The infusion by Swiss National Bank calmed global markets, but financial stress remains elevated.
The infusion by Swiss National Bank calmed global markets, but financial stress remains elevated and is likely to build in the near term as the crisis of confidence in global banks endures. Credit Suisse is too interconnected to other systemically important financial institutions to be allowed to collapse, and letting it fail would unleash contagion effects that would be difficult for central banks to contain. Bloomberg reported that the European Central Bank told European Union ministers that some European banks could be vulnerable to further potential contagion linked to the stress at Credit Suisse. Despite stress inside the European banking system, the European Central Bank hiked its policy rate by 50 basis points on Thursday, favoring its efforts to restore price stability over short-term financial stability. While the economic rationale for hiking rates to restore price stability is clear, the increase runs the risk of creating additional problems inside a stressed European and global banking system. The moves by both Credit Suisse and the Swiss central bank should put a floor under the troubled bank, but this is likely not the last action that will be necessary to stem the crisis in Geneva. Credit Suisse, which is Switzerland’s second-largest lender, reported a $7.9 billion loss last year as clients pulled more than $100 billion in assets during the final quarter even as the bank diluted shareholder value by raising capital worth 4 billion francs. On Wednesday, another large systemically important financial institution announced that it would begin reducing counterparty risk to Credit Suisse, which in all likelihood sealed the decision to rescue the troubled institution. Although a common denominator in the current crisis is interest rate risk management, the problems inside regional banks in the United States are far different from those at Credit Suisse. The large Swiss lender faced a growing number of troubles over the past decade. Those included a conviction on money laundering charges and large investments in failed global ventures, which, combined with other scandals, contributed to the long-term decline of its share price. At the same time, the bank experienced a parabolic increase in credit default swaps—a derivative contract that transfers credit exposure of a fixed income product to a counterparty—that should be understood as a proxy for default risk.