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Prolonged bear markets end with shutdowns or bailouts, mainly for institutions in the banking and finance sector. Since the great depression of 1929, we have seen the impact a bear market has on the economy for many years. The most recent was the global financial meltdown in 2008 which claimed the fourth biggest bank in the US–Lehman Brothers.
Is it Credit Suisse’s Lehman moment is a question that’s making the rounds, as people wonder if the current bear market will claim the Switzerland-based big bank. The banking sector continues to be under stress from lockdowns due to the pandemic. Europe has been one of the worst affected areas. Just when the continent was struggling to get back on its feet the Russia-Ukraine war and related energy crisis dealt it a body blow.
A series of hard blows have affected its largest bank Credit Suisse. The bank’s stock price has taken a hit by falling over 55 percent over the past year. More than the stock price, the trouble is visible in the bank’s credit default swaps (CDS) which are trading at the highest level since 2009. CDSs are instruments that measure the cost to insure the institution’s bonds.
The cost to insure the bank’s debt using five-year credit-default swaps rose to its highest level in years. It cost investors 335 Euros per 10,000 Euros (3.35 percent) of exposure while the cost for one-year credit insurance rose to 483 Euros, meaning investors were paying up for the likelihood a default to happen quickly. The average CDS for a five-year paper is less than one percent.
These rates are despite the fact that the 166-year-old bank is said to be one of the best capitalized in Europe by regulatory measures. The Swiss bank had an equity capital ratio of 13.5 percent as of the end of June, considered strong among its peers, as long as the numbers can be believed.
Banks have been known to sweep their problems under the carpet in the hope of cleaning them out when the situation returns to normalcy.
Moody’s Investors Service, a rating agency, downgraded its paper one notch to Baa2, the second lowest rung of investment grade, and kept it on a negative outlook.
Analysts feel that the bank needs to act fast by taking capital risks off the table. A restructuring plan that requires bringing in capital and selling off divisions or a complete sell-off seems to be limited options available to the bank.
The problem is that the issue is not restricted to Credit Suisse. Other banks such as usual suspects Deutsche Bank and UBS have also seen their CDS rising.
Graham Stephan a renowned name in the finance industry pointed out that the “$600 Billion: What Lehman Brothers held in assets when they crashed and took the economy with them. $2800 Billion: What Credit Suisse and Deutsche Bank control in AUM. 4.6x more. Credit Suisse is at a 'Critical Moment' now.”
Over the years we have seen that the banking sector does not operate in a vacuum. Cross-holding and lending to each other have made the sector one contiguous mass. While it may seem like Credit Suisse is an isolated case, when a big bank falls it can take down others with it.
The trouble will result in a flight of capital to safer shores, which means money will flow out of equity markets.
There is still time for Credit Suisse to get its act in order. There is enough liquidity in the system and the bank has sufficient assets to bail itself out and prevent another financial crisis. That’s the last thing the world needs at this juncture.
Investing insights from our research team
What else are we reading?
Time for investors to learn a new game (republished from the FT)
Shishir AsthanaMoneycontrol Pro