Credit Suisse bailout: last resort for toxic bank

DThe Swiss National Bank (SNB) has thrown a lifeline to Credit Suisse (CS). With its CHF50bn loan commitment to boost liquidity, the SNB is calming the nerves of investors in a crisis-ridden major Swiss bank, as evidenced by a sharp rise in prices on Thursday. Only in the coming weeks and months will it become clear whether this maneuver can also stop the churn.

One thing is clear: through countless scandals and costly failures, the traditional bank has lost an incredible amount of credibility. It cannot be restored overnight. Credit Suisse is not far off.

From the point of view of regulatory policy, the rescue operation of the National Bank is not a glorious act. After all, it was not force majeure that made the Zurich financial giant reel. The billions of losses in recent years have been largely self-inflicted. Only lending to the American gambling house Archegos led to a loss of 5 billion Swiss francs by the bank. The sale of Greensill’s supply chain funds, which had been positioned as low-risk, did serious damage to CS’s reputation, not to mention a smoldering multibillion-dollar litigation risk.

Against all odds, Credit Suisse’s commitment is right.

These are just two of a series of egregious risk-management scandals officially confirmed by Swiss financial market watchdog Finma. Why shouldn’t owners be held responsible for this? Strictly speaking, Credit Suisse does not deserve the support of the Swiss central bank.

And yet the usage is correct. The drop in prices on Wednesday was the result of unfortunate statements by a major shareholder from Saudi Arabia, which were fatally linked to the turbulence around the insolvency of the US Silicon Valley bank. In such an extremely nervous mood, CS, which is currently the weakest link in the group of Europe’s largest banks, has been hit particularly hard. The fall in prices threatened to provoke panic among already anxious customers, which could quickly spread to other banks. The Swiss central bank’s bailout efforts are aimed not only at stabilizing Credit Suisse, but at the entire system. Overall, she wants to reduce the risk of a domino effect in the financial sector.

The spin-off of the Swiss business and the controlled liquidation of the remaining parts of the bank as part of the contingency plans that were developed for systemically important banks such as CS in response to the 2008 financial crisis are not currently on the agenda. The capital rate is still too high for that. In addition, such a split, which has never been used before, is fraught with significant risks.

The takeover of CS by a large (healthy) local competitor of UBS is constantly used as a possible rescue maneuver. But it’s not just antitrust and regulatory barriers that speak against this. The integration of CS will be accompanied by a reduction in staff and will force UBS to work in-house for many years. In addition, incalculably high (legal) risks still lie dormant on Credit Suisse’s balance sheet. She’s toxic.

That is why, despite the low stock price on paper, not a single foreign bank contacted the troubled child on the Paradeplatz in Zurich. In addition, foreign competitors know that many customers who knowingly want to be served by a Swiss bank will flee under their flag.

A massive National Bank loan is now giving Credit Suisse a breather. However, the calm that the board hoped so much for is unlikely to come in the near future. When the bank releases its first quarter report at the end of April, there is a risk of getting unpleasant headlines again. Finally, another major loss is expected. Finma’s expected report on the control failure investigation into the Archegos scandal also promises “bad news”.

Credit Suisse can still rejoice that financial market watchdogs tend to be sharp in their choice of words when abuses are discovered, but not in their punishments. Finma has no right to impose fines. Through years of misconduct, Credit Suisse has discredited the entire Swiss financial center. Now is the time to sharpen Finma’s sword.

Source: Frantfurter Allgemeine

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