"History repeats itself" is a well-known expression, which is based on the hypothesis that the development of society is a cycle of certain events and phenomena, and that history, like economics, is characterized by cyclicity. Considering that history does not only record the heyday of empires, and that the cycle of the economy always goes through crises, it becomes uncomfortable when the symptoms of past economic recessions begin to manifest themselves in modern times.
The year 2022, a critical situation for Credit Suisse, one of the largest banks in the world and the second largest bank in Switzerland. All analysts agree that if it goes bankrupt, the consequences will be similar to those of the bankruptcy of US Lehman Brothers in September 2008. The global financial crisis of 2008 was one of the most serious financial and economic crises since the Great Depression, the consequences of which are still continuing in some countries.
Credit Suisse in the global banking system
Credit Suisse is the second largest bank in Switzerland, a systemically important bank in the global financial system, the main dealer and currency counterparty to the U.S. Federal Reserve System, a leader in the global market of structured products.
The stability of the entire banking system depends on banks like Credit Suisse. Their bankruptcy could have dire consequences for the entire financial system. Everyone remembers the bankruptcy of Lehman Brothers, the bank filed for bankruptcy on September 15, 2008, after rejecting the bailout. Many consider it the beginning of the global financial crisis of 2008.
Credit Suisse problems
There is now a growing murmur in the news background about problems at Credit Suisse. Credit Suisse has been involved in a large number of scandals in recent years. Last year, the bank suffered billions of dollars in losses with the bankruptcies of major clients Greensill Capital, a financial company, and Archegos Capital Management, a hedge fund. Both of these failures were accompanied by allegaticredons of misconduct and potential fraud.
Now the U.S. Department of Justice has taken up a new investigation: the bank is suspected of violating the law again. Former bankers have filed a compromise against the company that says it is once again helping customers evade taxes.
Credit Suisse Group AG CEO Ulrich Körner said the bank is at a "critical juncture" as it prepares to restructure. The memo was sent out to staff after the company's CDS jumped to all-time highs and the stock price hit all-time lows.
What could be the consequences of Credit Suisse's bankruptcy
Given Credit Suisse's role in the global banking system, realizing the risk of its bankruptcy would have global consequences:
- Shares and structured products issued by Credit Suisse would lose all their value. The bank is the largest player in the structured products market, which would cause the entire structured products market to implode.
- The chain reaction and collapse of such banks as Deutsche Bank, Credite Agricole, Unicredit, Barclays, Bank of China, Societe Generale and Standard Chartered and many intermediaries.
- The crisis of the global financial system and the collapse comparable to 2008.
- The return of many central banks to stimulating the economy through the printing press.
The bankruptcy of Lehman Brothers was unexpected and shocked the financial system. The problems of Credit Suisse have been known for a long time, and there is a high probability that the Swiss government will help the bank in case the situation worsens. But there is a question of the size of this help.
This year the ratio of tier 1 capital adequacy of Credit Suisse will make 13-14%, which is considered high for large financial companies and exceeds the regulatory norms. But Goldman Sachs Group Inc. estimates that if the bank doesn't address its problems, it could face an $8 billion capital shortfall in 2024.
Now, to reassure investors, the bank said it intends to buy eight issues of euro- and sterling-denominated bonds totaling up to $1 billion. It is also prepared to buy twelve issues of U.S. dollar-denominated securities totaling up to $2 billion.
On October 27, 2022, the bank plans to present a detailed plan for its reorganization along with its quarterly results.
Throughout its history, mankind has gone through numerous crises. Each crisis is unique in its cause, depth and duration. But what all crises have in common is that they end. A recession is always followed by recovery and growth.
What does an investor need to know and what should he prepare for? Crises are always accompanied by a decline in the stock markets. That is why it is important for an investor to take care of maximum protection of his capital. First of all, you need to maximize the share of protective assets in your investment portfolio.