Credit Suisse shares rebound, with gains slipping, after $74B central bank loan
Some analysts speculate that a takeover is likely to ease investor concerns
Credit Suisse shares surged Thursday after the Swiss central bank agreed to loan the bank up to 50 billion francs (about $74 billion Cdn) to bolster confidence in the country's second-biggest lender and blunt concerns about the international financial system following the collapse of two U.S. banks.
Credit Suisse announced the agreement before the Swiss stock market opened, sending shares up as much as 33 per cent before they settled at a 25-per-cent gain, to 2.13 Swiss francs ($3.16) in midday trading.
Shares retreated later in the day and were last up 18 per cent in heavy volume, following losses on Wednesday that stripped a quarter off the bank's market value.
It was a turnaround from a day earlier, when news that the bank's biggest shareholder will not inject more money into Credit Suisse sent its shares tumbling 30 per cent, dragging down other European banks.
European banking stocks also rose modestly Thursday.
The Swiss National Bank said Wednesday that it was prepared to back Credit Suisse because it meets the higher capital and liquidity requirements imposed on "systemically important banks," and said that the problems that have hit some U.S. banks don't "pose a direct risk of contagion" to Switzerland.
"You need to restore trust as quickly as possible, and that's what the Swiss National Bank is trying to do," Carlo Lombardini, an international banking expert at the University of Lausanne, told the BBC. "And we all know that the central bank is a lender of last resort."
Credit Suisse, which was beset by problems long before the U.S. bank failures, said Thursday that the loans from the central bank would give it time to complete a reorganization designed to create a "simpler and more focused bank."
Despite the banking turmoil, the European Central Bank on Thursday went with a large, half-percentage point increase in interest rates to tackle stubbornly high inflation, saying Europe's banking sector is "resilient," with strong finances.
Higher rates fight inflation, but in recent days have fuelled concern that they may have caused hidden losses on bank balance sheets.
Collapse of U.S. banks
Central banks in the U.S. and Europe have moved quickly to restore confidence in the banking system after last week's collapse of Silicon Valley Bank, the second-biggest bank failure in U.S. history.
U.S. authorities on Sunday said they would guarantee all of the deposits of California-based Silicon Valley Bank and the smaller Signature Bank of New York, making sure people wouldn't be hurt by the collapse of the banks.
The British government and Bank of England on Monday said they had facilitated the sale of Silicon Valley Bank's U.K. arm to HSBC, one of Europe's biggest banks, ensuring that the bank's customers would have access to their money.
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John Gieve, a former deputy governor of the Bank of England, said the rapid response is different from what happened at the start of the global financial crisis 15 years ago. At that time, U.S. authorities allowed the investment banking giant Lehman Brothers to collapse.
"That was what spooked the markets as a whole, because they didn't stand behind it," Gieve told the BBC. "So what we've seen overnight is the Swiss central bank saying, 'No, we will not let this get into a disorderly collapse.'"
Ruling out government assistance
Banks are under pressure after interest rates rose rapidly following a prolonged period of historically low rates.
In order to boost the return on their investments, banks needed to take more risks and some "did this more prudently than others," said Sascha Steffen, professor of finance at the Frankfurt School of Finance & Management.
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As a result, some banks are now facing a shortage of "liquidity," meaning they can't sell assets quickly enough to meet the demands of depositors.
Credit Suisse shares had dropped to a record low Wednesday after the Saudi National Bank told news outlets that it would not inject more money into the Swiss lender to avoid regulations that kick in if an investor's stake rises above 10 per cent.
Credit Suisse also reported Tuesday that managers had identified "material weaknesses" in the bank's internal controls on financial reporting as of the end of last year. That fanned new doubts about the bank's ability to weather the storm.
Its stock has suffered a long, sustained decline: Now it's trading at 2.10 Swiss francs ($3.11), while in 2007, it was at more than 80 francs ($118.60) each.
'Seen as the weakest link'
Credit Suisse is "a much bigger concern for the global economy" than the midsize U.S. banks that collapsed, said Andrew Kenningham, chief Europe economist for Capital Economics. It has multiple subsidiaries outside Switzerland and handles trading for hedge funds.
"Credit Suisse is not just a Swiss problem but a global one," he said. The troubles "once more raise the question about whether this is the beginning of a global crisis or just another 'idiosyncratic' case," Kenningham said in a note.
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"Credit Suisse was widely seen as the weakest link among Europe's large banks, but it is not the only bank which has struggled with weak profitability in recent years."
European finance ministers said this week that their banking system has no direct exposure to the U.S. bank failures.
With files from Reuters