Swiss bank Credit Suisse’s meltdown

The second largest Swiss bank, Credit Suisse, just managed to avoid sinking when the Swiss National Bank (SNB) threw a lifeline of 50 billion Swiss francs ($54 billion) because the Swiss authorities felt that Credit Suisse was “globally systemically important” and that it should not fall because if it fell it could possible bring down others in the system as well. This is another version of governments bailing out banks which are felt to be “too big to fail” as it was done in the United States in the 2007-2008 financial crisis. The Credit Suisse officials feel that all has not been lost and things could be salvaged, though other bank honchos in Europe seem to feel that Credit Suisse has no other option but to merge with the largest Swiss bank, the DBS.

The reason for the crisis in Credit Suisse seems to be connected with the panic caused by the run on the Silicon Valley Bank (SVB), and which has affected the banking sector stocks in the US and then the panic spread to the European banking sector stocks. Fears about Credit Suisse grew when its second highest investor, the Saudi National Bank, said that it would not increase its investment in Credit Suisse because of the Saudi legal ceiling on how much could be invested in a foreign bank entity. But this was typically misinterpreted by the Western news agencies to mean that the Saudi bank was not sure of Credit Suisse’s credibility. The problems of Credit Suisse have also been brewing for a longer time, going back to the last quarter of 2022 when $120 billion was withdrawn by the depositors. And the Swiss bank has been trying to save the situation when the SVB catastrophe occurred and it changed the market sentiment. The other problem with Credit Suisse’s affairs was that it was dealing in bonds and in credit default swaps (CDS), the most dangerous instrument which unleashed a storm in the US in 2007-08. And the Swiss bank was trying to move away from bonds and CDS’ but it seems that things got out of hand.

Credit Suisse has also been an old bank, with a 166-year history, and it represented in many ways the virtues for which Swiss banks won worldwide reputation of confidentiality, which was not compromised at any cost. But this was put to the test after the 2007-08 American financial crisis when the American government said that the tax-evaders were parking huge amounts in the Swiss bank accounts. The American government then had to arm-twist the Swiss banks to yield their secrets, and disclose the names of the account-holders. So for a decade now the Swiss banks have been removed from they high pedestal they were standing on. Even as it was dealing with the evolving crisis of credibility, Credit Suisse was planning to turn itself into an investment bank.

There was much expectation that due to the bad weather that has been caused by SVB and Credit Suisse, the US’s Fed Reserve and the European Central Bank (ECB) would desist from raising the interest rates so that there would be a positive sentiment in the markets and enabling liquidity. But the ECB had refused to oblige and raised the interest rate on Thursday by 50 basis points. It is hoped that the Fed Reserve would raise interest rates in a smaller amount. There are indications that the American central bank would raise the rates by 25 basis points. What is of greater concern to the central banks in Europe and America is the threat posed by inflation and fuelling the cost of living crisis, especially in Europe. But what is to be seen next week is whether the crises caused by SVB and Credit Suisse will subside, and the other challenges facing the economy would be back on the central agenda of governments and central bankers.