Credit Suisse to tap emergency funding from Swiss central bank to shore up finances

Open this photo in gallery:

Credit Suisse will borrow up to 50 billion Swiss francs ($74-billion) from the Swiss central bank under emergency credit lines, following a sharp drop in the lender’s share price Wednesday that added to concerns about the health of the financial system on both sides of the Atlantic.

Earlier in the day, the central bank had promised to provide Credit Suisse, Switzerland’s second-largest bank, with liquidity “if necessary,” essentially guaranteeing the lender would have access to cash in the event of a bank run. The move is reminiscent of the central bank supports provided to major global banks during the 2008 financial crisis.

At this point it is unclear how much Credit Suisse will actually borrow of the 50 billion Swiss francs made available. The bank also announced plans late Wednesday to buy back U.S.-dollar and Euro-denominated bonds worth up to US$2.5-billion and €500-million, respectively. Buying back debt will ease the bank’s financial burden as it completes a previously announced restructuring.

Credit Suisse shares leap after Swiss central bank provides lifeline

Global investors are on edge after two U.S. regional banks – Silicon Valley Bank and Signature Bank – failed in the past week. The fear is that rapidly rising interest rates have irreparably damaged certain corners of the global financial system. Because there is so much uncertainty, every new development is scrutinized and fretted over, even when problems have been publicly known for years, which is the case at Credit Suisse.

Before Wednesday’s woes, which resulted in the bank’s shares plummeting by as much as 30 per cent, they were already down 98 per cent from their record high in 2007, owing to never-ending scandals, financial losses and restructurings.

Investors are dumping shares in even the biggest banks, which have the largest capital backstops. JP Morgan Chase & Co.’s JPM-N shares fell 5 per cent Wednesday, and are now down slightly this year. Shares of Royal Bank of Canada RY-T, the largest Canadian lender, are down 5 per cent over the past week – but are still up 2 per cent this year.

In a joint statement, the Swiss central bank and the country’s financial regulator asserted that “the problems of certain banks in the USA do not pose a direct risk of contagion for the Swiss financial markets.”

“Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks,” they said in explaining the decision to backstop the lender if need be.

Wednesday’s sell-off began after Ammar Al Khudairy, chair of Saudi National Bank, which is Credit Suisse’s largest shareholder, said he would not boost his organization’s ownership stake. He later clarified that boosting the stake above 10 per cent would impose extra regulatory burdens.

Credit Suisse has struggled for years, plagued by scandal after scandal. It was damaged by massive trading losses after the implosion of Archegos Capital, and by links to the collapsed finance firm Greensill Capital. Once a dominant name in global finance, the bank’s stature has plunged with its market share. Its shares hit a record high of US$74 each in New York in 2007. The stock closed at US$2.16 Wednesday.

The key question for regulators and investors is whether the failures of the two U.S. banks stemmed from idiosyncratic factors, such as poor risk management decisions, or whether they auger deeper problems in the financial system.

With everyone on edge, one saving grace is that global banking watchdogs have forced systemically important banks to beef up their capital reserves – that is, cash and other liquid securities that serve as buffers when things go bad. Canada’s banking watchdog, the Office of the Superintendent of Financial Institutions, has been at the forefront of this effort, and Canada’s banks are praised globally for their stability and risk management.

But those buffers could now be tested.

“We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the US regional banking sector ... with more seizures and shutdowns coming,” BlackRock chief executive Larry Fink wrote Wednesday in his annual public letter. He described Silicon Valley Bank’s collapse as the “price we’re paying for decades of easy money.”

The rapid rise in interest rates has cratered bond prices, leaving large unrealized losses on the balance sheets of many financial institutions. This proved to be a landmine for Silicon Valley Bank, which was forced to sell a portion of its bond portfolio at a loss, sparking a bank run. The U.S. Federal Reserve announced a $25-billion liquidity facility on Sunday, giving regional banks the ability to swap their illiquid assets for cash in the event of bank runs.

In its funding announcement late Wednesday, Credit Suisse hoped to differentiate itself from Silicon Valley Bank by noting that its bond portfolio is “fully hedged for moves in interest rates.” In other words, if anything has to be sold, Credit Suisse should not incur losses.

Concerns about a broader financial crisis have quickly changed market expectations for future interest rate hikes. A week ago, markets were pricing in another percentage point of rate hikes from the U.S. Federal Reserve in the coming months, and no rate cuts until 2024. On Wednesday, markets were pricing in only a 50-per-cent chance the Fed would raise rates again at its next meeting, on March 22, and a high probability that it would start cutting rates this summer.

Banking sector woes have made bond prices swing at their fastest rate in decades. The yield on two-year U.S. Treasuries has fallen 120 basis points in the past five trading days.

Stock markets fell sharply Wednesday morning, although they recovered some ground through the trading day. The S&P 500 ended down 0.7 per cent, while the TSX Index dropped 1.6 per cent, dragged down by plummeting oil prices. The EURO STOXX 50, an index of large European companies, fell 3.46 per cent.