Credit Suisse is at the centre of market turmoil amid rumours the bank could be on the brink of collapse.
Investors have rushed to sell the Zurich-based bank’s shares amid concerns about its financial health as it prepares to unveil a costly restructuring plan due later this month.
Speculation that the bank could fail has invoked comparisons with the 2008 collapse of United States’s investment bank Lehman Brothers, which precipitated the worst economic crisis since the Great Depression. But economists are cautioning against such parallels due to the significant differences between then and now.
Why is Credit Suisse under scrutiny?
While Credit Suisse’s stock price has been declining for months, concerns have been heightened since CEO Ulrich Körner last week sent a memo to employees aimed at reassuring them about the bank’s future.
In the memo sent on Friday, Körner cautioned against conflating the “day-to-day stock price” with financial health and insisted the upcoming restructuring would ensure the bank’s “long-term, sustainable future”.
Rather than calm investors, the memo set off renewed anxiety about the bank’s standing.
On social media, a number of investors with large followings, including Lark Davis and Graham Stephan, posted comparisons to Lehman Brothers that quickly went viral.
On Monday, Credit Suisse shares plunged as much as 11.5 percent, hitting a record low of $3.64.
At the same time, credit default swaps — a type of investment that serves as insurance against a company defaulting — rose to all-time highs.
One of Europe’s largest banks, Credit Suisse’s troubles have been some time in the making.
The lender has been embroiled in a raft of scandals in recent years that have battered its image and balance sheet.
The controversies include trading jobs for business in Hong Kong, hiring private detectives to spy on employees, laundering money for a criminal organisation in Bulgaria, and facilitating corrupt loans in Mozambique, over which the bank agreed to pay $475m in fines.
The bank also racked up billions of dollars in losses from the collapse in 2021 of hedge fund Archegos and financial services firm Greensill.
Amid the turmoil, the lender has lost nearly 60 percent of its market value this year alone.
“Credit Suisse has the poor track record that features Archegos and Greensill – so there is not a lot of confidence,” Campbell R Harvey, a professor at Duke University’s Fuqua School of Business, told Al Jazeera.
“They have had CEO turnover. Further, the CEO’s internal letter to employees did not reassure – if you have to explain to employees what is going on, it is a bad sign.”
Under the restructuring announced following Körner’s appointment in July, Credit Suisse is seeking to shrink its investment bank to focus more on wealth management.
Analysts have estimated that Credit Suisse will need to raise $4-6bn to carry out the restructuring, which could prove challenging as investors see the bank as an increasingly risky bet.
Could Credit Suisse cause a Lehman Brothers-style crash?
Economic analysts generally see that as unlikely.
First of all, despite Credit Suisse’s woes, the lender has huge amounts of capital to withstand any losses.
The bank’s total assets came to 727 billion Swiss francs ($732.7bn) at the end of the second quarter, about one-fifth of which was held in cash, according to a recent analysis by JPMorgan Chase.
On Monday, Citibank analysts dismissed comparisons to 2008, noting that Credit Suisse’s liquidity coverage ratio — the portion of cash and other assets that can be quickly accessed in a crisis — was among the “best in class” at 191 percent.
“I do not think this is a Lehman Brothers. Their tier one ratio is 13.5 percent,” Harvey said, referring to the portion of capital made up of core assets, which regulators consider a key marker of financial strength.
The global financial environment has also changed significantly since Lehman Brothers went bankrupt.
Banks are more tightly regulated than in 2008 and have more capital on hand to manage risk.
“Big banks generally are far better capitalised than they were in 2008, and my own view of Lehman has always been that a big part of the problem when Lehman failed stemmed from the fact that everyone was expecting Lehman to be bailed out,” David Skeel, a professor of corporate law at the University of Pennsylvania Law School, told Al Jazeera.
“US regulators had signalled when Bear Stearns stumbled in March 2008 that they wouldn’t let a big bank fail, then surprised the markets by letting Lehman fail. I suspect the Credit Suisse situation won’t have knock-on effects, both because of generally high levels of capital and the very different circumstances of 2008.”
Holger Schmieding, chief economist at Hamburg-based Berenberg Bank, said that while he could not comment on the health of Credit Suisse, a crisis similar to 2008 was extremely unlikely.
“The risk of a Lehman-style event is close to zero as – whatever the problem with any bank may or may not be – regulators and central banks are far better equipped to nip any such problem in the bud,” Schmieding told Al Jazeera.