Global Financial Stress: Credit Suisse to Borrow $53.7 billion from Swiss Centra Bank
16 March 2023
The Swiss National Bank put forward $53.7 billion in liquidity to provide a backstop that attempts to prevent a probable collapse of Credit Suisse, a globally and systemically important financial institution. This will at least temporarily calm global financial markets. However, global financial stress is elevated and likely to build in the near term as the crisis of confidence in global banks has yet to clearly abate.
Credit Suisse is too interconnected to other large global systemically important financial institutions (SIFIs) to be allowed to collapse. Letting it fail would unleash contagion effects that would be difficult for the global central banks to dampen. Bloomberg news reported that the European Central Bank told European Union ministers of parliament that some European banks could be vulnerable to further potential contagion linked to financial stress at Credit Suisse.
Despite financial stress inside the European banking system the European Central Bank chose to favour efforts to restore price stability, over short term financial stability, by hiking its policy rate by 50 basis points. While the economic rationale for hiking rates to restore price stability is clear, increasing rates does imply further financial tightening will ensue that may create additional problems inside a stressed European and global banking system.
While the move by both Credit Suisse and the Swiss central bank should put a floor under the troubled bank this is likely not the last move that will be necessary to stem the crisis in Geneva.
Credit Suisse, Switzerland’s second largest lender, reported a $7.9 billion loss last year as clients pulled more than $100 billion in assets during the final quarter of 2022, even as the bank diluted shareholder value via raising capital worth 4 billion francs. Yesterday, another large SIFI announced that they would begin reducing counterparty risk to Credit Suisse, which in all likelihood sealed the deal on a rescue of the troubled institution by the Swiss central bank
Although, one common denominator in the current crisis is interest rate risk management, the problems inside regional banks in the United States are far different from those at Credit Suisse.
The large Swiss lender faced a growing number of troubles over the past decade, including a conviction on money laundering, large investments in failed global ventures and other scandals inside the bank. These have all contributed to the long term decline of its share price and the parabolic increase in credit default swaps (a derivative contract that transfers credit exposure of a fixed income product to a counterparty), that should be understood as a proxy for the measure of risk that an institution. In this case Credit Suisse defaults on its debenture obligations amidst a potential collapse.
