Why is Credit Suisse in trouble? The banking turmoil explained

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

First of all: what is Credit Suisse?

Zurich-based Credit Suisse dates back to 1856, when it was founded to finance the expansion of the Swiss railways. Today, it is Switzerland’s second-largest bank in terms of assets, behind UBS.

The bank’s main activity 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 effort to move on from a long string of scandals and quarterly losses.

What caused the Credit Suisse crisis?

Investors were on high alert for signs of contagion after the rapid collapse of California-based Silicon Valley Bank last week. That led to a sell-off in shares of banks around the world, including Credit Suisse.

But troubles for the Swiss lender became particularly acute on Wednesday, when its largest shareholder, Saudi National Bank, said in an interview with Bloomberg TV that it was not considering expanding its investment due to regulatory rules. Saudi National Bank owns 9.9% of Credit Suisse. Capital requirements often prevent banks from owning 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 nervous about other possible weak links in the financial system. The comments reinforced concerns about the bank’s ability to make money and raised the prospect that it might have to turn to shareholders for money again.

So-called credit-default swaps boomed as investors scrambled to protect themselves against a potential Credit Suisse bankruptcy. At the same time, shares of the Swiss lender plummeted, losing 24% on Wednesday – the largest one-day drop in recorded history. Prices on its bonds fell to distressing levels.

Traders rushed to pick up options linked to Credit Suisse, with activity reaching its highest level in recent history, according to data provider Trade Alert. Put options — or bearish contracts that typically profit when a stock falls — outnumbered bullish call options.

Credit Suisse clients and regulators kept a 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 customers interrupted transactions with the bank, The Wall Street Journal reported.

What happened after the market panic?

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

Within hours, Credit Suisse said it would drain a more than $50 billion lifeline from the Swiss National Bank.

That sent Credit Suisse’s stock price up On Thursday, other European banks followed suit.

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

Dan Davies, head of research at Frontline Analysts, said the bank is unlikely to use the facility to cover operating costs. It has used the support to buy liquid securities, which can be sold quickly if the bank ever needs the money, improving its balance sheet, he said.

“They mostly have that to have it to swing it around and say to everybody, ‘Look at our strong liquidity ratio,'” he said.

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

Are some investors still worried about Credit Suisse?

Yes. The beleaguered 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 lost about a fifth of its value this week. Meanwhile, prices on Credit Suisse’s bail-in bonds, which are wiped out when the bank runs into serious trouble, have yielded little recovery.

Investors also continue to buy protection against the bank defaulting on some of its debts. The cost of insuring against default on five-year Credit Suisse senior debt is twice what it was at the beginning of the week.

How far back do Credit Suisse’s problems go?

For years.

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

More recently, the bank has been struggling with customer withdrawals. In October, a social media storm over the bank’s health triggered an outflow of wealthy clients, Credit Suisse executives said.

The withdrawals continued through the end of the quarter and prompted the bank to personally contact more than 10,000 high net worth clients to reassure them about the bank’s health.

Deposits fell 40% last year to CHF 234 billion, equivalent to USD 252 billion, while total assets fell 30% to CHF 531 billion, or about USD 571 billion, partly as the bank scales down its activities used to be. Credit Suisse reported a net loss of 7.3 billion francs in 2022, after a net loss of 1.7 billion francs the previous year.

Investors were already shocked by last year’s outflow. “Their investors and their depositors have looked at this with some trepidation,” said Octavio Marenzi, CEO of consulting firm Opimas.

Wealth management clients are extremely conservative investors with very large sums of money and they were concerned, he said. “It was slow motion unfolding with CS hitting a breaking point and a 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 spend. The bank counts billionaires and sovereign wealth funds among its largest clients. Most of its loan portfolio is in ultra-conservative Switzerland, where it is the country’s No. 2 bank by assets, serving depositors and businesses. It also has major investment banking and wealth management divisions.

It is considered a systemically important bank by global regulators due to its size and interconnectedness with the financial system.

Silicon Valley Bank was a regional bank serving American venture capitalists and technology startups.

Credit Suisse, as is customary 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.

What happens now?

Swiss authorities are eager to bust Credit Suisse’s slide by making a deal with UBS – and soon. UBS’s balance sheet is twice as large as Credit Suisse’s, and it has proven to be a much stronger and more stable bank.

However, a transaction is not easy. Silicon Valley Bank’s parent company had several other businesses, but the largest share was a domestic bank that did the basic banking work: taking deposits and making loans.

Credit Suisse is much more complicated. It has a domestic (Swiss) bank, a global operation that manages wealthy clients’ money, and an investment bank. UBS could take over some or all of those pieces, or other bidders could show up for parts – or a transaction might not materialize at all.

How will Credit Suisse’s problems affect the global banking system?

Credit Suisse is deeply integrated into the global financial system and works closely with a number of banks and institutional investors. European bank stocks plummeted over the past week in part due to investor fears of contagion, investors said.

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

—Margot Patrick, Caitlin Ostroff, Jonathan Weil, and Patricia Kowsmann contributed to this article.

This explanatory article may be updated periodically.

Write to Caitlin McCabe at [email protected] and Josh Mitchell at [email protected]