Credit Suisse is at the center of market turmoil amid rumors the bank could be on the verge of collapse.
Investors rushed to sell shares of the Zurich-based bank amid worries about its financial health as it prepares to unveil a costly restructuring plan due later this month.
Speculation that the bank could go bankrupt has invoked comparisons to the 2008 collapse of US investment bank Lehman Brothers, which precipitated the worst economic crisis since the Great Depression. But economists warn against such parallels because of the significant differences between yesterday and today.
Why is Credit Suisse under surveillance?
While Credit Suisse’s share price has been falling for months, concerns have grown since CEO Ulrich Körner sent a note to employees last week aimed at reassuring them about the bank’s future.
In the memo sent on Friday, Körner warned against confusing the “day-to-day share price” with the bank’s “strong capital base and liquidity position”, and insisted that the upcoming restructuring would secure the lender’s “sustainable long-term future”. .
Körner also took aim at “numerous factually inaccurate statements” made in the media about the 166-year-old financial institution.
Rather than calming investors, the memo sparked renewed concern over the bank’s reputation.
On social media, a number of well-followed investors, including Lark Davis and Graham Stephan, posted comparisons with Lehman Brothers that quickly went viral.
Monday, Credit Suisse shares dipped up to 11.5%hitting a record low of $3.64.
At the same time, credit default swaps – a type of investment that serves as insurance against the default of a company – have reached all-time highs.
One of Europe’s largest banks, Credit Suisse’s troubles have been brewing for some time.
The lender has been embroiled in a series of scandals in recent years that have tarnished its image and balance sheet.
Controversies include swapping jobs for companies in Hong Kong, hiring private detectives to spy on employees, money laundering for a criminal organization in Bulgariaand facilitating corrupt loans in Mozambique, for which the bank agreed to pay $475 million in fines.
The bank has also racked up billions of dollars in losses following the 2021 collapse of hedge fund Archegos and financial services firm Greensill.
Amid the turmoil, the lender has lost almost 60% of its market value this year alone.
“Credit Suisse has the bad track record of Archegos and Greensill – so there’s not a lot of trust there,” Campbell R Harvey, a professor at Duke University’s Fuqua School of Business, told Al Jazeera.
“They had a CEO turnover. Also, the CEO’s internal letter to employees was not reassuring – if you have to explain to employees what’s going on, that’s a bad sign.
As part of the restructuring announced after Körner’s appointment in July, Credit Suisse is looking to downsize its investment bank to focus more on wealth management.
Analysts have estimated that Credit Suisse will need to raise $4 billion to $6 billion to complete the restructuring, which could prove difficult as investors view the bank as an increasingly risky bet.
Could Credit Suisse cause a Lehman Brothers-style crash?
Economic analysts generally view this as unlikely.
First of all, despite the setbacks of Credit Suisse, the lender has enormous capital to deal with possible losses.
The bank’s total assets stood at 727 billion Swiss francs ($732.7 billion) at the end of the second quarter, of which about a fifth were held in cash, according to a recent analysis by JPMorgan Chase.
On Monday, Citibank analysts dismissed comparisons with 2008, noting that Credit Suisse’s liquidity coverage ratio – the part of cash and other assets that can be accessed quickly in a crisis – was among the “best in its category” at 191%.
“I don’t think it’s a Lehman Brothers. Their Tier 1 ratio is 13.5%,” Harvey said, referring to the portion of capital made up of core assets, which regulators consider a key marker of financial strength.
The global financial environment has also changed significantly since the bankruptcy of Lehman Brothers.
Banks are more strictly regulated than in 2008 and have more capital to manage risk.
“The big banks are generally much better capitalized than they were in 2008, and my own view of Lehman has always been that a lot of the problem when Lehman failed was that everyone was waiting for Lehman to be bailed out,” David Skeel, professor of corporate law at the University of Pennsylvania Law School, told Al Jazeera.
“US regulators signaled when Bear Stearns stumbled in March 2008 that they wouldn’t let a major bank fail, then surprised the markets by letting Lehman fail. I suspect the Credit Suisse situation will not have a ripple effect, both due to generally high capital levels and the very different circumstances of 2008.”
Holger Schmieding, chief economist at Hamburg-based Berenberg Bank, said while he could not comment on the health of Credit Suisse, a crisis similar to 2008 was extremely unlikely.
“The risk of a Lehman-like event is close to zero because – whatever the problem with a bank – regulators and central banks are much better equipped to nip such a problem in the bud,” Schmieding told AlJazeera.