Named the consequences of the problems of the largest European bank: traders in a panic

Shares in the Swiss lender fell more than 30% at some point on Wednesday to a record low of around 1.56 Swiss francs (£1.40) a share after its main shareholder, the Saudi Arabian National Bank (SNB) ), has ruled out giving it new funding due to rules limiting its stake – now 9.9% – to 10%.

SNB chairman Ammar Al Hudayri told Reuters that Credit Suisse was “a very strong bank” and was unlikely to need additional cash after raising CHF4bn (£3.59bn) to fund a major restructuring plan last fall. However, his comments on the funding cut have spooked investors who fear it could limit emergency cash inflows from investors in the Middle East.

This, The Guardian continues, has exacerbated panic over potential weaknesses in a global banking sector still reeling from the SVB collapse, as well as worries about continued problems for the Swiss lender, which, as Europe’s 17th largest lender by assets, is far larger than SVB and is considered systemically important to the global financial system.

Shares of many other European banks also fell on Wednesday as traders got scared. However, it’s important to remember that stock prices reflect investor sentiment, not the actual strength of balance sheets.

Market fluctuations can cause customers to panic and withdraw cash from their accounts, creating a shortage of deposits, which is risky for small banks that rely more on customer cash. However, larger banks such as Credit Suisse are expected to be in a much better position, thanks in part to government regulations and annual regulatory stress testing introduced in the wake of the financial crisis.

After the chaos of 2008, regulators around the world imposed tougher restrictions – especially on banks that were considered important to the global financial system. Most central banks and national regulators have introduced annual stress testing to see if banks can withstand major economic and market shocks while continuing to support their customers.

The worst-case scenario assumes that systemically important banks must have sufficient capital and so-called living wills in place to ensure that they can fail in a relatively orderly manner. However, these “testaments” have yet to be tested in the face of a real banking collapse, notes The Guardian.

Swiss regulator Finma approved Credit Suisse’s emergency winddown plans last year but said some of its plans are “still inadequate.”

The panic around Credit Suisse came after the collapse of crypto lender Silvergate last Thursday, SVB on Friday, and New York bank Signature on Sunday. However, Credit Suisse’s troubles are also relatively unique and not new, with a string of major financial losses and scandals that have worried investors and fueled a recent customer churn.

Credit Suisse clients – primarily wealthy clients and businesses rather than ordinary savers – spent months withdrawing money from the bank, leading to an outflow of more than 111 billion Swiss francs (£99.7 billion) at the end of last year.

Some investors are also concerned about potential unrealized losses lurking in the investment portfolios of European banks. SVB’s troubles intensified after it suffered losses on bonds it was trying to sell as clients withdrew cash.

In an attempt to assuage concerns, Credit Suisse chairman Axel Lehmann said on Wednesday morning that government bailouts are not a topic for the lender, adding: “We have strong capital adequacy, a strong balance sheet. We have already taken the medicine.”

The bank is in the midst of a major restructuring plan to stem massive losses, which rose to CHF 7.3bn (£6.6bn) in 2022, and to restart operations that have been thwarted by multiple scandals over the past decade related to alleged misconduct, violation of sanctions, money laundering and tax evasion.

In the last three years alone, Credit Suisse has been exposed as a corporate spy after hiring professional spies to track down departing executives; admitted to defrauding investors in the Mozambique tuna bond scandal, resulting in a fine of over £350m; and was involved in the collapse of lender Greensill Capital and US hedge fund Archegos Capital in 2021, writes The Guardian.

The company also came under fire after a 2022 publication by international media outlets, including The Guardian, of an investigation that revealed it had served clients for decades involved in torture, drug trafficking, money laundering, corruption and other serious crimes.

In the same year, the Swiss prosecutor’s office found the bank guilty of facilitating money laundering on behalf of the Bulgarian mafia, although the bank pleaded not guilty and intends to appeal this decision.

But the problems have not yet disappeared. Earlier this week, the lender acknowledged that there were significant weaknesses in its financial reporting-related internal controls, but assured management was working on a plan to strengthen risk management systems.