Credit Suisse on Thursday said it might lend to $54 billion from the Swiss central bank to bolster liquidity and investor confidence after a collapse in its stock fueled fears of a global financial crisis.
The Swiss bank’s announcement helped stave off a robust sell-off in financial markets in Asian morning trading on Thursday, after heated sessions in Europe and the US overnight as investors anxious a couple of potential run on global bank deposits.
In its statement early Thursday, Credit Suisse said it might exercise its option to borrow from the central bank for up to $54 billion. This followed assurances by Swiss authorities on Wednesday that Credit Suisse met “the capital and liquidity requirements imposed on systemically vital banks” and will access central bank liquidity if needed.
Credit Suisse is the first major global bank to receive emergency relief since the 2008 financial crisis, and its problems have raised serious doubts about whether central banks will find a way to proceed to fight inflation with aggressive rate of interest hikes.
Asian stock markets followed suit shit on Thursday and investors bought gold, bonds and the dollar. The bank’s announcement helped reduce a few of those losses, but trading was volatile and sentiment fragile.
“It helps. Removes direct risk. Nonetheless, it presents us with a special selection. The more we do that, the more we blunt monetary policy, the more we’ve got to live with higher inflation – and what is going to that be?” said Damien Boey, chief capital markets strategist at Barrenjoey in Sydney.
“Do subsidies improve the situation? On the one hand, you might be removing a source of risk to the markets that could be a clear and present threat. On the other hand, we feed into this monetary policy paradigm, which itself is at odds.”
Credit Suisse loan shall be made under a collateralized loan and a short-term liquidity facility fully secured by high-quality assets. It also announced senior money offerings of up to $3.2 billion.
“This extra liquidity would support Credit Suisse’s core business and customers as Credit Suisse takes the crucial steps to create an easier and more focused bank built around customer needs,” the bank said.
Credit Suisse CEO Ulrich Koerner on Wednesday sought to reassure investors about the lender’s high liquidity.
“Our capital, our liquidity base may be very, very strong,” Koerner told the media. “We meet and exceed essentially all regulatory requirements.”
THE EUROPEAN EPICENTRE
The 167-year-old bank’s woes shifted the attention of investors and regulators from the US to Europe, where Credit Suisse led a sell-off of the bank’s shares after its largest investor said it couldn’t provide more financial assistance due to regulatory constraints.
Concerns over Credit Suisse have joined those of the banking sector, sparked by the collapse of Silicon Valley Bank and Signature Bank, two US mid-sized firms.
Investors are also focused on any motion by central banks and other regulators elsewhere to restore confidence in the banking system, in addition to any possible corporate exposures to Credit Suisse.
The collapse of Silicon Valley Bank last week, followed by Signature Bank two days later, sent global bank stocks on a rollercoaster ride this week, with investors discounting assurance from US President Joe Biden and emergency steps giving banks access to more funding.
On Wednesday, Credit Suisse shares led approx 7% decrease in the European banking index, while five-year credit default swaps for the Swiss flagship bank hit a recent record.
The exit of investors out the door has raised concerns a couple of wider threat to the economic system, with two oversight sources telling Reuters that the European Central Bank contacted the banks on their watch to query them about their exposure to Credit Suisse.
The U.S. Treasury Department also said it was monitoring the situation around Credit Suisse and was in touch with its global counterparts, a Treasury Department spokesman said.
“FLIGHT TO SAFETY”
The rapid increase in rates of interest has made it harder for some firms to repay or service loans, increasing the probabilities of losses for lenders who’re also anxious about the recession.
Traders are now betting The Federal Reserve, which was supposed to speed up its rate hike campaign last week in the face of persistent inflation, could also be forced to pause and even change course.
Bets on a big increase in rates of interest of the European Central Bank at Thursday meeting it also quickly evaporated due to growing concerns about the condition of the European banking sector. Money market prices suggested that investors now saw lower than a 20% likelihood of a 50 basis point rate hike at the ECB meeting.
The anxiety over the collapse of SVB has also prompted depositors to look for brand spanking new homes for his or her money.
Ralph Hammers, chief executive of Credit Suisse’s rival UBS, said the market turmoil had directed extra money towards itself, while Deutsche Bank’s chief executive Christian Sewing said the German lender had also seen deposits pouring in.