Can the big bank Credit Suisse, which has been reeling for months, trigger a new financial crisis? Already the collapse of the Silicon Valley Bank intensified the fears of investors and stockbrokers. Credit Suisse is one of the 30 financial institutes in the world considered to be systemically important.a, that is, they are too big to go bankrupt. The failure of a bank so closely linked to the global financial system would also have consequences for other financial institutions.
On the other hand, at a global level, credit institutions are going to have to cushion the rapid changes in interest rates. Everything will depend on whether they have enough capital of their own that they can draw on.
ECB raises interest rates
Investors were tensely awaiting the European Central Bank’s decision on interest rates. Clemens Fuest, head of the Ifo Institute in Munich, feared that a departure from the current trend to raise prices could be interpreted by markets as a sign of concern about the stability of banks. However, on Thursday (03.16.2023), the guardians of the currency followed through on what they had announced and raised interest rates by 50 basis points.
“The good news is that Credit Suisse is now smallersays Hans-Peter Burghof of the University of Hohenheim. The sum of its balance sheet has been reduced to about 500 billion euros, some two-fifths of its previous size, and the average size of other large financial institutes, explains the expert.
In recent years, Credit Suisse has been involved in several major scandals, such as the insolvency of the Archegos hedge fund or the bankruptcy of the financial services company Greensill Capital, with which it had cooperated.
As a result, investors had already withdrawn 123 billion francs last year, something the bank first tried to cushion by raising its capital with support from the Saudi National Bank. However, on Wednesday, March 15, 2023, its president, Ammar Al Khudairy, indicated that, for regulatory reasons, the Saudi bank could no longer continue injecting more capital. As a result, Credit Suisse shares plunged 30 percent..
Credit Suisse ‘didn’t do its homework’
The same day in the evening, the Swiss National Bank announced a rescue package of 50 billion francs, managing to calm the markets.
In the opinion of Hans-Peter Burghof, unlike other banks, such as Germany’s Deutsche Bank and Commerzbank, Credit Suisse “did not do its homework” on time. Now, the German financial institutes are less vulnerable, partly also because of banking supervision, says the interviewee from the University of Hohenheim.
For his part, the German Finance Minister, Christian Lindner, assured that the country’s credit system remains stable.
Investor confidence is decisive
Also Christoph Schalast of the Frankfurt School of Finance and Management is convinced that Germany does not face the threat of a financial or banking crisis. According to the expert, the failure of the Silicon Valley Bank is a particular case.
The future of Credit Suisse now depends on whether investors put their trust in the big bank again. Although the share price rallied again on Thursday, it is not yet clear how durable this turnaround is. Schalast points out that there are always problems when investors lose confidence in a bank.
“Germany, on the other hand, is protected by the three-pillar system, which many consider outdated. Furthermore, our large institutes reduced their size after the 2008 crisis and are being supervised by both the European Central Bank and the Federal Financial Supervisory Authority and the Federal Bank,” says Schalast, who adds that this may even be an opportunity for him banking Made in Germany/European Union.