The threat of another “Lehman Brothers” but in Europe grows with a great candidate as the protagonist: Credit Suisse. The second Swiss bank and one of the largest banks in the world is in serious trouble and is already fighting for its survival. An unfavorable result could be settled with an impact similar to that caused by the bankruptcy of the US bank Lehman Brothers in 2008, when the financial institution declared bankruptcy and caused a domino effect that led to the greatest economic crisis in history since the Great Depression.
Now, speculation about the future of the Swiss banking giant is increasing in the markets, in business and political circles.
in fall. Credit Suisse has reached a new historic low: its shares fell 12% to 3.64 euros. Simply put, the bank has lost around 60% of its market value in just one year and is on track for the biggest annual decline in its history. Its president, Ulrich Koerner, has spent weeks trying to calm the markets after the swaps credit default rates have skyrocketed.
To understand the phenomenon it is necessary to know how the swaps of credit default, or CDS. They are an instrument that allows an investor to exchange his credit risk with another investor, which gives clues to the market’s perception of increasing risk. It is now approaching highs, rising to almost 15%, levels not seen since 2008 when the Lehman Brothers crisis hit.
Critical situation. The company grapples with market speculation, banker exits and capital doubts as it seeks to establish a safe route. Last week, its president recognized that they are facing a “critical moment”. For this reason, the lender has begun a radical remodeling of its investment banking that could include the destruction of thousands of jobs over several years, according to Bloomberg in this article.
Analysts estimate the company would need to raise €4bn of capital even after selling some assets to finance any restructuring.
Face wash. Credit Suisse is a universal bank, offering services and products mainly in Switzerland. But it is known worldwide for its investment banking (trading, deals like mergers and acquisitions, bonds, etc.) and wealth management operations. And it is that investment banking that has put him in great difficulties, although it was, for a long time, one of his great sources of income.
Indeed, the investment bank’s mistakes have plunged Credit Suisse into numerous successive scandals in recent years. In 2021 it was involved in the bankruptcy of the controversial lender Greensill Capital and the US hedge fund Archegos Capital. He also admitted last year that he had defrauded investors in Mozambique’s “tuna bond” scandal, which saw him fined more than $350 million. And these restructuring plans are part of a facelift to put an end to that unclean image.
what awaits you. From rubbing shoulders with a multinational like Morgan Stanley 10 years ago to being only a quarter of the size by revenue. Credit Suisse’s board is now faced with the question of whether to continue the bloodshed or slam the door. The problem is that closing an investment bank is not entirely easy. First, it is expensive. Around 18,000 people are currently employed in this division and laying them off comes at a brutal cost. It must be remembered that it already cost Credit Suisse 1.3 billion euros to carry out its 2015 restructuring.
Second, the costs would weaken the group’s capital position. And you don’t have much room for manoeuvre. Its current capital ratio is 13.5%. A full-scale restructuring would require a capital increase, further diluting shares that have plunged more than 50%. However, Credit Suisse is not the first European investment bank to make cuts. But now more than anyone else it shows that dismantling a bank can be as expensive as building one.