GENEVA (AP) — Shares of Credit Suisse jumped on Thursday after the Swiss central bank agreed to lend the bank up to 50 billion francs ($54 billion) to bolster confidence in the country’s second-largest lender after the collapse of two American banks.
Credit Suisse announced the deal before the Swiss exchange opened, sending shares soaring as much as 33% before stabilizing around a 17% gain, to 2 francs ($2.15), in late afternoon. It was a massive reversal from the day before, when news that the bank’s largest shareholder would not be pumping more money into Credit Suisse caused its shares to fall 30%. Falling prices dragged other European banks down and heightened concerns about the international financial system.
European banking stocks also rose slightly on Thursday.
The Swiss National Bank said on Wednesday it was ready to support Credit Suisse because it meets the higher financial requirements imposed on “systemically important banks”, adding that the problems of some American banks do not “present a direct risk of contagion” to Switzerland.
Regulators are trying to reassure depositors that their money is safe. They “don’t want anybody to be the person who’s sitting in a dark room or a dark cinema and screaming fire, because that’s what causes a rush to exit,” said Russ Mould, director of investments from the AJ Bell online investment platform.
Credit Suisse, plagued by problems long before the U.S. bank failures, said the central bank loans would give it time to complete a reorganization aimed at creating a “simpler, more focused bank.”
“These steps demonstrate decisive action to strengthen Credit Suisse as we continue our strategic transformation,” Chief Executive Ulrich Koerner said in a statement.
Despite the banking turmoil, the European Central Bank endorsed a large half-percentage-point hike in interest rates to try to rein in stubbornly high inflation, saying Europe’s banking sector is “resilient”, with strong finances.
European Central Bank Vice President Luis de Guindos told a news conference that European banks’ exposure to Credit Suisse was “quite limited.”
Higher rates fight inflation but recent days have fueled fears that banks have caused hidden losses on their balance sheets.
Central banks in the United States and Europe acted quickly to restore confidence after the collapse of Silicon Valley Bank last week, the second largest bank failure in US history.
US authorities moved quickly to guarantee all deposits at the California-based bank and the smaller Signature Bank in New York. The US Federal Reserve also announced additional funding to ensure that other banks could meet depositors’ needs.
In a similar vein, the UK government and the Bank of England facilitated the sale of the UK branch of Silicon Valley Bank to HSBC, one of Europe’s largest banks, thereby ensuring customers have access to their money.
The rapid response is different from what happened at the start of the global financial crisis 15 years ago, when US authorities let investment banking giant Lehman Brothers collapse.
Loans to Credit Suisse “should prevent a Lehman moment, much to the relief of markets and investors,” said Victoria Scholar, chief investment officer at the online investing service known as Interactive Investor. “It’s a bank that’s been around since 1865 and has been instrumental in supporting the growth of the Swiss economy.”
ECB President Christine Lagarde said banks “are in a completely different position from 2008” during the financial crisis.
After this crisis, Europe strengthened its banking safeguards by transferring the supervision of the largest banks to the central bank.
“Crises are never exactly the same,” she said, “but the architecture of our banking system, the framework within which they operate, the supervision that is applied to the banking system, have all been significantly improved.” .
Banks are under pressure after interest rates rose rapidly after a prolonged period of historically low rates.
To increase the return on their investments, banks needed to take on more risk, and some “did it more cautiously than others,” said Sascha Steffen, professor of finance at the Frankfurt School of Finance & Management.
As a result, some banks are now facing a “cash” shortage, meaning they cannot sell assets fast enough to meet depositors’ demands.
Shares of Credit Suisse fell to a record low on Wednesday after the Saudi National Bank said it would not invest more money in the Swiss lender to avoid regulations that come into effect if an investor’s stake exceeds 10%.
Credit Suisse also reported that managers had identified “significant weaknesses” in the bank’s internal controls over financial reporting late last year. This stoked new doubts about the bank’s ability to weather the storm.
Its stock has suffered a long and sustained decline: now trading at just over 2 francs ($2.15), the stock was valued at over 80 francs ($86.71) in 2007.
The Swiss bank has been pushing to raise funds from investors and roll out a new strategy to overcome a series of problems, including bad hedge fund betsrepeated reshuffling of its top management and a spy scandal involving its Zurich rival UBS.
Outside a branch of Credit Suisse on Thursday, accountant David Glaus said the Swiss government was unlikely to let such a big bank fail, even to protect the Swiss banking sector.
“It remains a Swiss bank. In the background, there are people who will support her and protect her because I don’t think it’s in our interest for her to go bankrupt,” he said.
But he thinks the country has a fallback position to keep up appearances in the event of the worst.
“We still have chocolate and cheese, anyway, to defend our image,” he said.
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Kirka reported from London. AP reporters David McHugh in Frankfurt, Germany, Colleen Barry in Milan and Joseph Krauss in Ottawa, Ontario, contributed.