News & Analysis

Is Credit Suisse running out of Credit?

20 October 2022 By GO Markets


This year has not been kind to the domestic and global economy. The financial woes keep rolling in, this time an old issue has rear its head with one of largest global investment banks seeing its share price drop significantly.

That institution in question, is stalwart Credit Suisse. Credit Suisse’s share price is down more than 70% – from 14.45 USD in Feb 2021, to currently trading around 4.71 USD. There is a potential case to answer in the mismanagement of their investment department and investors are starting to take a deeper look into their finances. The Bank is beginning to attract market attention as trading in their Credit Default Swaps reaches levels not seen since the Lehman Brothers collapse. The rapid 15 per cent rise in the price of the swaps, was last seen in 2009 during the financial crisis, suggests investors are worried about Credit Suisse’s financial health.

Credit Default Swaps, offer protection against a company defaulting on its bonds and are affected by interest rates. With many central banks trying to combat inflation by hiking interest rates this has caused further stress to Credit Suisse’s liquidity and ability to remain default free.

Credit Suisse, CEO, Ulrich Koerner had to reassure investors and staff – admitting that the bank was facing a “critical moment” but stressing that the Swiss-based financial institution has a “strong capital base and liquidity position.”

In the memo to staff he wrote: “I know it’s not easy to remain focused amid the many stories you read in the media – in particular, given the many factually inaccurate statements being made. “However, the statement has not satisfied everyone, with some still believing that the bank will still need to go through a serious restructure to stay afloat.

A broader issue that lingers and surrounds large institutions such as Credit Suisse and fellow European bank, Duetsche Bank, is that if their conditions continue to worsen, they could end up like Lehman Brothers and ‘fail’? Alternatively, due to their sheer size, in which both banks collectively manage around $US2.8 trillion ($4.4 trillion) in assets they may be deemed ‘Too big to Fail’ and receive large bailouts if needed. This potential safeguard could arguably encourage increasing risky asset management and creates a potentially dangerous cycle.

With inflation and the bond market remaining highly volatile, Credit Suisse remains in precarious position.

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