Oct 14, 2022

Credit Suisse Woes Continue: Why it Matters

Oct 14, 2022 | Banks, Market

By: Ken Chase.

For Credit Suisse, this week continued to bring bad news, as the firm’s shares dropped once again after U.S. authorities announced an investigation into whether the Swiss bank had helped its U.S. clients to hide their assets from tax officials. The U.S. Department of Justice is reportedly looking into the possibility that the bank aided customers in shielding hundreds of millions of dollars.

The bank, which pleaded guilty to similar charges in 2014 and agreed to close any U.S. accounts that had not been declared to the IRS, has denied these latest allegations. It also claims to be fully cooperating with U.S. officials as they investigate the matter.

While Credit Suisse remains the second-largest lender in Switzerland and among the larger banking entities in Europe, its recent troubles have drawn increased scrutiny from investors, analysts, and the markets. Some have even drawn comparisons to AIG’s troubles in 2008, which led to the firm receiving a $180 billion bailout from the U.S. government due to the fears that its collapse could cause a domino effect harming its partner banks like Bank of America, Goldman Sachs, and others.

One former Chair of the FDIC, Sheila Bair, told Fox Business that she was concerned about Credit Suisse’s announced restructuring plans: “It’s concerning when a bank in market conditions like this says that they’re restructuring, they’re going to sell assets, they’re going to raise capital.”

Capitalization appears to be another concern for the market, with Goldman Sachs analysts estimating that Credit Suisse could see a capital shortfall of around $8 billion by 2024. Meanwhile, Moody’s has speculated that the bank could lose as much as $3 billion this year.

The firm’s risk management efforts remain a source of speculation, as it continues to overhaul its processes in the aftermath of scandals like the Archegos Capital hedge fund meltdown, and the closing of its $10 billion supply chain finance funds related to the British financial services company Greensill Capital.

To add to those woes, recent reports have suggested that relationship managers within the bank have been busy in recent weeks working to keep the bank’s larger clients on board.Credit Suisse reportedly managed nearly $770 billion dollars in assets for its wealthiest clients, as of June 2022.

That latter speculation points to the larger concern many in the markets have expressed in recent weeks: though Credit Suisse’s own equity and liquidity are being questioned in the here and now, the fact that so many other people’s money may also be at risk is something that cannot be overstated.

At the same time, however, most serious analysts seem to dismiss any comparisons to Lehman Brothers, which collapsed in epic fashion in 2008, fueling the subsequent financial crisis that led to the Great Recession. As Morningstar equity analyst Johann Scholtz told CNBC last week, there are clear differences:

“Whilst there is a potential for new write-downs being announced by Credit Suisse at the end of the month when they’re coming up with results, there is nothing publicly available at the moment that indicates that those write-downs will be sufficient to actually cause solvency issues for Credit Suisse.”

He also noted that the complete overhaul of banking capitalization rules in the aftermath of the 2007-2008 crisis has forced banks to maintain higher equity capital levels, which provides better protection against the type of insolvency seen in the financial industry during that period.

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