Swiss lender’s struggles shake the financial sector worldwide
Credit Suisse’s longstanding financial issues erupted into a severe crisis on Wednesday (Mar 15), as its stocks and bonds plummeted while major global banks scrambled to safeguard their finances from potential repercussions.
The Swiss lender’s stock plunged by up to 31%, hitting unprecedented lows, while its key bonds dropped to distressing levels, raising alarms reminiscent of the 2008 financial crisis. To mitigate risks, trading partners of Credit Suisse hastily acquired credit-default swaps, financial instruments designed to provide compensation should the situation escalate.
One notable reaction came from BNP Paribas, which informed clients it would cease accepting requests involving derivatives contracts with Credit Suisse as the counterparty. This decision reflects a broader trend among banks, particularly in the US, that have been gradually reducing their exposure to the troubled lender.
As markets reeled from the unfolding crisis, Swiss authorities issued a statement in the evening, pledging to offer emergency financial support to Credit Suisse if necessary. “The trading dynamics reflect a crisis of confidence in Credit Suisse,” remarked Mark Heppenstall, president of Penn Mutual Asset Management. “Institutions are actively seeking ways to protect themselves.”
Investor fears intensified following comments by the Saudi National Bank, Credit Suisse’s largest shareholder. When asked about providing additional funding, its chairman, Ammar Al Khudairy, unequivocally declined, amplifying concerns already heightened by recent US regional bank failures.
The crisis took a heavy toll on Credit Suisse’s dollar bonds, which plunged by as much as 40 cents on the dollar, marking the worst performance globally. Credit default swaps for the lender soared, particularly for shorter durations, as institutions sought immediate protection.
Although Swiss authorities’ intervention helped Credit Suisse’s American depositary receipts recover some ground, they still closed 14% lower in New York trading. The shockwaves extended to other banking giants, with Morgan Stanley and Citigroup dropping over 5%, and JPMorgan Chase, Goldman Sachs, and Wells Fargo experiencing losses exceeding 3%.
Rising fears in global markets
The unfolding turmoil highlights the broader fears enveloping the global economy as central banks aggressively combat inflation. Oil prices fell below $70 per barrel in the US for the first time since 2021, reflecting recession concerns.
Dollar funding markets also felt the strain, with overnight repurchase agreement rates climbing amid increased demand and unease. Other financial indicators, such as the gap between forward-rate agreements and overnight index swaps, further signalled heightened tension.
Unlike the regional banks recently impacted in the US, Credit Suisse’s status as a globally significant institution magnifies the potential fallout. Scott Kimball, managing director of fixed income at Loop Capital Asset Management, emphasised the broader implications: “Persistent troubles at Credit Suisse pose serious challenges for the credit markets. The bank’s struggles to stabilise highlight the systemic risks at play.”
