Fears of another banking crisis in 2008 have resurfaced this week after Credit Suisse received a £45bn emergency loan from the Swiss National Bank while US authorities have stepped in to broker a £24.7bn bailout for the First Republic.
Stock markets have been jittery on concerns that isolated failures could mount and affect the global banking system, reviving bad memories of the financial crisis that plunged many Western economies into recession in 2008-09.
The news comes after the collapse last week of Silicon Valley Bank, the second largest bank failure in US history.
Shares in San Francisco-based First Republic tumbled on Thursday as customers began withdrawing their money over fears it could be the next to fail, but shares rebounded as reports of the bailout emerged.
A joint statement from US federal financial authorities said 11 banks have agreed to pump billions into the lender to stabilize it.
The Bank of England is said to have held talks with its global counterparts about the crisis, and is said to have been in contact with both Credit Suisse and the Swiss National Bank regarding the emergency loan.
But markets stabilized on Thursday night amid hopes that the lifelines will limit any “contagion”.
What’s happening at Credit Suisse?
The lender has been struggling for months, but this week sought help from the Swiss government after revealing it had found “material weakness” in its financial situation.
Its top shareholder, the Saudi National Bank (SNB), said it could not provide new financing because of a regulatory cap; news of that limit sent shares in the Swiss lender plunging more than 30 per cent at one point on Wednesday to a record low of around 1.56 Swiss francs (£1.40) a share.
How worried should we be?
Economist Nouriel Roubini, who predicted the collapse of Lehman Brothers in 2008, which led to the global financial crisis, warned that the world could be on the verge of another systemic crisis.
But former deputy governor of the Bank of England, Sir John Gieve, said the support behind Credit Suisse was a key differentiator in the Lehman Brothers case.
“Credit Suisse is like Lehman Brothers in terms of scale and complexity and importance, but it’s a big difference if you remember that the Americans didn’t bail out Lehman Brothers,” Sir John said.
“That’s what spooked the markets as a whole because they weren’t behind it. What we’ve seen overnight is the Swiss bank saying they’re not going to let this get into a disorderly collapse. I don’t know what the future of Credit Suisse looks but so far they are still standing and it looks like the Swiss National Bank will secure its position long enough to rearrange its affairs for the future.”
Sir John added that the big difference between the current issues of high interest rates and 2008 is that central banks are stepping in to ensure there is no disruptive collapse.
“If you go back a couple of months, the first kind of problem that arose in the financial market from higher interest rates here in the UK was with our pension funds,” Sir John said.
“If you remember, our central bank stepped in and provided the money to make sure it didn’t have repercussions elsewhere, so the message is very clear that the central banks are behind these banks that are getting into trouble.”
Why is Credit Suisse at risk?
Over the past three years, Credit Suisse has been embroiled in corporate espionage after hiring professional spies to track down outgoing executives and admitting to defrauding investors as part of the Mozambique tuna bond loan scandal. It resulted in fines worth more than £350m. It was also implicated in the collapse of lender Greensill Capital and US hedge fund Archegos Capital in 2021.
The bank is in the midst of a major restructuring plan, intended to stem major losses, which rose to 7.3 billion Swiss francs by 2022, and revive operations marred by several scandals over the past decade involving alleged misconduct, the lifting of sanctions, money laundering and tax evasion.
How big is Credit Suisse?
The Swiss bank, widely regarded as “too big to fail” by experts, primarily serves wealthy clients and businesses rather than everyday savers. It has been pulling money from the bank for months, leading to more than 111 billion Swiss francs in outflows at the end of last year. It was not immediately clear on Wednesday whether customer withdrawals had picked up as a result of its falling share price.
As Europe’s 17th largest lender by assets, it is much larger than Silicon Valley Bank and is considered systemically important to the global financial system.
The Bank of England is said to be monitoring developments in the financial sector very closely and has issued a statement assuring that the UK banking system is not at risk and “remains safe, sound and well capitalised”.