The Credit Suisse Collapse Impact: A Global Financial Crisis Unfolds

The collapse of Credit Suisse has sent shockwaves through the global financial system, with the Swiss bank's assets plummeting by over $100 billion in a single day.

The bank's instability has sparked a massive sell-off of stocks and bonds, causing a ripple effect on markets worldwide. This has led to a significant increase in borrowing costs for businesses and individuals.

The global economy is now facing a potential crisis, with many experts warning of a recession. The International Monetary Fund (IMF) has already expressed concerns about the impact of the collapse on the global economy.

The collapse of Credit Suisse has also raised concerns about the stability of the entire banking system, with many investors questioning the safety of their deposits.

A different take: Economy Collapses

Credit Suisse's downfall was a result of years of struggling to stay afloat. The bank faced several scandals, including a conviction on counts of money laundering by several former employees.

Its auditor, PwC, found a "material weakness" in the bank's investment banking division. This made Credit Suisse look increasingly risky to investors.

In 2022, many clients deserted the bank, especially in the growing Asian market, which had been a profit driver for several years. This loss of clients had a significant impact on the bank's revenue.

Credit Suisse's largest shareholder, Saudi National Bank, was asked to inject liquidity into the struggling bank, but it declined. This decision sent the bank's share price tumbling.

The share price dropped from CHF 7.64 in September 2022 to CHF 0.74 as of March 20, 2023, a staggering 84% drop in market cap. This decline in value made it even harder for the bank to recover.

A journalist's tweet in October 2022 that a major investment bank was "on the brink" led investors to assume it was Credit Suisse. This speculation triggered deposit withdrawals of over SFr100 billion and a further decline in share price.

The collapse of Credit Suisse was a chaotic end, with the Swiss authorities struggling to prepare a less chaotic outcome despite the bank's larger capital buffers.

The bank's funding costs may increase due to the bail-in of its AT1 bonds, which were designed to provide additional loss-absorbing capacity but ended up being written down to zero in stress events.

The Swiss National Bank extended a line of credit to smooth the acquisition procedure, ensuring a liquidity support of up to 100 billion Swiss francs to back up the operation.

Credit Suisse's largest shareholder, Saudi National Bank, declined to inject liquidity into the struggling Swiss bank, sending the bank's share price tumbling by 84% in just a few months.

The fall of Credit Suisse could have sparked a financial crisis on par with the demise of Lehman Brothers, but regulators around the world welcomed the Swiss National Bank's swift move to acquire the bank.

Credit Suisse's largest shareholder, the Saudi National Bank, declined to inject liquidity into the struggling bank, causing its share price to plummet by a staggering 84% in just a few months.

The bank's share price dropped from CHF 7.64 in September 2022 to a mere CHF 0.74 by March 20, 2023.

UBS stepped in to absorb Credit Suisse with the help of the Swiss National Bank (SNB), which provided a line of credit to smooth the acquisition process.

The SNB backed up the operation with a liquidity support of up to 100 billion Swiss francs.

Regulators around the world welcomed the SNB's swift move, which helped to prevent a potential financial crisis on par with the demise of Lehman Brothers.

In just 15 years, Switzerland has seen two major bailouts, with the most recent one being the Credit Suisse collapse. The 2008 bailout by the Swiss National Bank (SNB) and the Swiss taxpayer of the country's largest systemic bank, Union des Banques Suisses (UBS), was a significant event.

The authorities in Bern responded quickly to the 2008 bailout by hammering out new financial legislation. The goal was to bring Swiss laws in line with international frameworks and to follow international financial recommendations.

Unfortunately, just 15 years later, Switzerland finds itself in the same exact spot. The systemically-important bank, Credit Suisse, was extending an open palm to the SNB, which was not even the authority designed to handle bailouts. The SNB has a very conservative mandate, echoing the old Taylor rule: fight inflation.

The SNB offered a line of credit of CHF 100 billion, which is not exactly in line with a policy of fighting inflation. This bailout is not as dramatic as the one in 2008, but it's still a significant event.

Additional reading: Exploring Credit Inquiry Solutions for Smarter Financial Decisions

The merger between UBS and Credit Suisse has significant implications for Switzerland. UBS now accounts for about 200% of Swiss GDP, comparable to the amount of bank liabilities guaranteed by the Irish government at the start of the global financial crisis.

This massive size makes it difficult for the Swiss state to cover all of UBS's potential losses if it were to fail. There's no other bank in Switzerland big enough to buy out UBS, leaving resolution as the only option.

However, the Swiss authorities are concerned that resolving UBS could have the same devastating effects on the Swiss economy as resolving Credit Suisse did. After all, FINMA believes that UBS's resolution plans are as incomplete as those of Credit Suisse.

As global systemically important banks, UBS and Credit Suisse are required to hold additional capital against losses. But increasing the amount of capital UBS is required to hold offers little comfort, especially considering Credit Suisse's capital buffers were insufficient to prevent its failure.

The Swiss authorities have effectively created an institution that is not just "too big to fail", but "too big to save."

The collapse of Credit Suisse has raised serious questions about the effectiveness of financial regulation and oversight.

The reforms put in place after the global financial crisis have not operated as planned, allowing Credit Suisse to fail despite having larger capital buffers.

These buffers did provide some extra time for the authorities to prepare, but not enough to prevent a chaotic end for the bank.

The bail-in of Credit Suisse AT1 bonds has also caused concerns about funding costs for banks, with investors increasing the yield they require to hold such bonds.

Regulators in the euro area and the UK have stated that they will not bail in bondholders before shareholders, which may have contributed to a decline in AT1 yields.

The long-term effects on bank funding costs in Switzerland and globally remain to be seen.

The takeover of Credit Suisse by UBS has had significant consequences. FINMA's decision to write off Tier 1 capital, worth $100 billion, has left bondholders with a huge loss.

The international regulatory community created Tier 1 capital as a safety net for banks in times of distress. However, FINMA's move has turned conventional wisdom on its head, making it seem like a riskier investment to hold bonds than shares of stock.

A fresh viewpoint: What Is Tier One Credit

This decision may have far-reaching implications for the asset class of CoCos, or contingent convertible bonds. Who will trust them now? The market may view them as less secure, making it harder for banks to access capital when needed.

The takeover has also raised questions about the role of regulators and watchdogs. FINMA's detection of the problem was too little, too late, and now the SNB is left to deal with the consequences.

Here are some key facts about the takeover and its consequences:

The takeover has sent a scary message to investors, which may cut the legs out of a market that has proven to be efficient in preventing bank failures.

The market reacted swiftly to the Credit Suisse collapse, with stocks plummeting by 30% in a single day.

The Swiss National Bank had to intervene with a massive injection of liquidity to prevent a complete collapse of the financial system.

The bank's collapse was a major shock to the global economy, with many investors scrambling to withdraw their funds.

The collapse also had a significant impact on the Swiss franc, which rose sharply in value as investors sought safe-haven assets.

The bank's assets under management had been dwindling in recent years, down from $1.3 trillion in 2018 to $1.1 trillion in 2022.

The bank's collapse was also a major blow to the reputation of the Swiss financial system, which had long been considered one of the most stable in the world.

For your interest: Major Credit Bureaus

Credit Suisse's collapse has sent shockwaves through the financial industry, and experts are weighing in on the impact.

The bank's assets have shrunk by over 40% since 2021, with a significant decline in its investment banking business.

This decline is largely due to the bank's struggles in its investment banking division, which has seen a 30% drop in revenue over the past two years.

The bank's decision to cut 2,000 jobs in 2022 was a clear indication of its efforts to restructure and adapt to the changing market.

However, the bank's efforts to diversify its business have been hindered by the Swiss banking system's strict regulations, which limit its ability to expand into new areas.

The collapse has also raised concerns about the stability of the global banking system, with many experts warning of a potential domino effect.

A collapse of Credit Suisse would have a ripple effect on the global financial system, with experts warning of a potential chain reaction of bank failures.

The bank's collapse would likely trigger a sharp decline in the value of the Swiss franc, which could lead to a surge in inflation and a decrease in the purchasing power of consumers.

In 2022, Credit Suisse reported a significant loss of $7.9 billion, which raised concerns about the bank's financial stability.

Check this out: Vive Financial Credit Card

Experts warn that a collapse of Credit Suisse could lead to a loss of trust in the entire banking system, causing depositors to withdraw their funds en masse.

A collapse of Credit Suisse would also have a significant impact on the global economy, with some experts predicting a recession in Europe and beyond.

The bank's collapse would likely lead to a sharp decline in the value of its assets, including its shares, bonds, and other investments.

In 2019, Credit Suisse was fined $77 million by the US Department of Justice for its role in a tax evasion scandal.

A collapse of Credit Suisse would also have a significant impact on the global financial markets, with some experts predicting a sharp decline in stock prices and a rise in volatility.

Curious to learn more? Check out: Significant Impact