Is Credit Suisse on the Brink of Collapse?

As we enter the second week of October, the global economic outlook remains grim. Energy and gas costs are still very high, inflation is soaring in many countries, supply chains are disrupted, equity markets have lost significant value, and tensions between the West and Russia continue to escalate.

In the midst of this recessionary economic climate, two of the world’s largest investment banks, Credit Suisse Group AG (NYSE: CS) and Deutsche Bank AG (NYSE: DB), are struggling from distressed valuations. According to market data, Credit Suisse and Deutsche Bank are trading at exceptionally low valuations- the likes of which have not been seen since the 2008 global financial crisis.

Credit Suisse’s stock has plunged by more than 53% year-over-year, while Germany’s Deutsche Bank- another source of serious market unease- has seen its stock tumble 41% in the same period.

Furthermore, Credit Suisse’s 5-year credit default swap (CDS), a type of insurance that protects investors against the prospect of a Credit Suisse debt default, soared as high as 355-basis points (bps) on Oct. 4, one of the highest levels in a decade.

At last check, CSCD5 was printing below 300 bps.

At the end of August, Deutsche Bank released an analysis of the Swiss lender’s financial situation. The report noted that there was a 4 billion Swiss francs ($4.1 billion) gap in the bank’s finances that needed to be addressed in order to improve its overall health. Furthermore, Credit Suisse’s CDS levels are comparable to those at Lehman Brothers- an investment firm who infamously filed for bankruptcy during 2008’s financial crisis.

Another recent analysis published on Seeking Alpha has noted that both Credit Suisse and Deutsche Bank are trading at distressed valuations. The report further says that Credit Suisse “will have to go through a painful restructure.”

In addition to these financial setbacks, the Swiss lender has been facing an onslaught of legal scandals and allegations.

In June of 2022, Credit Suisse was found guilty by Switzerland’s Federal Criminal Court of failing to implement adequate security measures to prevent money laundering. The bank denied the charges, which were brought against them by a Bulgarian cocaine trafficker.

Credit Suisse has also been involved with some high profile collapses including UK lender Greensill Capital and US hedge fund Archegos Capital. Both of these failures were mired in allegations of misconduct and possibly fraud, with the UK taxpayer expected to pay anywhere from £3 to £5 billion ($3.4 to $5.6 billion) in compensation as a result of Greensill Capital’s collapse.

As rumors of Credit Suisse’s possible collapse grow louder, the head of the Swiss lender, Ulrich Koerner, sent a memo to employees on October 4. In the memo, Körner said that the bank was at a “critical moment” and advised against confusing the lender’s “strong capital base and liquidity position” with its day-to-day stock price performance.

The words in this memo were very similar to ones spoken by Lehman Brothers CFO Erin Callan Montella back in September 2008, when she said “our capital position at the moment is strong.”

The implications of these comparisons are worrying, especially if a global recession hits. Nevertheless, with focus on Credit Suisse and Deutsche Bank in particular, it is hoped that lessons have been learned from the mistakes leading to the 2008 financial crash.

According to data, Credit Suisse currently manages about $1.45 trillion in assets, with Deutsche Bank responsible for $1.3 trillion. This is nearly four times the worth of what Lehman handled at its peak before its collapse. On a global scale, the consequences if either were to fail would be devastating.

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