Credit Suisse’s anxiety shows just how fearful the markets are right now

CNN business

Social media speculation that Credit Suisse was on the verge of collapse sent the Swiss bank’s shares on a wild ride in recent days, with investors shrugging off the frenzy and buying protection in the event of a default.

But the hand-wringing over the global lender’s fortunes seems to say more about the nervous mood hanging over the markets than the bank’s financial position.

Analysts say Credit Suisse ( CS ) has enough capital on hand to meet regulatory requirements and the liquidity needed to weather a potential shock. Years of scandals and fines have hurt the bank’s business, but it is not about to fail.

“From our point of view, looking at the finances of the company [the second quarter]we see [Credit Suisse’s] capital and liquidity position are healthy,” JPMorgan Chase analyst Kian Abouhossein wrote on Monday.

This does not mean that there are no risks. The Financial Times reports that Credit Suisse’s top executives spent the weekend calling clients and large counterparties, making sure the bank is on solid footing. If customers start cashing out, this can create a dangerous feedback loop.

Time is also difficult. Credit Suisse needs to raise new funds from investors Approving a turnaround plan to be announced later this month, which will include shrinking the struggling investment bank.

However, many experts say that the spectacle surrounding Credit Suisse looks overblown, at least based on what we know now.

“I don’t think it’s a ‘Lehman moment,'” Allianz adviser Mohamed El-Erian said on CNBC on Monday, referring to the 2008 collapse of Lehman Brothers, which sparked market panic during the global financial crisis. .

Credit Suisse, Switzerland’s second-largest bank, has been plagued by a string of mistakes and compliance failures in recent years that have cost billions and led to a senior management overhaul.

However, the review has been renewed following a memo to staff by CEO Ulrich Körner on Friday, which sought to dispel concerns about the bank’s financial health ahead of the October 27 unveiling of the restructuring plan. The letter backfired, and instead stoked fears about the bank. crushing

Shares of Credit Suisse fell nearly 12% on Monday as investors dumped their holdings. Sentiment appears to be improving, with shares ending up just 0.9% on Monday and rising on Tuesday. However, traders have raced to buy insurance if the bank defaults on the debt, sending five-year credit yields soaring.

Credit Suisse’s business is under severe strain. It is preparing to shrink its investment bank and strengthen its wealth management arm – a costly endeavor that could cost it 6 billion Swiss francs ($6.1 billion), according to a recent analysis by Keefe, Bruyette & Woods. Asset sales would cover just 2 trillion Swiss francs.

The bank’s market value has fallen to 10.5 billion Swiss francs after its share price has fallen 54% this year.

Körner acknowledged in a statement on Friday that this is a “critical moment” for the entire organization. However, analysts stress that there are no signs that the bank faces a more existential threat, although securing financing to carry out an effective restructuring could be a challenge.

“We would be cautious about drawing parallels with banks in 2008,” Citigroup analysts said in a note to clients on Monday.

At the end of the second quarter, a key measure of Credit Suisse’s capital position — which is tied to its ability to absorb losses — stood at 13.5%, higher than peers, according to Citi. The bank also has “very healthy” levels of cash that can be quickly accessed in a crisis.

They were concerns about Credit Suisse A sudden crisis in the UK bond markets exacerbated this late last month. Investors were caught off guard after Prime Minister Liz Truss’ new government unveiled an unfunded package of tax cuts. This led to a frenzied sale of government debt, backing pension funds into a corner and forcing the Bank of England to intervene to ensure financial stability.

The episode heightened fears of exposing cracks in the financial system as the central bank’s aggressive interest rate hike campaign aims to combat inflation-loving markets. volatility

“The market reaction is the interesting thing here,” El-Erian said Monday of the Credit Suisse drama.

The bank may be exposed to risks unknown to the market or even to insiders, said José-Luis Peydró, finance professor at Imperial College Business School.

The collapse of US hedge fund Archegos Capital last year, for example, cost Credit Suisse $5.5 billion. An independent external investigation later found “a failure to effectively manage risk”.

However, if Credit Suisse had deeper problems, many of the problems would be unique to the company, meaning they would likely not set off a chain reaction in the banking sector, Peydro added.

Big banks also face much more significant scrutiny after the 2008 crash, which makes them more vulnerable.

“Banks have much higher levels of capital and liquidity than they did in the past thanks to post-2008 banking regulation,” Peydro said.

Other lenders are not subject to these conditions, however. In recent days, experts say, they are looking at so-called “shadow banks”, which make loans but don’t have to follow the same strict rules. They believe that these companies can be a source of confusion if the markets are hit with new shocks.

“If you’re worried about systemic risk, look at non-banks, not banks,” El-Erian said.