finance professor“Every other negative headline acts like a fire accelerator”
The fear of a collapse of Credit Suisse has multiplied on social media in recent weeks, says economist Maurice Pedergnana. CS and the National Bank underestimated the impact.
That’s what it’s about
Within weeks, the former major bank Credit Suisse became a takeover candidate.
How could it come to this? And what role did the media and social media play in this?
Economist Maurice Pedergnana provides answers.
Mr Pedergnana, there has been a crisis at CS for months, but events have escalated over the past few days. The fate of the bank now seems sealed. How did that happen?
The decline of CS must be viewed in a global context: after the collapse of Silicon Valley Bank (SVB) and Signature Bank, nervousness in the US stock market increased enormously. Confidence in the banking system was on shaky ground. After the statement by the Chairman of the Saudi National Bank on “Bloomberg”, taken out of context, that no further capital would “definitely” be injected into CS, the dams broke. The example of Credit Suisse shows how a bank can be destroyed within 24 hours.
Do the classic media, which spread every rumor, also share responsibility?
It’s the duty of journalism to report on current events. And these are all the more interesting the more negative they are. That can sometimes be exaggerated. It is perfectly clear that the flow of bad news does not have a positive effect on trust. Statements such as those by the failed ex-banker Konrad Hummler that CS must be wound up further fuel the situation. However, unfounded rumors on social media are much worse than news reports, which are usually accompanied by objective assessments.
Can you run this?
Social media has multiplied the fear of a bank collapse. You could already see that at the SVB: After the US billionaire Peter Thiel, who is well established in Silicon Valley, and other people called online for funds to be withdrawn, 42 billion US dollars flowed out of the bank within 24 hours – a quarter of the total assets. It was the first digital bank run in history.
There has also been enormous pressure on social media at CS in recent days to withdraw funds. That effect has only increased since the former core shareholder, Harris Associates, sold all of its shares in early March. This week, CS announced in its annual report that it had lost over 100 billion in customer funds in the fourth quarter of 2022. Such a loss of trust is of course devastating. Every further negative headline acts like a fire accelerator.
Has CS been caught off guard by this social media pressure?
Yes, not only CS, but also the central banks were not at all prepared for the fact that customer trust and customer funds were dwindling at such a rapid pace. The reason for the impending end of CS is not rational: the latest liquidity figures and Credit Suisse’s equity ratio of 14 percent were impressive. But in a deep crisis of confidence, rational arguments no longer help.
Social media still played a minor role during the 2008 financial crisis. Customer reaction was different. That has changed: The news cycle on Twitter and Co. runs around the clock. That means: All balance sheet figures, all security guarantees are useless if fear on social media becomes independent and multiplies. Trust is something emotional. Loss of trust and fear cannot be addressed in a rational way. That’s why billions in customer money have already flowed out and that’s why more will flow out if there is no takeover. If there is such a herd instinct, one is practically defenseless.
Isn’t CS to blame for the loss of trust?
It sure is. But not for a few days, but for many months, yes for many years: Greensill, Archegos, money laundering, surveillance scandal: CS has hardly missed a scandal in recent years. Customers don’t appreciate it when their own bank delivers negative headlines every two weeks. However, winding up Credit Suisse – i.e. sending it to its death – would make no sense at all: there are too many good, competent departments within the bank for that.
To what extent are the Financial Market Authority (Finma) and the Swiss National Bank (SNB) interested in a solution?
It is important to use all means to maintain financial market stability, both nationally and globally, in the interest of the Swiss supervisory authorities, but also in the interest of the many private and corporate customers. It’s about hundreds of thousands of people, SMEs, corporations who want to concentrate 100 percent on their task again on Monday morning and don’t want to transfer money from bank A to bank B.
Since the last financial crisis, the Financial Stability Board of the world’s most important bank supervisors has identified those globally systemically important banks that should not collapse. They are subject to particularly high requirements. The liquidation of Lehmann Brothers has now lasted 14 years and will probably only be completed in three years. Something like this shouldn’t happen again. The other central banks are therefore confident that, under pressure from Finma and the SNB, a quick solution can be found on Sunday. A takeover by UBS or the federal government is the logical, painful consequence.
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