Breaking! Credit Suisse’s $54 billion lifeline gives global banks tentative respite

(Reuters) – Credit Suisse sought to shore up its liquidity and restore investor confidence on Thursday by borrowing up to $54 billion from Switzerland’s central bank, after a slump in its shares had intensified fears of a global banking crisis.

Following the bank’s announcement, which came in the middle of the night in Zurich, Credit Suisse shares briefly bounced back from Wednesday’s 25% wipe out, but ceded some ground by late morning.

The European banking index, initially rose following the intervention, but was virtually flat by 1130 GMT, after days of heavy losses on investor fears over potential bank stresses across the world.

Credit Suisse is the first major global bank to be thrown an emergency lifeline since the 2008 financial crisis and its troubles have raised serious doubts over whether central banks will be able to sustain aggressive interest rate hikes.

Policymakers have stressed that the situation is different to the global financial crisis more than a decade ago as banks are now better capitalised and funds, which dried up almost overnight in 2008, more easily available.

Switzerland’s second-largest bank said it would exercise an option to borrow up to 50 billion Swiss francs ($54 billion) from the Swiss National Bank, which confirmed it would provide liquidity to Credit Suisse against sufficient collateral.

The move followed assurances from Swiss authorities on Wednesday that Credit Suisse met “the capital and liquidity requirements imposed on systemically important banks”.

Chief Executive Ulrich Koerner told Credit Suisse staff in a memo they should focus on facts as he pledged to rapidly move forward with a plan to streamline operations.

Credit Suisse would continue to focus on the transformation from a position of strength, Koerner said, citing an improved liquidity coverage ratio and recent capital increases.

Analysts said that the measures will buy Credit Suisse time to carry out its planned restructuring, although there could well be further moves to pare down the Swiss lender.

“While a liquidity boost relieves some near term pressure, most of the concerns around the stock before the recent events are still valid (weak profitability),” Thomas Hallett at KBW said in a note to clients. “We would not exclude the possibility of further restructuring statements from management designed to further simplify the bank.”

As its shares regained some of the ground lost on Wednesday, when they dropped by as much as 30%, the cost of insuring exposure to Credit Suisse debt tumbled from record highs.

Insurance protection on bonds issued by BNP Paribas, Deutsche Bank and UBS also inched back down.

Swiss media reported that Switzerland’s cabinet would hold an extraordinary meeting on Thursday to discuss the situation at Credit Suisse. The government declined to comment.

Stocks had wallowed in the red as investors rushed to the relative “safe havens” of gold, bonds and the dollar through most of the Asian day. While Credit Suisse’s announcement helped trim some losses, trade was volatile and sentiment fragile.

The head of Japan’s banking lobby said that there were no signs of the Japanese financial system being affected by a crisis of confidence in Credit Suisse.

In Asia, Credit Suisse bankers contacted clients to reassure them after the latest inflow of funds.

“We’ve been telling them to read the statements and look at the fact that we are buying 3 billion francs worth of bonds because they are so cheap,” said a Hong Kong-based senior banker, who declined to be named.

EUROPEAN EPICENTRE

The 167-year-old bank’s problems have shifted the focus for investors and regulators from the United States to Europe, where Credit Suisse led a selloff in bank shares after its largest investor said it could not provide more funds because of regulatory constraints.

The concerns about Credit Suisse added to broader banking sector fears sparked by last week’s collapse of Silicon Valley Bank (SVB) and Signature Bank, two U.S. mid-size firms.

Investor focus is also on any action by central banks and other regulators elsewhere to restore confidence.

Policymakers in Australia and South Korea sought to reassure markets that banks in their jurisdictions were well-capitalised.

SVB’s demise last week, followed by that of Signature Bank two days later, sent bank stocks on a roller-coaster ride as investors feared another collapse like Lehman Brothers, the Wall Street giant whose failure sparked the global financial crisis.

The exit for the doors raised fears of a broader threat to the financial system, and two supervisory sources told Reuters that the European Central Bank had contacted banks on its watch to quiz them about their Credit Suisse exposures.

The U.S. Treasury also said it was monitoring the situation around Credit Suisse and was in touch with global counterparts.

Graphic: Credit Suisse goes off piste – https://www.reuters.com/graphics/CREDITSUISSEGP-STOCKS/akveqegdgvr/chart.png

NEXT STEPS

Rapidly rising interest rates have made it harder for some businesses to pay back or service loans, increasing the chances of losses for lenders already worried about a recession.

Traders are now betting that the Federal Reserve, which last week was expected to accelerate its interest rate hikes in the face of persistent inflation, may hit pause or reverse course.

There is also heightened uncertainty about how hard the European Central Bank will step on the brakes when it meets on rates later on Thursday.

For now, investors are focussed on Credit Suisse.

“The next important step needs to come out from their CEO and display their new strategy to the public sooner than later to reassure the markets,” Tareck Horchani, head of prime brokerage dealing at Maybank Securities in Singapore.