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EXPLAINED: What Credit Suisse crisis really is

EXPLAINED: What Credit Suisse crisis really is

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By Sandeep Singh  Oct 3, 2022 3:35:55 PM IST (Published)

Does the trouble at Credit Suisse, the second largest Swiss bank, warrant caution for investors, given a series of record lows in its stock price? Many on social media are actually comparing Credit Suisse with the Lehman crisis of 2008. Here's what analysts think.

Credit Suisse — one of the world's largest investment banks — has lost more than half its market value in a matter of just a few months due to concerns about its financial health owing to a chain of scandals and bad hedge fund bets.

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Although its management has sought to calm the nerves of its investors and clients about its financial position in the recent past, amid posts comparing it with the 2008 crisis doing rounds on social media, analysts believe it is not a Lehman moment for the world markets.
What is the issue?
The second largest Swiss bank succumbed to losses this year after several quarters of falling revenue, owing to a steadily weakening investment banking unit and high litigation costs.
The bank has been involved in a string of setbacks over the past few years, including a spying scandal involving UBS and fines for failing to prevent money laundering linked to a Bulgarian criminal gang 15 years ago.
Credit Suisse shares have nosedived to a chain of record lows, leading to erosion of about 55 percent of investor wealth so far in 2022. Investors have been waiting for more clarity on a strategic review announced by its management in a bid to lower costs.
The lender has said a combination of factors is behind the turmoil, including:
  • Jitters emanating from geopolitical tensions thanks to the Russia-Ukraine war
  • Market volatility owing to steel hikes in lending rates to fight inflation
  • Client turning more risk averse given the market situation
  • Credit Suisse Group CEO Ulrich Koerner — who took over after the resignation of Thomas Gottstein citing personal and health-related reasons following a more than two-year stint — has said the bank is at a “critical moment” as it prepares for an overhaul, asking staff not to confuse the day-to-day stock movement with the bank's "strong capital base and liquidity position”.
    He has asked investors for less than 100 days to deliver a new turnaround strategy.

    What does it mean for markets?
    Analysts believe Credit Suisse is unlikely to have significant impact on the world markets amid fears of the crisis at the Swiss bank causing ripples across the world. They are banking on the strength of the global financial system, which has headwinds in the form of a global slowdown.
    "Fears regarding the Credit Suisse crisis are unlikely to impact the market since it doesn’t have the potential to become a systemic crisis, like the Lehman crisis," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
    "It appears that the No. 2 Swiss bank failed in due diligence.. There is perhaps more pain in the offing for the bank," Vijayakumar told CNBCTV18.com.
    Vijayakumar was referring the the collapse of one of the largest American investment banks Lehman Brothers in 2008 after being in operation for more than 160 years. The firm declared bankruptcy at the climax of the subprime mortgage crisis — considered one of the defining moments of the Global Financial Crisis of 2008.
    The subprime meltdown involved a surge in high-risk mortgages in the US that went into default in 2007 and eventually contributed to the Global Financial Crisis.
    "This (Credit Suisse crisis) is not a Lehman moment for the world... Governments and the financial system today is much more well prepared to handle a situation like the Lehman (Brothers) crisis... Both cannot be compared as too many things led to the Lehman situation," AK Prabhakar, Head of Research at IDBI Capital Markets, told CNBCTV18.com.
    "A collapse, if it happens, will definitely have some impact all over the globe... Even if they (management) are wrong, the world today will handle it more effectively... There is no need to worry comparing it with Lehman," he said. 
    Vijayakumar said, "The troubles in the world economy now emanate from sharp slowdowns in the Eurozone, China and the US."
    The risk of this crisis spilling over to all corners of the world seems to be on the lower side, said Rahul Shas, Co-Head of Research at Equitymaster.
    "Nothing can be said for sure. Given how financial markets are linked, a global contagion remains a possibility. However, since authorities have seen similar crises crop up in the past, I am sure the response will be swift to any such dislocation," he told CNBCTV18.com.
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