- Credit Suisse stock tanked on Monday, as concerns grew that it would default on its debts.
- The Swiss Bank is working to assuage widespread worries about its financial health.
Credit Suisse is fending off concerns about its financial health, with some investors going as far as suggesting the Swiss bank is at risk of suffering a Lehman Brothers-style collapse that could upend the global financial system. Here's a closer look at what's going on.
Markets are on edge
Rampant inflation, soaring interest rates, early signs of a global economic downturn, and tumbling asset prices have spooked investors in recent months, and made them worry about what's coming next.
The new UK government also roiled markets last week by announcing a slew of unfunded tax cuts and spending programs, which fueled fears of worse inflation and more rate hikes. The news sent the British pound to a record low against the US dollar, spiked the UK government's borrowing costs, and prompted a rare Bank of England intervention. The backlash spurred Prime Minister Liz Truss and her team on Monday to scrap their planned removal of the top rate of income tax.
With all that kindling, it should be no surprise that a spark would cause a massive blaze. In this case, Credit Suisse CEO Ulrich Koerner told staff in a Friday memo that it was a "critical moment" for the bank ahead of the unveiling of its restructuring plan on October 27, and they should expect more market volatility.
Instead of calming anyone, the memo set Twitter and Reddit alight with wild predictions of the bank imploding and triggering the collapse of the global financial system. A large Credit Suisse investor told a Fox reporter the bank's investment arm is a "disaster," and the lender's credit-default swaps were trading as if a "Lehman moment was about to hit."
Senior bank executives rushed to reassure large clients, counterparties, and investors about their liquidity and capital position over the weekend, the Financial Times reported. The BoE also liaised with Swiss authorities after the Credit Suisse memo added fuel to the firesale in markets, The Telegraph reported.
Bad news for Credit Suisse
Credit Suisse shares fell as much as 12% on Monday morning, extending their decline this year to 60%. Moreover, the spread on five-year credit-default swaps (CDS), which investors often buy as insurance against a company defaulting, climbed as high as 350 basis points, up from about 55 basis points at the start of this year, the FT reported. The larger spread suggests investors now see a far higher chance of the bank defaulting on its debts.
If Credit Suisse decides to issue shares to fund its restructuring plans, the plunge in its stock price this year will make a capital raise much more dilutive for existing shareholders. The wider CDS spread will likely translate into higher borrowing costs too, as it reflects greater concerns about the bank's creditworthiness.
The bank updated its talking points for staff over the weekend to note it has a $100 billion capital buffer, and still expects to maintain a 13% to 14% ratio for its safest equity capital through the end of this year, The Journal reported.
Credit Suisse, which manages about $1.1 trillion of assets, has been hit by several fiascos in recent years. For example, it was embroiled in the Greensill Capital scandal, and suffered a $5 billion blow from the collapse of Archegos Capital Management last year.
There's no reason yet to believe Credit Suisse is at risk of imploding and causing a repeat of the 2008 financial crisis. However, it's clear that already rattled investors are deeply worried about the bank's short-term outlook, and the company hasn't succeeded in alleviating their concerns.
Credit Suisse didn't immediately respond to a request for comment from Insider.