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Credit Suisse: Foreshadowing A Lehman-Style Fall?

Over the last year, central banks have been the centre of attention as they have attempted to take inflation head-on. However, this week, the attention has quickly shifted from central banks to Credit Suisse.


This is the result of increased speculation that the bank could collapse from a capital or liquidity crunch (Financial Review, 2022). However, this is not the first time that Credit Suisse have been embroiled in scandal. Investors will remember when they traded jobs for business in Hong Kong, hired private detectives to spy on employees. laundered for a criminal organisation in Bulgaria, and the billions they lose in the collapse of the Archegos and Greensill in 2021. While this list is non-exhaustive, it is no surprise that Credit Suisse is involved in controversy, which is again, impacting its image and share price.


"Credit Suisse has the poor track record ... so there is not a lot of confidence" - Campbell R Harvey, a professor at Duke University's Fuqua School of Business (Financial Review, 2022)

This lack of confidence was echoed in Credit Suisse's shares sliding by 11.5% and its bonds hitting a record low on Tuesday before crawling back from some of the losses. Industry sources have claimed that the bank had enough capital and cash to deal with crisis. While this may have been seen as a product of Credit Suisse propaganda, favouring the aforesaid claim is the fact that Credit Suisse, alongside other banks, have applied the Basel Accords. Essentially, the Basel Accords are a set of banking regulations which were introduced after the GFC to safeguard banks from overexposing themselves without the requisite capital for taking on such risk.


Source: AP

While the claim that Credit Suisse could suffer a collapse like the Lehman Brothers floats around global markets, economists caution drawing parallels between the two. The capital structure of Lehman then and Credit Suisse now makes a collapse in the same fashion a near fantasy. As already mentioned, the requirements banks must now use under the Basel Accords, and more specifically Basel III, serve to specifically safeguard banks from the financial logic of Lehman and similar banks during the GFC.


Certainly, based on its second quarter, its balance sheet appears healthy. Aljazeera (2022) stated, "Credit Suisse had total assets of 727 billion Swiss francs ($732.7bn) at the end of the second quarter, of which 159 billion Swiss francs 9$160.3bn) was cash and due from banks, while 101 billion Swiss francs ($101.8bn) was trading assets."


Despite insiders pointing towards their strong capital ratios and healthy balance sheet, Credit Suisse is not off the hook yet. The problem remains: its costs are too high for its revenue. Consequently, Credit Suisse must be restructured, and the CEO is aiming to restructure it so that it is a capital-lite advisory business.


Faith will be restored in this 166-year-old institution if its restructuring is successful. Currently, Credit Suisse is amid typical investor speculation and doubt, however it will not collapse like Lehman. All things considered, its books are healthy, but restructuring is necessary to clean up the ship and fix its cost problem so that it will not manifest itself more viciously in the future.


 

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