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Tuesday, May 28, 2024

Central Bank to Lend Credit Suisse Up to $54 Billion in Borrowings

After investors dumped Credit Suisse stock out of fear that the bank would run out of money, the price of insuring its debt against a default skyrocketed, putting Credit Suisse in a fight for its life. Credit Suisse is an institution that has been around for 166 years and was once considered an emblem of Swiss national pride.

When the markets in Europe had closed for the day, the Swiss National Bank, which serves as Switzerland’s central bank, said that it was prepared to assist Credit Suisse “if required” and would step in to do so.

Early on Thursday morning, Credit Suisse said that it will borrow up to 50 billion Swiss francs, which is equivalent to around $54 billion, from the Swiss National Bank in an effort to allay worries over its current state of finances. In addition to this, the bank said that it would look into buying back debt worth up to three billion Swiss francs.

Ammar al-Khudairy, chairman of the Saudi National Bank, the bank’s biggest shareholder, made a statement on Wednesday that served as the immediate spark for a dangerous decline in the shares of the bank. Mr. al-Khudairy said, during the course of a television interview, that the state-owned bank would not invest any further funds in Credit Suisse. In a subsequent statement, he made it clear that his bank would not increase its stake in the company beyond the 9.9 percent it already held due to regulatory concerns.

With the failure of Silicon Valley Bank a week ago, investors are understandably frantic about the state of the world’s financial system. The knee-jerk response is additional indication of how frightened investors are about the stability of the system. The sudden failure of the bank awoke investors and depositors to the possibility of problems that may endanger other banks, both in the United States and throughout the world. As a result, there has been a widespread sell-off in bank stocks and in the financial markets.

Yet the issues that have been plaguing Credit Suisse are distinct and, to a significant extent, of the company’s own design. Credit Suisse’s colonnaded offices are located in Zurich, which is almost 5,800 miles away from Silicon Valley Bank’s base in California. The fact that the Swiss bank said on Tuesday that it had discovered “material deficiencies” connected to its financial reporting did not assist the situation at all.

On Wednesday, shares of Credit Suisse fell by 24 percent on the SIX Swiss Exchange, reaching an all-time low, and the price of the company’s bonds fell significantly as well. The price of financial contracts that insured against a default by the bank skyrocketed to a level that had never been seen before in recorded history.

Credit Suisse, in contrast to Silicon Valley Bank, is regarded as a globally systemically important financial institution since it had $569 billion in assets as of the end of the year and adhered to far more stringent capital requirements. According to Johann Scholtz, a research analyst at Morningstar, the bank’s balance sheet does not show any indication of a huge hole, and the institution has tens of billions of dollars in cash that is deposited in central banks throughout the globe that it may draw from.

Since Credit Suisse is having so much trouble, the possibility that it would default on its obligations has caused banks and other organisations who do business with Credit Suisse to purchase additional swaps in order to offset the increased risk. When the price of Credit Suisse’s swaps increased during the trading day on Wednesday, the chance that the bank would have to pay a great deal more in the overnight market to finance itself also increased. This was due to the fact that the overnight market is where swaps are traded.

According to the two, the company “meets the greater capital and liquidity standards applicable to systemically significant institutions” and was not immediately at danger as a result of the upheaval that has been occurring in the banking industry in the United States. Yet, they pointed out that the stock and debt prices of Credit Suisse had dropped, and they added that the Swiss National Bank would support the bank if it became necessary.

The company’s announcement on Tuesday that there were issues with its financial reporting systems had already caused a significant drop in the value of its shares. This finding came about as a result of inquiries made by the Securities and Exchange Commission, which resulted in the firm being required to postpone the publishing of its annual report. Credit Suisse has said that it is working to rectify such shortcomings and that it stands by the representations it has made about its finances.

The resurfacing of worries over Credit Suisse placed a significant burden on the world’s financial institutions since investors were concerned about their exposure to the Swiss company. The stock prices of European financial institutions such as BNP Paribas and Société Générale of France plunged by double digits, while those of their American equivalents, such as JPMorgan and Citigroup, also went down.

The statements made by Mr. al-Khudairy of Saudi National Bank on Wednesday, in which he said that his institution would not invest any more in the Swiss bank due to regulatory considerations, were the spark that ignited the panic.

If Saudi National Bank were to increase its ownership to more than 10 percent, the company would be subject to extra requirements imposed by Switzerland. Mr. al-Khudairy has said that he does not want to be bound by these laws.

According to Reuters, Mr. al-Khudairy stated that he was pleased with Credit Suisse’s recovery strategy and that he felt the company will not need any extra capital. He expressed these sentiments after stating that he was delighted with the plan.

David Faber
David Faber
I am a Business Journalist of The National Era
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