The Rise and Fall of Credit Suisse

Credit Suisse is crumbling. 

The Swiss banking system is feeling the heat. 

Top investors are unwilling to invest more.

Welcome to 2023.

Credit Suisse, recognized as the second-largest financial institution in Switzerland and the seventeenth-largest lender by assets in Europe, has recently caught the world’s attention.

Over the past six months, the 166-year-old bank’s valuation has witnessed a staggering 65% decline, reaching an unprecedented low.

Let’s dive in.

Last October, the company announced a radical restructuring after cutting thousands of jobs, including shrinking its investment bank and raising $4 billion in capital from investors, including the Saudi National Bank, which would make them a 10% owner of the company and the largest shareholder.

Coincidently, the Qatar Investment Authority became the second-largest shareholder in Credit Suisse.

It is important to recall that Credit Suisse faced a substantial setback in 2021, incurring a loss of $5.5 billion due to its connection to the collapse of Archegos Capital Management.

This single event led to the obliteration of five years’ worth of investment banking profits, highlighting its risk management practises’ total and complete failure.

Earlier this week, the bank revealed that the unprecedented outflows of client funds in early October had not been recuperated as of this month but had stabilized at lower levels.

Credit Suisse saw customer withdrawals of more than 110 billion Swiss francs in the fourth quarter.

Additionally, the bank confirmed in its annual letter it had to utilize liquidity buffers to address the consequences of these withdrawals and acknowledged that these circumstances have exacerbated and may continue to exacerbate liquidity risks.

Why did people begin to panic?

On Tuesday, executives said the bank’s financial reporting was subject to material weaknesses in internal reporting processes for 2022 and 2021 after years of showcasing embarrassing risk management practices and empty promises.

This is where things get turned up.

The head of Saudi National Bank (the biggest shareholder) chose not to invest more in Credit Suisse due to regulations, sparking liquidity fears alongside European bank instability.

@zerohedge also reported that the bank’s second-largest shareholder, the Qatar Investment Authority declined to comment as the fear started to take flight.

This prompted the US Treasury Department to say it was closely monitoring the Credit Suisse situation. Switzerland has a long-standing reputation for stability, neutrality, and a historical role as a tax haven since the mid-20th century, adding a layer of complexity to the matter.

Naturally, the Swiss National Bank swooped in like a guardian angel waving a magic wand, eager to save the day for more bankers. 

What else would a central bank do but tenderly rescue a bumbling institution after a long, steady dance with recklessness?

Credit Suisse said it would borrow up to 50 billion Swiss Francs ($53.7 billion) from the Swiss central bank.

Yet another bailout. Incompetence bags a prize again.

But what happens if this is not enough?

In March 2022, the Swiss government indicated it wanted to set up a public liquidity backstop for banks to provide state-guaranteed cash should one of the country’s big banks fail.

The proposed backstop would allow the Swiss National Bank to provide funds to any systemically important bank in the event of a failure in the form of a state-guaranteed loan.

However, the Swiss central bank recorded a historic loss of 132.5 billion francs ($141.54 billion), echoing Credit Suisse’s reckless risk management skills over the years.

The Fed and Swiss central bank’s support for financial institutions illustrates the flawed system of socialized losses and privatized profits in today’s version of capitalism.

Expect more volatility and, sadly, more government support in the financial system.