Credit Suisse’s failures raise fears of a new Lehman Brothers

Credit Suisse's failures raise fears of a new Lehman Brothers

(BFM Bourse) – Concern over Credit Suisse’s situation has revived the Lehman Brothers scenario that triggered the 2008 economic crisis. For many observers in the financial world, these fears are unfounded. European banks are indeed much more heavily armed than they were in 2008 due to tighter capital rules.

The failure of Credit Suisse, rocked by a series of scandals and whose stock value has tripled in a year and a half, is raising the specter of the first major victim of the 2008-2009 financial crisis, American Lehman Brothers.

For nearly three weeks, its share price has fallen to lows after lows as rumors swirl around its strategy’s impending balance sheet. In early August, the new managing director Ulrich Körner, who is considered a specialist in restructuring, was given the difficult task of conducting a strategic review of the bank, which he must conclude on October 27.

But credit swaps jumped last week. These derivatives are used by investors to hedge against default risks, and their growth means investors are demanding more collateral on Credit Suisse-related liabilities.

The price is at an all-time low

The number two share in the Swiss banking sector fell nearly 11.5% in early trade on Monday, hitting a new all-time low of 3.518 Swiss francs after a fresh round of rumors over the weekend. The name eventually closed down just under 1% at CHF 3.94.

Debate over the “Lehman Brothers moment” of the US bank that failed in 2008 and marked the start of the Great Financial Crisis has spread like wildfire on social media, even as many observers in the financial world dismiss it. risk.

For the European Systemic Risk Board (ESRB), attached to the ECB, the second Swiss bank and the European banking system as a whole are better prepared than at the time to deal with the crisis.

Why is Credit Suisse’s situation worrying?

By allowing Lehman Brothers to fail in 2008, the Bush administration hoped to set an example without weighing the full consequences. Thus, the institution’s failure led market participants to believe that other institutions might follow suit, compounding the difficulties and requiring the intervention of many governments. The Belgian-Dutch holding company Fortis was liquidated, and the Belgian subsidiary came under the control of the French BNP Paribas.

Especially many other institutions that are considered “too big to fail” (too big to fail) had to be rescued urgently, under the threat of a complete collapse of the financial system. Among the rescued institutions were the American insurance company IAG or the Franco-Belgian bank Dexia, which ultimately did not survive the Greek debt crisis.

However, these bailouts were very costly to public finances and triggered the subsequent debt crisis and led to austerity measures, especially in Europe.

Tests to measure the sustainability of banks

Under pressure from the European regulator, banks have made significant efforts over the past decade to be more resilient in the event of a crisis. For example, they must demonstrate a higher minimum level of capital designed to cover any losses. This hard capital ratio, also called CET1, is the work of the Basel Committee in Switzerland.

Credit Suisse reported its half-year results published at the end of July, a solvency ratio of 13.5%. For comparison, BNP Paribas — 12.2%, Italian Unicredit — 14.93%, Deutsche Bank — 13%.

This capital ratio, which allows you to cope with unexpected losses, was “strongly strengthened” after the 2008 crisis, says the head of the Paris banking group of Moody’s rating agency Alain Lauren, and the method of calculation was changed in a more restrictive sense.

The European banking authority is also stress-testing fifty of the continent’s biggest banks. The results of the last financial year, published at the end of July 2021, showed that the institutions were able to withstand the severe economic crisis without much damage.

Afraid of a new domino effect?

Experts contacted by AFP want to calm things down for now. First, Credit Suisse “remains a solid financial institution,” says Guillaume Larmareau, partner in charge of financial services at Colombus Consulting.

Then, even in the event of a crisis, “the financial strength of the banks is extremely strong, the lessons of 2008 have been well learned,” Vanessa Holtz, head of France at Bank of America, told AFP. If a banking player fails, the European continent “now has the framework” to derail it, regardless of its size, the president of Spanish bank Santander, Ana Botin, also president of the European Bank, added in February. banking lobby.

And if, in the extreme case, governments were tempted to pull out their wallets to save the institution, unlike the situation before 2008, the system initially involves forcing shareholders or the largest creditors to pay. Banks also contribute to the European Fund, which is supposed to avoid overbilling taxpayers.

(From AFP)

SS – ©2022 BFM Exchange

Leave a Comment

Your email address will not be published. Required fields are marked *