Whether you’re a regular person or a large Swiss bank, you know things have gone south when you’re left with no option but to change your name…
… which may end up as the plan for Credit Suisse as the bank lurches from one crisis to another.
What happened: Credit Suisse saw a gauge of its credit risk rise to a record high while its stock hit record lows (down 3.03% the past five days), raising doubts about its financial stability.
- The cost of five-year credit default swaps (CDS) for the bank has jumped over 5x since January (it’s like insurance that protects investors against potential defaults).
- CDSs played a key role in the 2007-2008 credit crisis since big banks could not pay out the “insurance” to investors protected against defaults across the housing market.
According to experts, these CDS levels alone aren’t cause for alarm and are driven (for now) by broader investor caution, but that didn’t stop people from stirring up some online drama.
- In a since-deleted tweet, ABC reporter David Taylor caused waves after writing that a “credible source tells me a major international investment bank is on the brink.”
- But prominent figures like Saba Capital Management’s Boaz Weinstein were quick to tweet that the speculation felt like “a concerted effort at scaremongering.”
Yes, but: These levels do show the bank’s creditworthiness is being called into question in today’s risk-averse market, and imply a 23% chance of default on its bonds within five years.
- Unlike the situation Deutsche Bank faced in 2016, Credit Suisse’s one-year swaps are still much cheaper than five-year ones (meaning investors think it’s unlikely to default in the near term).
Why it matters: Credit Suisse is one of the largest banks in the world (about the size of BMO by total assets) and one of the most important banking institutions in Europe, which means the pressure is on to regain investor trust after a recent past of crisis and scandal.
- The bank has struggled to shake a reputation of prioritizing financial results at any cost, along with its association with Bulgarian drug smugglers and Russian oligarchs.
What’s next: The bank’s plan is due at the end of the month, which may include selling its LatAm wealth management arm and changing the name of some investment banking units.
In the meantime, the bank’s new CEO, Ulrich Koerner, has been sending out weekly memos to calm employees and the markets, but they seem to just be sparking more doubts.