It has been 50 years since global stock markets experienced a year as bad as 2022, falling by 9% at the end of September 2022. This gloomy scenario is running alongside mounting concerns surrounding large banking institutions.
Major Swiss bank Credit Suisse is considered a systemically important financial institution and holds the moniker of being ‘too big to fail’ (in that it is integral to the economy it serves). Yet the bank has raised concerns about an imminent collapse that is conjuring comparisons with Lehman Brothers – the investment bank that infamously filed for bankruptcy during the 2008 financial crisis.
Stocks and scandals at Credit Suisse
Credit Suisse has seen a drop in stock of 55% between October 2021 and 2022. Similarly, Germany’s Deutsche Bank, another major institution causing serious market concern, has seen its stock drop by 27% in the same period.
Furthermore, the interest rate for Credit Suisse’s five-year credit default swap (CDS) – an insurance against the risk of investments that allows an investor to swap or offset their credit risk with that of another investor – spiked by six basis points to 2.47% on 30 September, the highest level in ten years.
The riskier an investment is deemed, the more expensive a CDS is, which indicates that the market may be protecting itself against a potential Credit Suisse collapse.
Alongside a falling stock evaluation and heightened CDS rates, both Credit Suisse and Deutsche Bank have endured a string of legal scandals and allegations in recent years. In June 2022, Credit Suisse was found guilty by Switzerland’s Federal Criminal Court of failing to prevent money laundering (which the bank denied) by a Bulgarian cocaine trafficker. In July 2022, an internal probe found that Deutsche Bank had committed tax fraud, according to an internal investigation, by breaking regulation to allow clients to siphon off millions of euros in government revenues.
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Just one month after Credit Suisse’s guilty verdict, a new group CEO, Ulrich Körner, was appointed and the bank announced that it would be conducting a comprehensive strategic review.
Credit Suisse attempts to reassure
As rumblings of a possible collapse at Credit Suisse increased, Körner issued a memo to employees that was leaked to Reuters, saying that the bank was at a “critical moment” and advised against confusing the “day-to-day” stock price performance with the banks “strong capital base and liquidity position”.
This message bore a striking resemblance to words offered by the Lehman Brothers chief financial officer Erin Montella in a statement in September 2008, in which she said “our capital position at the moment is strong”.
These comparisons are particularly concerning given that a global recession is a possibility. However, with specific reference to Credit Suisse and Deutsche Bank, the hope is that lessons were learned from the failures of the 2008 financial crash.
Lessons learned from 2008?
Many Wall Street experts express scepticism over the possibility of another round of collapse in the global financial system. The general thought among the more optimistic is that there are more rigorous regulations in place in 2022 than there were in 2008, which are designed to prevent financial institutions from failing.
Furthermore, some are blaming investors for causing market anxiety, which in turn is driving up the CDSs and reinforcing the falling stock price.
Credit Suisse currently manages approximately $1.45trn-worth of assets and Deutsche Bank is responsible for $1.3trn. This is roughly four times the value of what Lehman Brothers managed at its peak before its collapse. The repercussions if either were to fail would be catastrophic on a global level.
While the current status of Credit Suisse – and Deutsche Bank – is causing high levels of concern among investors, the resulting heightened CDS price and low stock is unlikely to be resolved quickly. A turnaround strategy from Credit Suisse is expected to be revealed on 27 October. While they wait for the details of this strategy, many investors have an anxious month of CDS and stock price-watching ahead.