Credit Suisse in free fall
The financial institution’s sharp fall on the stock market has halved the value of its shares since the beginning of the year. The restructuring announced by the bank’s management has not prevented some clients from withdrawing hundreds of millions of dollars.
The spectre of Lehman Brothers rears its head in the face of doubts about the solvency of Switzerland’s second-largest bank. The financial institution’s share price has fallen by 60% and its capitalisation has fallen from 22.3 billion euros a year ago to 9.942 billion euros today. Credit Suisse’s bankruptcy could drag down other institutions, companies and investors in the sector, causing a chain reaction in the financial market.
The critical moment in which the investment bank finds itself became apparent after the price of credit default swaps, or CDS, hit record highs last week at around 293 basis points, higher than the levels seen during the 2008 crisis, and well above the 55 basis points seen at the start of the year.
Beyond the lack of investor confidence due to the current negative figures and doubts about the bank’s funding capacity, the bank has long been in the red thanks to a string of scandals and a series of fundamental management errors that neutered its ability to recover after the fall experienced by the investment banking sector in the wake of the sanitary crisis.
Selling assets and raising capital
Experts and analysts expect that as part of the restructuring plan that the bank’s management will announce on 27 October to remedy the crisis situation, asset sales and measures to increase capital will serve as a basis for stemming losses and securing the future of the flagship of the Swiss banking system.
In addition to selling its wealth management unit in Latin America, the bank is also considering the sale of its Savoy Hotel in the heart of Zurich’s financial district, worth an estimated EUR 410 million. Also, according to Bloomberg, the bank may be considering reviving the First Boston brand with the intention of diversifying the investment banking model into an advisory business.
Despite these measures, a 10% cut in the workforce, around 5,000 jobs, is seen as a fait accompli as part of the cost-cutting drive. The staff restructuring would be caused by the separation of the advisory business, the management of risk assets and the sale of the rest of the business divisions.
A possible bailout?
The bank has tried to calm investor fears by buying back some of its debt to 3 billion euros, while CEO Ulrich Körner says he wants to put an end to years of scandals and losses, and that Credit Suisse has solid capital and liquidity.
But not everyone is buying the official rhetoric, according to Bloomberg, some clients in Singapore and the Middle East have requested cash withdrawals or asset transfers worth hundreds of millions of dollars, causing a queue of unprocessed transactions that had led to some temporary delays in procedures and additional costs associated with “cash withdrawals”.
A possible Credit Suisse bankruptcy is far from being a reality, but it is to be expected that if a worst-case scenario were to occur, the Swiss government and the country’s central bank would bail out the financial institution, as the German government did with Deutsche Bank or as other European governments did with their banks. It is therefore unlikely that Credit Suisse will become the European Lehman Brothers.
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