No, Credit Suisse Won’t See A ‘Lehman-Style Explosion’—Here’s Why

Concerns about the financial health of Swiss banking giant Credit Suisse over the weekend have led to fresh market fears of another meltdown similar to Lehman Brothers’ collapse in 2008. Rumors abound that Credit Suisse’s capital position is at great risk, with shares plunging to new lows on Monday and the cost of insuring the bank against default surged to its highest level in more than two decades.

Shares of Credit Suisse initially tanked on Monday morning, hitting a new low of $3.70 per share, before rebounding back above $4 per share by later in the day. The stock is down roughly 60% this year, on track for its biggest annual drop in the firm’s history.

But experts say it’s unlikely Credit Suisse will fail even as the bank’s credit default swaps (CDS), which offer protection against default, surged on Monday. Despite whispers of another “Lehman Brothers moment,” however, most Wall Street experts currently dismiss the idea of another Great Recession-type blow up that rocks the entire financial system.

“The world is in a very different place than 2008, when there was a sudden realization of widespread losses throughout the entire financial system,” says James Angel, finance professor at Georgetown University’s McDonough School of Business. Although there are “painful realizations” going around markets today given a looming recession on the horizon, “there is no big systemic issue that is affecting everyone like it was in 2008,” he adds.

What’s more, banks face much stricter regulatory supervision today than they did during the Financial Crisis, with rigorous stress tests to ensure they meet capital requirements. Still, Credit Suisse’s CDS spreads are exploding because the market is in “cockroach mentality” according to Angel, where investors believe if there’s one bank with risky capital levels then there are more.

Credit Suisse remains “trapped in a circular loop of doom”—where bad news is just sending CDS higher and the stock lower despite management’s efforts to reduce market anxiety, says Vital Knowledge founder Adam Crisafulli. “Investors shouldn’t necessarily rush out to buy Credit Suisse shares, but we strongly doubt some type of a ‘Lehman Moment’ is imminent.”

The worst-case scenario, according to experts, would be if the Swiss banking giant has to file for Chapter 11 bankruptcy. Such an event would have negative ripple effects on the rest of the financial system as counterparty exposure becomes more of an issue. Long before that, however, the bank would have to reach a point where it is unable to fund its assets: Under that scenario, the big question becomes how regulators would respond, says Angel. The firm would likely be forced to recapitalize—raising money at a diluted rate, or go further by borrowing through a central bank’s discount lending facility.

In the past, distressed financial institutions have tried to fix capital ratios by selling assets or completing a deal or merger with another institution. The last resort from regulators to avoid a bankruptcy would be a government-engineered solution similar to 2008, when the Swiss central bank stepped in with emergency funding for the likes of UBS (Credit Suisse raised outside capital at the time).

Still, a “Lehman-style explosion” remains unlikely, says Angel, as Credit Suisse’s situation appears more company-specific, where the bank has made mistakes with scandals in recent years and is now paying the price for it.

KBW analysts likened Credit Suisse’s current situation to that of Deutsche Bank in 2016, when the bank faced similar concerns about liquidity. Deutsche Bank was facing a federal probe related to mortgage-backed securities at the time, credit default swaps surged higher, the bank’s debt rating was downgraded and some clients stopped doing business with the firm. Pressures eventually eased, however, as the bank reached a smaller settlement fee than expected and raised nearly $8 billion in new capital.

Credit Suisse CEO Ulrich Körner said in a memo over the weekend that the bank is at a “critical moment” in its restructuring efforts, though he urged employees not to confuse the company’s “day-to-day stock price performance with the strong capital base and liquidity position of the bank.” The firm has discussed asset sales as part of its strategic overhaul, with a business update scheduled alongside its third quarter earnings release on October 27.

Both analysts at Deutsche Bank and KBW have recently estimated Credit Suisse’s restructuring plans would cost roughly $4 billion.

Hovering near record lows, Credit Suisse shares are now a “buy for the brave,” CitigroupC
analysts led by Andrew Coombs wrote in a note on Monday. There is “significant execution risk” from the firm’s new strategic plan and markets are now pricing in what will likely be a “highly” dilutive capital raise, the analysts said, though they don’t believe this is another “2008” moment. JPMorgan analysts similarly argued in a note on Monday that Credit Suisse still has “healthy” capital and liquidity, based on financial results from the most recent quarter.

Source: https://www.forbes.com/sites/sergeiklebnikov/2022/10/03/no-credit-suisse-wont-see-a-lehman-style-explosion-heres-why/