Credit Suisse grabs $54bn lifeline from central bank

Credit Suisse said on Thursday it would borrow up to $54bn from Switzerland’s central bank to shore up liquidity and investor confidence, after a slump in its shares intensified fears about a global banking crisis.

The bank’s announcement, which came in the middle of the night in Zurich, prompted a 24% rise in Credit Suisse shares and helped reverse some of the heavy losses on stock markets driven by fears of bank runs across the world.

Credit Suisse is the first major global bank to be handed an emergency lifeline since the 2008 financial crisis and its troubles have raised serious doubts whether central banks will be able to sustain their fight against inflation with aggressive interest rate hikes.

Switzerland’s second-largest bank said it would exercise an option to borrow up to Sf50bn ($54bn) from the central bank.

That followed assurances from Swiss authorities on Wednesday that Credit Suisse met “the capital and liquidity requirements imposed on systemically important banks”, and that it could access central bank liquidity if needed.

JPMorgan analysts said that the measures will buy the Swiss lender time to carry out its restructuring.

“The combination of measures should be sufficient to stem the negative moves across the capital structure as the market priced in the potential impact of liquidity pressures,” JPMorgan said in a note on Thursday.

While its shares bounced back, the cost of insuring exposure to Credit Suisse debt tumbled. Five-year credit default swaps were down 128 basis points to 1,016bp from Wednesday’s close after hitting record highs that day.

The European banking index, known as SX7P, was up 2.4% after the Swiss intervention, with big bank stocks rising and insurance protection on bonds issued by BNP Paribas, Deutsche Bank and UBS also edging lower.

Throughout most of the Asian day, stocks had wallowed in the red as investors rushed to the relative safe havens of gold, bonds and the dollar. While Credit Suisse’s announcement helped trim losses, trade was volatile and sentiment fragile.

The head of Japan’s banking lobby said that there were no signs yet of the Japanese financial system being affected by a crisis of confidence in Credit Suisse, as Japanese banks are well-capitalised.

Credit Suisse’s borrowing will be made under the covered loan facility and a short-term liquidity facility, fully collateralised by high-quality assets. It also announced offers for senior debt securities for cash of as much as Sf3bn.

CEO Ulrich Koerner told staff in a memo they should focus on facts as he pledged to rapidly implement a plan to streamline operations. The bank would continue to focus on the transformation from a position of strength, Koerner said, adding that bank’s liquidity coverage ratio had improved and that it had raised capital recently. 

Meanwhile, Credit Suisse bankers in Asia contacted clients to reassure them after the latest inflow of funds.

“We've been telling them to read the statements and see that we are buying Sf3bn worth of bonds because they are so cheap,” said a Hong Kong-based senior banker, who declined to be identified.

European epicentre

The 167-year-old Credit Suisse’s problems have shifted the focus for investors and regulators from the US to Europe, where it led a sell-off in bank shares after its largest investor said it could not provide more financial assistance due to regulatory constraints.

The concerns about Credit Suisse added to broader banking-sector fears sparked by last week’s collapse of Silicon Valley Bank (SVB) and Signature Bank, two mid-size US lenders.

Investor focus is also on any action by central banks and other regulators to restore confidence. Policymakers in Australia and South Korea sought to reassure markets that banks in their jurisdictions were well-capitalised.

SVB’s demise, followed by that of Signature Bank two days later, sent bank stocks on a roller-coaster ride as investors feared another collapse like Lehman Brothers, the Wall Street giant whose failure sparked the global financial crisis.

On Wednesday, Credit Suisse shares led a 7% fall in the European banking index.

The exit raised fears of a broader threat to the financial system, and two supervisory sources said that the European Central Bank (ECB) had contacted banks on its watch to question them about their Credit Suisse exposures.

The US Treasury also said it was monitoring the situation and was in touch with global counterparts.

Next steps

Rapidly rising interest rates have made it harder for some businesses to repay or service loans, increasing the likelihood of losses for lenders already worried about a recession.

Traders are now betting that the Federal Reserve, which last week was expected to accelerate its interest rate hikes in the face of persistent inflation, may pause or reverse course.

Bets on a large ECB interest rate hike at Thursday’s meeting also evaporated quickly. Money market pricing suggested traders now expect less than a 20% chance of a 50bp rate hike.

For now, investors are focused on Credit Suisse.

“The next important step needs to come from their CEO and display their new strategy to the public sooner than later to reassure the markets,” said Tareck Horchani, head of prime brokerage dealing at Maybank Securities in Singapore.

Reuters