One of the biggest banks in Switzerland, Credit Suisse, has been entangled in scandals since the beginning of 2021. Due to its size, its failure could have effects comparable to those of the American bank Lehman Brothers, whose collapse in 2008 caused the Great Recession. Credit Suisse has been the topic of the financial markets due to its shares dropping to their lowest level of $4 from their crisis high of $12.3, an almost 50% reduction, amid concerns by its investors that it could be the next Lehman Brothers. Will it?
In accordance with a Reuters article, Credit Suisse Group AG (CSGN.S) has reportedly approached a Middle Eastern sovereign wealth fund for a capital infusion, and numerous funds are apparently considering the operations of the scandal-plagued Swiss bank as potential investment opportunities.
What caused Credit Suisse to be in the condition it is in now?
There have been continuous rumors that Credit Suisse is financially unstable, the next Lehman Brothers, and whether it will trigger another financial crisis after the Covid-19 Recovery because of the company's past and ongoing scandals. The Credit Suisse controversies include its stock price dropping because of the failure of Archaegos Capital Management, losses from lending to the bankrupt Greenskill Capital, and the "tuna bonds" loan scandal in Mozambique. Additionally, a data breach involving 30000 Credit Suisse clients from throughout the world revealed the identities of those who received more than 80 million pounds or 100 billion Swiss Francs. The accounts were connected to individuals who were engaged in human trafficking, drug trafficking, and torture. In addition to the aforementioned, it was discovered that the bank benefited a Bulgarian criminal organization by laundering funds for cocaine trafficking, allowing the individual to evade taxes on more than 19 million Swiss francs ($19.9 million). As a result, the bank was ordered to pay fines and compensation totaling an astounding 21 million Swiss francs, or $22 million.
What strategies does credit Suisse have in place for its recovery?
Credit Suisse has already started restructuring to recover as quickly as possible, starting with the appointment of Mr. Koerner as CEO in lieu of Thomas Gottstein. It also intended to lessen risk by shifting the emphasis from investment banking to asset management. Lastly, there are plans to divide investment banking into Group Advisory, a bad bank to keep high-risk assets that will be liquidated, and the remainder of the firm. The restructuring plan will cost a lot of money and take some time to implement. Therefore, recovery will also take some time, making it complicated to anticipate where Credit Suisse will be after experiencing a sharp decline in its share price and the occurrence of multiple issues.
Will it succeed or not?
The controversy over whether Credit Suisse will be the next Lehman Brothers is currently the focus of most financial newspapers. Few people, though, think that won't be the case. In a tweet posted recently, Boas Weinstein of the hedge fund Saba Capital Management said the Credit Suisse controversies felt like "a concerted effort at scaremongering." Furthermore, despite a rise in the spreads of Credit Suisse's Credit Default Swaps, the spreads are still only half of those of US Banks in 2012. Lastly, Forbes has also highlighted that Credit Suisse now has a capital ratio of 13.1%, which is more than the 9.6% that they are required to have by law.
What will the consequences be of it failing?
Firstly, one of the biggest investment banks in the world is Credit Suisse, and the global financial system is highly intertwined, according to Forbes. In the same way that the collapse of Lehman Brothers sparked the onset of the 2008 recession, the failure of one of the biggest investment banks may shock the financial system. Second, the bankruptcy of Credit Suisse could cause several businesses connected to it to fail. Third, investors' trust could further deteriorate, particularly in the current environment of high inflation and an impending recession.