The sharp fall of Credit Suisse shares on Wednesday is prompting questions about a possible global contagion, or worse a repeat of the 2008 financial crisis.
Wall Street stocks dropped to negative territory on Wednesday, as banking shares in the US and Europe are hammered by worries that more lenders could fail, after a record low drop of almost a third of the shares of the global investment bank, Credit Suisse, the second largest bank in Switzerland.
The fall of Credit Suisse shares is also prompting questions about a possible global contagion, or worse, a repeat of the 2008 financial crisis.
The beating began earlier on Wednesday in Europe, after Credit Suisse's largest investor said it would not provide additional money to the Zurich-based financial institution, setting off a fierce selloff that slashed its shares by 30 percent at one point before recovering slightly.
But even before Credit Suisse's Saudi backer, the Saudi National Bank (SNB), said on Wednesday that it would not provide extra investment, the bank's shares were already down by more than 20 percent, dragging the whole European banking index down by more than 6 percent.
As a result of the rout in Switzerland and across Europe, London's FTSE 100 index declined almost 4 percent as of 1630 GMT while the European index, STOXX Europe 600, was down almost 3 percent also as of 1630 GMT.
American banking shares soon followed after trading opened in the US, with JPMorgan Chase falling more than 5 percent and Citigroup falling 6.7 percent as of 1830 GMT on Wednesday.
US stocks had already rebounded on Tuesday, leading some to believe that the worst was over for the US banking system, only to be confronted with the Credit Suisse scare, which is considered a bigger problem given its size. In 2021, it had assets of $1.7 trillion under its management.
Wednesday's development in the stock market led some publications to describe it as a "bloodbath", while others are comparing it to Black Wednesday in 1992, when the pound sterling crashed in the UK, sending shockwaves worldwide.
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What's triggering the scare at Credit Suisse?
There have been speculations that the ongoing Credit Suisse scare is directly connected to last week's collapse of two regional banks in the US, the Silicon Valley Bank (SVB) in California and the Signature Bank in New York.
According to news reports and investment analysts, Credit Suisse has limited exposure to the US banks that collapsed.
But what happened to SVB and Signature Bank created a psychological ripple effect on investors' minds, leading some to believe that something similar could happen to Credit Suisse.
Their concerns are not entirely without basis.
While Credit Suisse is one of the most-respected banking institutions in the world, developments in recent months have led some experts to start questioning the company's financial strength.
In 2022, it was reported that the company suffered a significant outflow raising concerns about its liquidity.
According to information released by the bank, its net outflow during the fourth quarter of 2022 alone was about $118.6 billion, taking the annual asset outflows for fiscal year 2022 to about $132.77 billion mostly in the last three months.
In contrast, the bank's capital inflows in 2021 was about $33.1 billion.
Since then, the bank has assured the public and its investors that it has slowed the outflows in 2022 and even started to get more investors back.
As early as Tuesday, Credit Suisse CEO Ulrick Koerner said in an interview with Bloomberg Television that the outflows have "significantly moderated".
When asked if the SVB collapse could adversely affect Credit Suisse, Koerner said that their situation is "very different".
He went on to say that the situation at the bank is "pretty calm", adding that they received "inflows" as recently as Monday, "which is a positive sign".
It turned out to be the calm before the storm.
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'Serious breach' of law at Credit Suisse
It did not help that Swiss regulators concluded in February that Credit Suisse made a “serious breach” of law in connection with the now-bankrupt firm, Greensill Capital, which is linked to Australian financier Lex Greensill.
After two years of review, the country's financial markets authority, FINMA, said that it has opened a probe that could lead to penalties against four former bank managers.
According to a Reuters news report, at the time, Credit Suisse closed four funds linked to the partnership, in which bank clients had invested about $10 billion.
Credit Suisse's ties to Greensill Capital were just one of a string of troubles that have led in part to repeated shake-ups of top management and corporate restructurings in recent years.
Greensill Capital has also been reportedly a target of inquiries in the UK.
As a result of the review, FINMA said it will now require top executives at Credit Suisse to periodically review about 500 of its most important business relationships.
It has also ordered Credit Suisse to record the responsibilities of about 600 of its highest-ranking employees.
Credit Suisse has vowed to address the concerns of FINMA, adding that the review "underlines the importance of the actions we have taken in recent years to strengthen our risk and compliance culture."
For some of the bank's biggest financiers, however, that may not be enough to assuage their doubts, although they still expressed confidence publicly.
On Wednesday, Saudi National Bank's (SNB) chairman Ammar Al Khudairy said that while it is happy with the transformation plan of Credit Suisse, it does not think it will need extra money.
"I don't think they will need extra money; if you look at their ratios, they're fine. And they operate under a strong regulatory regime in Switzerland and in other countries," Khudairy told Reuters news agency on the sidelines of a conference in Riyadh.
He also described Credit Suisse as an opportunistic investment and said the value realisation of that investment will unfold as the Swiss bank proves they are doing a turnaround.
The Saudi lender acquired a stake of almost 10 percent last year after it took part in Credit Suisse's capital raising and committed to investing up to $1.5 billion.
In a separate interview with Bloomberg, Khudairy declared "absolutely not" when asked if SNB would be willing to raise its stake at the bank and respond to a call for additional liquidity, citing regulatory limits.
Credit Suisse's price further slid after Khudairy's remarks on Wednesday.
Meanwhile, the Swiss Financial Market Supervisory Authority and the Swiss National Bank said that Credit Suisse “meets the capital and liquidity requirements imposed on systemically important banks” and that the central bank will step in if the situation changes.
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More concerns ahead?
In an interview with The Guardian, Andrew Kenningham, chief Europe economist at Capital Economics, warned that what is happening at Credit Suisse is "in principle a much bigger concern for the global economy" compared to the collapse of the US regional banks.
"Credit Suisse is not just a Swiss problem but a global one," Kenningham was quoted as saying.
He said that if authorities act decisively, a resolution can be achieved without triggering "too much contagion".
"While regulators will be aware of this, the risk of a botched resolution will be worrying the markets until a solution becomes apparent."
Meanwhile, New York University professor and economist Nouriel Roubini, called on the European Central Bank and the Saudi National Bank to extend Credit Suisse "some liquidity lifeline".
In a social media post, Roubini said the European Central Bank should avoid repeating the same mistake it made in 2011 during the Eurozone crisis when it raised interest rates by 50 basis points (bps).
"If ECB hikes by 50bps, it is possible that CS (Credit Suisse) goes bust over the weekend & then the ECB has to reverse itself by next week."
In a separate interview with Bloomberg, he warned that the Credit Suisse scare could be a "Lehmann moment", referring to the US investment bank that collapsed in 2008, and triggered the global financial crisis.
"So anything will happen to Credit Suisse will be of systemic effect for not just the European financial system but also for the global financial system," he said, adding the effect of a collapse would be "more severe".
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