March 16 (Reuters) – Credit Suisse (CSGN.S) said on Thursday it would borrow up to $54 billion from the Swiss central bank to bolster liquidity and investor confidence, after a slump in its equities has intensified fears of a global banking crisis.
The bank’s announcement, which came in the middle of the night in Zurich, sent Credit Suisse shares up 24% and helped reverse some of the heavy losses in stock markets sparked by investor fears over a potential bank runs around the world.
Credit Suisse is the first major global bank to receive an emergency lifeline since the 2008 financial crisis and its troubles have raised serious doubts about central banks’ ability to continue their fight against inflation with hikes aggressive interest rates.
Switzerland’s second-biggest bank said it would exercise an option to borrow up to 50 billion Swiss francs ($54 billion) from the central bank.
See 2 more stories
This followed assurances from Swiss authorities on Wednesday that Credit Suisse met “the capital and liquidity requirements imposed on systemically important banks” and that it could access central bank liquidity if needed.
JP Morgan analysts said the measures would give the Swiss lender time to complete its restructuring.
“The combination of measures should be sufficient to stem negative movements in the capital structure as the market considers the potential impact of liquidity pressures,” JP Morgan said in a note Thursday.
As its shares rebounded, the cost of insuring Credit Suisse’s debt exposure fell. Five-year credit default swaps fell 128 basis points to 1,016 basis points from Wednesday’s close after hitting record highs that day.
The European Banking Index <.SX7P) rose 2.4% on Switzerland's dramatic intervention as shares of major banks rose and insurance protection on bonds issued by BNP Paribas (BNPP. PA), Deutsche Bank (DBKGn.DE) and UBS also retreating. down.
For most of the Asian day, stocks wallowed in the red as investors rushed to the relative “safe havens” of gold, bonds and the dollar. Although the Credit Suisse announcement helped pare some losses, trading was volatile and sentiment fragile.
The head of Japan’s banking lobby said there were no signs yet that the Japanese financial system would be affected by a crisis of confidence in Credit Suisse, as Japanese banks are well capitalized.
Credit Suisse’s borrowings will be made under the Covered Lending Facility and a Short Term Liquidity Facility, fully collateralized by high quality assets. It also announced offers of senior debt securities for cash of up to 3 billion francs.
Chief Executive Ulrich Koerner told Credit Suisse staff in a memo they should focus on the facts as he pledged to move quickly with a plan to streamline operations.
Credit Suisse would continue to focus on transformation from a position of strength, citing an improved liquidity coverage ratio and recent capital raises, Koerner said.
Meanwhile, Credit Suisse bankers in Asia have reached out to clients to reassure them after the latest inflow of funds.
“We told them to read the statements and look at the fact that we are buying 3 billion francs worth of bonds because they are so cheap,” said a Hong Kong-based senior banker, who requested the anonymity.
The 167-year-old bank’s troubles have shifted the attention of investors and regulators from the United States to Europe, where Credit Suisse led a sell-off in bank shares after its biggest investor said it could not provide more financial assistance due to regulatory constraints.
Concerns about Credit Suisse added to broader banking sector fears sparked by last week’s collapse of Silicon Valley Bank (SVB) (SIVB.O) and Signature Bank, two midsize U.S. companies.
Investors are also focused on any action by central banks and other regulators elsewhere to restore confidence.
Policymakers in Australia and South Korea sought to reassure markets that banks in their jurisdictions were well capitalized.
The demise of SVB last week, followed by that of Signature Bank two days later, sent banking stocks on a rollercoaster ride as investors feared another meltdown like Lehman Brothers, the Wall Street giant whose bankruptcy triggered the global financial crisis.
On Wednesday, shares of Credit Suisse led the European banking index (.SX7P) down 7%.
The exit for the gates raised fears of a broader threat to the financial system, and two watchdog sources told Reuters the European Central Bank had contacted banks under its watch to ask about their exposures to Credit Suisse.
The US Treasury also said it was monitoring the situation around Credit Suisse and was in touch with its global counterparts.
Rapidly rising interest rates have made it harder for some businesses to repay or service loans, increasing the risk of losses for lenders already worried about a recession.
Traders are now betting that the Federal Reserve, which was expected to accelerate interest rate hikes last week in the face of persistent inflation, could pause or reverse course.
Bets on a big ECB interest rate hike at Thursday’s meeting also quickly evaporated. Money market prices suggest traders now see less than a 20% chance of a 50 basis point rate hike.
For now, investors are focused on Credit Suisse.
“The next important step is to get out of their CEO and show their new strategy to the public as soon as possible to reassure the markets,” said Tareck Horchani, head of prime brokerage at Maybank Securities in Singapore.
Additional reporting by Akriti Sharma in Bengaluru, Rae Wee in Singapore, Amanda Cooper, Chiara Elisei and Dhara Ranasinghe in London, John Revill in Zurich; Written by Deepa Babington, Sam Holmes and Alexander Smith; Editing by Matthew Lewis, Shri Navaratnam and Tomasz Janowski
Our standards: The Thomson Reuters Trust Principles.