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Banks in Turmoil

Europe’s Credit Suisse is in trouble. Could its problems infect the rest of the financial system?

Mitchell Hartman Mar 15, 2023
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Credit Suisse, an institution with global reach, has had problems prior to the current turmoil in the banking industry. Fabrice Coffrini/AFP via Getty Images
Banks in Turmoil

Europe’s Credit Suisse is in trouble. Could its problems infect the rest of the financial system?

Mitchell Hartman Mar 15, 2023
Heard on:
Credit Suisse, an institution with global reach, has had problems prior to the current turmoil in the banking industry. Fabrice Coffrini/AFP via Getty Images
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First, Silicon Valley Bank failed. Then, Signature Bank failed. Now, in Europe, Credit Suisse is teetering.

On Tuesday, the Swiss bank reported it had found “material weaknesses” in its past financial reporting. The bank’s biggest investor — the Saudi National Bank — said it was not about to pony up any more capital to prop up its sagging balance sheet.

On Wednesday, Credit Suisse shares took a beating. The bank has reportedly asked Switzerland’s central bank for support. And The Financial Times is reporting that the European Central Bank has asked lenders throughout the European Union to disclose exactly how much exposure they have to Credit Suisse. 

The worry? That financial contagion could spread globally.

Credit Suisse was already in a world of trouble prior to this week, according to Cornelius Hurley at Boston University Law School.

“If there is any problem going on in the global banking system, Credit Suisse has acted as the spear receiver for it,” he said.

“Credit Suisse has been scandal plagued for the last few years,” added Karen Petrou at Federal Financial Analytics.

The bank has a reputation “for flying very close to the edge, a number of serious scandals with fraudulent borrowers, terribly lax internal controls,” she said.

Those problems may be unique to Credit Suisse. But in the current climate of fear and uncertainty, the CS saga has global investors worrying.

“Any bank of its size that is so accident-prone is a very high-risk institution. And then people are looking again and very askance at other high-risk institutions,” Petrou said.

On Wednesday, investors looked askance at the rest of Europe’s banking system. They’re not likely to find too many problems, according to Nicolas Véron with the Peterson Institute for International Economics.

“The European Central Bank, which is the lead supervisor for banks in the eurozone, has been pretty focused on interest rate risks and the kinds of things people have been obsessing about in the context of Silicon Valley Bank in the last few days,” he said.

Credit Suisse doesn’t pose a systemic risk to the U.S. financial system the way Silicon Valley Bank did, Petrou said. But “Credit Suisse is a systemic-level global player, so the financial system as a whole is facing yet another point of significant fragility,” she said.

And is there a risk of global contagion? “I hate to say it,” Petrou said. “I think the answer is yes.”

Swiss regulators disagree. They say that Credit Suisse’s problems aren’t related to the turmoil in the U.S. banking system and that they’ll provide liquidity to the bank, if necessary

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