Credit Suisse: Why it’s struggling and why that’s a big deal

Credit Suisse is one of the largest financial institutions in the World.

The Financial Stability Board is an international organization that monitors and regulates the financial sector. It has classified it as “a global systemically important banking” along with only 30 other banks, including JPMorgan Chase Bank of America, Bank of China, and Bank of China.

On Wednesday, Andrew Cunningham, a Capital Economics analyst, wrote to clients that “Credit Suisse” is a more significant concern regarding the global economy. “Credit Suisse has a much greater global interconnection… it is not only a Swiss issue but a worldwide one.”

Why is Credit Suisse in trouble now?

Central banks have raised interest rates to cool down the global economy and slow inflation.

Some banks are now vulnerable as a result of this process.

Silicon Valley Bank’s collapse last week was the most significant U.S. banking failure since 2008. This engulfed many other banks with significant problems, such as Credit Suisse. It has been a slow-moving car wreck for years.

Capital Economics economists said Thursday in an email sent to clients that the problems at Credit Suisse were very different from those which brought down SVB just a few days earlier. They warn that, as interest rates increase, there are vulnerabilities in the financial system.

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The rising interest rates did not trigger Wednesday’s Credit Suisse shares plunge. The Saudi National Bank, the bank’s most prominent backer, said it was willing to spend less after purchasing a nearly-10% stake in the bank for $1.5 billion.

What happened to Credit Suisse prior to this meltdown?

Credit Suisse has struggled for years.

According to Cunningham, it was regarded as the weakest of Europe’s largest banks.

In recent years, the company was plagued with a series of missteps and failures to comply that have cost billions and resulted in several management changes. Over the last decade, the Swiss Bank has faced fines and penalties for tax evasion and misplaced wagers, among other things.

Credit Suisse pleaded guilty 2014 to federal charges of allowing some U.S. customers to evade taxes illegally. As part of the settlement, the bank paid $2.6 billion to the federal government and New York’s financial regulators.

Accounting fraud at Luckin Coffee damaged the bank’s reputation. Credit Suisse was an underwriter for the company when it went public on Nasdaq in 2019. After fraudulently inflating sales, the Chinese company was removed from the U.S. exchange.

After two high-profile spying cases involving bank officials, Credit Suisse CEO Tidjane Thiam will resign in 2020.

The collapse caused by the U.S. hedge fund Archegos Capital damaged Credit Suisse and cost it $5.5 billion a year later. Credit Suisse was found to have allowed Archegos Capital, a U.S. hedge fund, to take “potentially disastrous” risks. This culminated in a spectacular collapse of the U.S. hedge funds.

Social media rumors in 2022 led to customers withdrawing billions of dollars. This has made profitability for the bank near impossible, as it has been bleeding money for years.

Last month, Credit Suisse stock fell to new record lows following its most enormous annual loss since 2008’s financial crisis. A report revealed that regulators are reviewing the comments made by the lender’s Chairman about its finances.

What is next for Credit Suisse

Credit Suisse could use the lifeline provided by the Swiss National Bank to buy some time and restore its confidence. It can also continue restructuring plans, including carving out Investment Banking into an independent U.S. business, focusing on Switzerland, and managing money for wealthy customers.

Credit Suisse is not out of the woods just yet.

JPMorgan’s Banking Analysts said that the Swiss Central Bank’s liquidity support would not be enough due to “ongoing issues with market confidence” in Credit Suisse’s plans for investment banking and the erosion of its franchise.

A research report published on Thursday stated that “status quo” is not an option, as counterparty worries are beginning to surface, as shown by the credit/equity market weakness. They also added that a takeover, most likely by UBS, a larger Swiss rival, was most likely.

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