Credit Suisse isn’t just any bank. Unlike midsize Silicon Valley Bank, which went under this month in the US, it is one of 30 banks classified as globally significant because it could pose a risk of bigger trouble if it collapses, as happened with Lehman.
Credit Suisse’s troubles pre-dated Silicon Valley’s failure, including a US$5.5 billion ($8.8b) loss on its dealings with private investment firm Archegos and a spying scandal.
Then fears about banks fed by the US failures made investors take a closer, less friendly look at banks. When Credit Suisse’s biggest investor, Saudi National Bank, refused to put up more money, investors and depositors headed for the exits.
Will the takeover restore confidence in the global financial system?
Confidence in banks is shaky right now. That said, economists, bank regulators and stock-market analysts generally say that banks are in better shape than in 2008, with thicker financial buffers against losses and a slew of new regulations.
And this time, policymakers have been quicker to respond. The US Federal Reserve offered credit to banks that suffered uninsured losses on bond holdings because of rising interest rates.
On Sunday, just ahead of the opening of markets in Asia, other central banks joined the Fed in expanding unlimited dollar credit to any bank that needs it. That was a swift preemptive move used in emergencies such as the pandemic market meltdown of 2020.
Swiss officials baulked at letting Credit Suisse fail, unlike the US government in 2008, when it let Lehman go under, spreading losses and fear across the financial system. Financial institutions had been in trouble since 2007, but it wasn’t until two weeks after Lehman that the US Congress came to the system’s aid with a US$700b emergency economic stabilisation act.
Questions have been raised about the technicalities of the Credit Suisse rescue and the decision to insure all depositors at Silicon Valley. But officials are showing that they learned one lesson from Lehman: “namely to act decisively and swiftly, and if needed to run roughshod over any discussion of moral hazard and legal obstacles, both of which can be discussed once the dust settles”, said Marc Ostwald, chief economist and global strategist at ADM Investor Services International.
As a result, “some semblance of calm has been restored. This crisis is far from over, but at least some of the immediate risks of an exponential ballooning of contagion effects have been mitigated.”
So we can sound the all clear?
Not yet. UBS shares initially plunged Monday on fears that the bank has simply inherited trouble by buying Credit Suisse. The share later turned positive. And the way the takeover was done, by wiping out some of Credit Suisse’s bondholders, rattled markets in those bonds. So new problems could arise.
“Containing crises is a bit like a game of whack-a-mole — with new fires starting as existing ones are extinguished,” said Neal Shearing, group chief economist at Capital Economics. “A key issue over the next week will be whether problems arise in other institutions or parts of the financial system.”
Among the lingering worries: did other US banks ignore the risk that interest rates might swiftly rise, as Silicon Valley did? Could there be trouble in other parts of the financial sector that don’t take insured deposits, such as investment banks, hedge funds and mortgage brokers?
Said Shearing: “A reasonable base case is that we avoid a system-wide crisis on the scale of 2007-08, but further problems emerge at individual institutions.”
What does this mean for Swiss banks?
In the global financial crisis, UBS needed government help, while Credit Suisse did not. Now UBS faces the task of integrating Credit Suisse and sorting out its problems.
Switzerland, which had five big banks 30 years ago, is now left with one very large bank that’s “too big to fail”.
“That means the government is even more challenged to support any problems in the financial system,” said Tobias Straumann, an economic history professor at the University of Zurich.
What does that mean for the global economy?
Analysts say pressure from markets and regulators may make banks less likely to risk new lending, which could restrict credit for new purchases or investment in new businesses.
If credit is seen to tighten because of fears over banks, central banks such as the Fed, the European Central Bank and the Bank of England might choose to slow down their recent rapid interest rate increases aimed at fighting inflation — or to stop the increases at a lower level than they otherwise would have.
Tighter credit, whether from nervous banks or from central bankers raising rates, tends to counteract inflation.
That was behind European Central Bank head Christine Lagarde’s statement last week after the bank raised rates by a half-percentage point. She said further rate decisions would be taken meeting to meeting based on the latest data.
Lagarde said Monday that the current financial tensions “might have an impact on demand and might actually do some of the work that might otherwise be done by monetary policy”.
