Switzerland’s radical pledge to bail out Credit Suisse has given the besieged bank a chance to recover from a near-complete collapse in confidence that has rocked global markets.
The measure, equivalent to a blank check from one of the world’s major central banks, recalls former European Central Bank president Mario Draghi’s pledge to do whatever it takes to prop up the euro during the financial crisis more than a decade ago .
The Swiss National Bank and the country’s financial regulator FINMA sought, in a joint statement on Wednesday, to cap months of speculation about the bank’s future that culminated in a 30% drop in the price of its shares on Wednesday.
“If needed, the SNB will provide liquidity to the CS,” they said.
In the early hours of Thursday, Credit Suisse said it was taking “decisive action” to shore up its liquidity, exercising its option to borrow up to 50 billion francs ($54 billion) from the Swiss National Bank.
The measure in support of the group aims to stem a crisis of confidence in the second largest Swiss bank, the result of years of scandals and losses. It’s a step up from a comprehensive bailout like those seen during the financial crisis over a decade ago.
But it leaves the central bank firmly engaged should bank confidence spiral again. Meanwhile, Credit Suisse has yet to move forward with a sweeping restructuring undertaken in October to restore profitability.
“AVOID THE CHAOS”
The state bailout came after one of the worst days in the bank’s recent history, one that rattled the nerves of politicians and bankers across Europe.
“You can only advise Switzerland to quickly organize a rescue package… to restore confidence,” a European government source said ahead of the announcement. “The goal must be to avoid chaos.”
Long a concern, the bank’s troubles came to a head last year amid a storm of social media speculation it could collapse. Since then, Credit Suisse has struggled to recover after clients withdrew about $120 billion in the fourth quarter.
The provision of the Swiss central bank aims to dispel these doubts. Credit Suisse is the first global systemically important bank to receive a tailor-made lifeline since the 2008 global financial crisis.
Shares of Credit Suisse rose 32% on Thursday, retracing Wednesday’s losses.
But while the funding secures the bank’s future, it does little to resolve the group’s strategic confusion and its inability to convince investors and customers that it can move on.
The bank sought to restore profitability by moving away from investment banking and bond trading to focus on money management for the wealthy.
The plan hinges on the bank’s ability to find sponsors for the investment banking division it wants to create, while also being able to scale up asset management.
The bank saw revenues from trading stocks and bonds fall 88% in the final three months of 2022 compared with a year earlier, in part as clients moved their businesses elsewhere, Reuters reported in early March.
Within hours of the rescue, some were expressing skepticism.
“They’re going to support this thing and walk around as if it’s alive, but basically it’s going to be a state-controlled zombie bank,” said Thomas Hayes, chairman and managing director of Great Hill Capital.
A UK equity manager said that while the bailout could prevent the bank’s shares from falling, the bank may be forced to consider selling assets such as its Swiss branch. Other analysts on Wednesday said the bank may need a break.
In their joint statement on Wednesday, the Swiss National Bank and financial regulator FINMA said the “current turbulence in the US banking market” will have no repercussions for banks in Switzerland.
Source: Terra
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