between Credit Suisse and its main rival, UBS, have accelerated in recent hours. The goal is for the second largest Swiss bank to take over its main rival. Apparently, in the next few hours the addresses of both entities will meet separately to analyze the possibilities.
Among these possibilities would be the purchase of all or some business units, while the rest would be sold to other banks or liquidated. According to JP Morgan, if there were finally a merger, investment banking will most likely be liquidatedthe business in Switzerland goes public and the patrimonial management legs are preserved.
UBS has a market value of $56.6 billion, while Credit Suisse shares closed on Friday with a value of $8 billion.
The British newspaper assures that various sources have confirmed that the Swiss National Bank has communicated to the US authorities that its objective is to settle the open crisis this weekend. That is, before the market opens next Monday. In this way, they estimate, confidence is returned to the market.
Now it seems some members of the Swiss authorities have their doubts about this strategy. “They would be creating something that could never be destroyed,” say people familiar with the negotiations. In other words, a bank would be created that would be Too Big To Fail. too big to fall.
Thus begins the race to settle the doubts about Credit Suisse open this week. Investors took it for granted that the entity was not going to be able to continue on its own.
The 1-year CDS, default insurance, closed this Friday at 2,426 points, according to Refinitiv. That is to say, the risk they see of falling is very high. The stock market is also a faithful reflection of the market’s nervousness. Credit Suisse shares closed on Friday at 1.86 francs Swiss after leaving 8% in the day, thus extending the decreases up to 26% in the week.
So, with these alarm signals and with investment funds (as this newspaper has been able to verify) withdrawing deposits from the entityThe concern seems logical.
(The ECB will use all its artillery if any European bank is vulnerable to interest rate hikes)
Until now, the entity’s intention was to remain alone and continue with its transformation plan, as its top executive, Axel Lehman, said last Thursday. Although Credit Suisse ensures that the plans executed in recent months are working It seems that there are doubts about it.
The evolution of assets under management in the part of asset management, but also the evolution of the entity’s net deposits. In both cases it can be checked how the inputs are unable to cover the outputs. Hence the importance for the entity that the National Bank maintains its liquidity.
In the year-end accounts, the bank recognized that the adjusted net income in 2022 reached 15,164 million Swiss francs, which represents a drop of 33% compared to the previous year. And its liquidity coverage ratio stood at 144% compared to 203% a year earlier.
Despite everything, the entity insists that it is “capitalized”, has access to financing, liquidity and, therefore, trusts that it will be able to face the outflows of deposits to which it is being subjected. All this while executing the changes that the bank needs and undergoing a radical transformation of its investment banking.
However, it seems that time has run out.
Axel Lehmann, Chairman of Credit Suisse.
Reuters
Now it remains to be seen what will happen. Above all because a bad exit from Credit Suisse could have a contagion effect to the rest of Europesomething that, for now, the European Central Bank rules out since the exposure to the entity is minimal.
Beyond the negotiations with UBS by the Swiss government, other options would be on the table. The most extreme, proceed to its resolution.
This would be the solution of last resort, and it would come if there was no buyer to take over the business. In fact, various international media suggest that the possibility of ‘chop’ the bank and sell the units to the highest bidders.
If this doesn’t work, it would be time to intervention and resolution. The Swiss National Bank would take control, proceed to resolution and guarantee the bank’s deposits.
Odds
This possibility is the one with the fewest options at this time. Firstly, because it has a negative impact on the image of Swiss banks. Second, for the high cost that would have to support the deposits. Third, because in political terms it has a high cost and it does not seem that the Government has a great interest at this moment in ‘eating’ a situation of this type.
The instability of Credit Suisse also occupies and worries in Frankfurt where they look sideways at how the situation can be resolved. Sources familiar with the emergency meeting of the European Central Bank (ECB) held this Friday explain that at this moment they do not see signs of contagion or entities that worry. Now, they will be vigilant for what may happen.
A bad solution could provoke mistrust throughout the European financial sector, which this week has been hit by the Credit Suisse crisis. The index STOXX Banks has fallen by 13.4% in the week, a true reflection of the nervousness in the market.
Problems
This puts an end to a long history of problems that have arisen in recent years and have increased in recent months. Last summer its CEO, Thomas Gottstein, resigned and was replaced by Ulrich Körner. His objective was to restore the bank’s stability, especially in the investment area. However, the excesses committed by the Swiss entity have surpassed it.
This same Monday it was known that its auditor PwC sees “material weaknesses” in its accounts. A situation that caused the National Bank of Arabia to say in Bloomberg that it had no intention of acting as a lender of last resort, and that it was not going to inject more money into the entity.
From there Credit Suisse’s problems accelerated. Investors withdrew their confidence in the bank; the stock plunged and CDS soared to levels not seen since the financial crisis. On Wednesday night the Swiss National Bank launched a lifeline to the entity: a credit line of 54,000 million that allowed it to stay afloat until the end of the week.
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