Why Is Credit Suisse in Trouble?

The Banking Turmoil Explained - WSJ

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Why Is Credit Suisse in

Trouble? The Banking Turmoil
Explained
The Swiss bank has weathered a period of market
crises, executive turnover and financial losses

By Caitlin McCabe Follow and Josh Mitchell Follow

Updated March 18, 2023 1:48 pm ET

Stress in the U.S. banking system jumped across the Atlantic this week, sparking
▲
turmoil for embattled Swiss bank Credit Suisse. CS -6.94%

The European lender has long been dogged by issues. But on Wednesday,
problems surrounding the bank exploded into plain view. After a whirlwind 24
hours marked by a dramatic fall in the bank’s stock price and financial contagion
concerns, Credit Suisse said it would borrow cash from the Swiss central bank to
shore up its liquidity. On Saturday, Credit Suisse’s larger rival, UBS Group AG
▲
UBS -5.50% , was in talks to take over all or part of the bank.

Here’s what you need to know on how Credit Suisse got here and what might
happen next.

First things first: What is Credit Suisse?

Zurich-based Credit Suisse traces its history to 1856, when it was founded to
finance the expansion of Swiss railroads. Today, it stands as Switzerland’s second-
largest bank by assets, trailing UBS.

The bank’s main business is managing money and creating investment products
for wealthy clients around the world. Recently, Credit Suisse has been working to
spin off its investment-banking arm as part of an attempt to move on from a long
stretch of scandals and quarterly losses.

What caused the crisis at Credit Suisse?

Investors have been on high alert for signs of contagion following the rapid
collapse of California-based Silicon Valley Bank last week. That led to a selloff in
shares of banks around the world, including Credit Suisse’s.

But problems for the Swiss lender turned particularly acute on Wednesday, when
its largest shareholder, Saudi National Bank, said in a Bloomberg TV interview
that it wasn’t considering adding to its investment due to regulatory rules. Saudi
National Bank owns 9.9% of Credit Suisse. Capital requirements often prevent
banks from holding more than 10% of other banks.

How did investors react to Saudi National Bank’s statement?

The timing couldn’t have been worse. Investors were already jittery about other
 Why Is Credit Suisse in Trouble? The Banking Turmoil Explained - WSJ

potential weak links in the financial system. The comments amplified their
concerns about the bank’s ability to make money and raised the prospect that it
might have to tap shareholders again for funds.

So-called credit-default swaps surged, as investors rushed to protect themselves

against a possible Credit Suisse default. At the same time, the Swiss lender’s
shares plunged, losing 24% on Wednesday—its largest-one day drop in recorded
history. Prices on its bonds fell to distressed levels.

Traders rushed to scoop up options tied to Credit Suisse, with activity hitting its
highest levels in recent history, according to data provider Trade Alert. Put
options—or bearish contracts that typically profit as a stock falls—outnumbered
bullish call options.

Credit Suisse clients and regulators were keeping close watch. European Central
Bank officials called the banks it supervises to ask about their exposure to Credit
Suisse, people familiar with the matter said. Meanwhile, some clients paused
trades with the bank, The Wall Street Journal reported.

What happened after the market panic?

After the close of European markets on Wednesday, Swiss regulators said they
would provide liquidity to Credit Suisse, if needed.

Within hours, Credit Suisse said it would tap a more than $50 billion lifeline from
the Swiss National Bank. That sent Credit Suisse’s stock price up on Thursday,
lifting other European banks alongside it.

Credit Suisse might not actually need the money, analysts said. Rather, it
borrowed the money to reassure investors about their ability to get cash quickly.

Dan Davies, head of research at Frontline Analysts, said the bank likely wouldn’t
use the facility to cover operating costs. It has used the aid to buy liquid
securities, which could be sold quickly if the bank ever needed the cash, improving
its balance sheet, he said.

“They’ve mainly got that for the purposes of having it in order to wave it around
and tell everyone, ‘Look at our strong liquidity ratio,’” he said.

It was likely intended as a show of force to investors who shorted Credit Suisse’s
stock or sold credit-default swaps insuring against default, said Jérôme Legras,
head of research at Axiom Alternative Investments.

Are some investors still worried about Credit Suisse?

Yes. The lender’s bonds and other securities continue to show signs of stress.

Shares of Credit Suisse fell nearly 7% in Switzerland on Friday, meaning the stock
has shed about a fifth of its value this week. Meanwhile, prices on Credit Suisse
bail-in bonds, which get wiped out in case the bank runs into serious trouble, have
made little recovery.

Investors also continue to buy protection against the bank defaulting on some of
 Why Is Credit Suisse in Trouble? The Banking Turmoil Explained - WSJ

its debt. The cost of insuring against default on five-year Credit Suisse senior debt
is double what it was at the start of the week.

How far back do Credit Suisse’s problems go?

For years.

The bank has weathered a period of market crises, executive turnover and
financial losses. Most notably, it was burned by its connection to the separate
collapses of now-bankrupt Greensill Capital and Bill Hwang’s Archegos Capital
Management. In 2021, the Credit Suisse took a $5 billion hit due to the collapse of
Archegos, which was equivalent to more than a year’s worth of profit.

More recently, the bank has been contending with customer withdrawals. In
October, a social-media firestorm over the bank’s health drove outflows of rich
clients, Credit Suisse executives have said.

The withdrawals continued through the end of the quarter and prompted the bank
to reach out personally to more than 10,000 wealthy customers to reassure them
of the bank’s health.

Deposits fell 40% last year to 234 billion Swiss francs, equivalent to $252 billion,
while total assets dropped 30% to 531 billion francs, or about $571 billion, because
the bank was, among other things, scaling back its businesses. Credit Suisse
reported a 2022 net loss of 7.3 billion francs, after posting a net loss of 1.7 billion
francs the year before.

Investors were already spooked by last year’s outflows. “Their investors and their
deposit holders have been basically looking at this slightly on edge,” said Octavio
Marenzi, chief executive of consulting firm Opimas.

Wealth-management clients are extremely conservative investors with very large

amounts of money and they became concerned, he said. “It’s been a slow motion
unfolding with CS that reached a breaking point and tipping point a few days ago.”

How is Credit Suisse different from Silicon Valley Bank?

Credit Suisse mainly manages money for people with millions of dollars to invest.
The bank counts billionaires and sovereign-wealth funds among its biggest
clients. Most of its loan portfolio is in ultraconservative Switzerland, where it is
the country’s No. 2 bank by assets, serving savers and companies. It also has large
investment-banking and asset-management arms.

It is considered a systemically important bank by global regulators given its size

and interconnectedness with the financial system.

Silicon Valley Bank was a regional bank, serving U.S. venture capitalists and
technology startups.

Credit Suisse, as is typical in the industry, has placed bets to hedge against rising
interest rates; Silicon Valley Bank reported virtually no interest rate hedges on its
massive bond portfolio at the end of 2022.
 Why Is Credit Suisse in Trouble? The Banking Turmoil Explained - WSJ

What happens now?

Swiss authorities are eager to arrest Credit Suisse’s slide by reaching some kind of
deal with UBS—and soon. UBS’s balance sheet is twice as big as Credit Suisse’s,
and it has proved a far stronger and more stable bank.

A transaction isn’t simple, though. Silicon Valley Bank’s parent company had
some other businesses, but the biggest share was a domestic bank that did the
straightforward work of banking—taking deposits and making loans.

Credit Suisse is vastly more complicated. It has a domestic (Swiss) bank, a global
operation managing money of rich clients and an investment bank. UBS could take
some or all of those pieces, or other bidders may emerge for parts—or a
transaction may not come together at all.

What implications do Credit Suisse’s troubles have on the global banking

system?
Credit Suisse is deeply integrated into the global financial system—working
closely with a number of banks and institutional investors. European banking
stocks tumbled this past week due in part to investor fears of contagion, investors
said.

On a broader level, the problems of Silicon Valley Bank and Credit Suisse have led
investors to think that the Federal Reserve might pause or scale back its plans to
further raise interest rates to tame inflation.

—Margot Patrick, Caitlin Ostroff, Jonathan Weil and Patricia

Kowsmann contributed to this article.

This explanatory article may be periodically updated.

Write to Caitlin McCabe at caitlin.mccabe@wsj.com and Josh Mitchell at

joshua.mitchell@wsj.com
 Why Is Credit Suisse in Trouble? The Banking Turmoil Explained - WSJ

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