Credit Suisse announced on Thursday that it would borrow up to $54 billion from the Swiss central bank to bolster liquidity and investor confidence following a decline in its stock price that heightened worries of a worldwide financial crisis.
The Swiss bank's announcement halted Thursday morning's hefty selling on Asian financial markets. Following the previous night's tumultuous sessions in Europe and the United States, investors panicked about potential runs on global bank accounts.
Credit Suisse announced early Thursday morning that it would exercise an option to borrow up to 50 billion Swiss francs ($54 billion) from the central bank. This follows Swiss authorities' Wednesday assurances that Credit Suisse met "the capital and liquidity standards imposed on systemically important banks" and could access significant bank funding if necessary.
Credit Suisse is the first central global bank to get an emergency lifeline since the 2008 financial crisis. Its issues have raised severe worries about whether central banks can sustain aggressive interest rate hikes in their fight against inflation.
On Thursday, Asian markets followed Wall Street's decline, and investors purchased gold, bonds, and the dollar. Even though the bank's announcement helped mitigate some of the losses, trade was erratic, and the sentiment was fragile.
"That does assist. It eliminates an imminent threat. But, it presents us with another option. The more we do this, the more we weaken monetary policy, and the more we must endure more significant inflation — and what will be the result? "Damien Boey, the chief equities strategist at Barronjoey in Sydney, stated as much.
"Do bailouts improve the situation? On the one hand, you are eliminating a clear and present threat to the markets by eliminating a source of risk. On the other hand, we contribute to the monetary policy paradigm that is buckling within itself."
The covered loan facility and the short-term liquidity facility will be utilized for Credit Suisse's borrowing, which high-quality assets will fully collateralize. In addition, it launched offers for senior debt securities for up to 3 billion Swiss francs in cash.
This additional liquidity would assist Credit Suisse's core operations, and clients as the bank takes the required measures to become a more straightforward, client-centric institution.
Earlier on Wednesday, Credit Suisse CEO Ulrich Koerner sought to reassure investors about the bank's robust liquidity.
"Our capital and liquidity are robust," Koerner told the journalists. We meet and exceed virtually all regulatory criteria.
The 167-year-old bank's woes have turned investors' and regulators' attention from the United States to Europe. Credit Suisse led a selloff in bank shares after its largest investor stated it could not provide additional financial aid due to regulatory limits.
Two mid-sized U.S. banks, Silicon Valley Bank and Signature Bank, went bankrupt this week, sparking widespread concerns about the banking industry.
Investors are mainly focused on any measures taken by central banks and other regulators to restore trust in the banking system and any exposure that businesses may have to Credit Suisse.
Last week's death of Silicon Valley Bank, followed by that of Signature Bank two days later, sent global bank equities on a roller coaster trip this week, with investors rejecting pledges from U.S. Vice President Joe Biden and emergency measures providing banks with access to fresh cash.
On Wednesday, Credit Suisse shares led a 7% decline in the European banking index as the flagship Swiss bank's five-year credit default swaps reached a new record high.
Two supervisory sources informed Reuters that the European Central Bank had contacted banks under its supervision to inquire about their exposures to Credit Suisse in response to the investor flight.
A Treasury spokeswoman stated that the U.S. Treasury is watching the situation surrounding Credit Suisse and is in contact with worldwide peers.
'Flight to safety
Rapid increases in interest rates have made it more difficult for some businesses to repay or service loans, increasing the likelihood of losses for lenders concerned about an economic downturn.
Traders now anticipate that the Federal Reserve, which was expected to intensify its interest-rate-hike campaign only a week ago in response to persistent inflation, may be compelled to pause or reverse course.
Amid rising concerns over the soundness of Europe's banks, bets on a significant European Central Bank interest-rate hike at Thursday's meeting disappeared rapidly. Pricing on the money market indicated that traders saw less than a 20% likelihood of a 50 basis point rate hike at the ECB meeting.
The uncertainty caused by the bankruptcy of SVB has also pushed depositors to search for new homes for their funds.
Ralph Hammers, chief executive officer of Credit Suisse's rival UBS, stated that market volatility has led to an influx of deposits. Christian Sewing, chief executive officer of Deutsche Bank, concurred.