Switzerland’s role as banker to the world’s rich is built on a reputation for institutional discretion and dull reliability. That only makes the scandals, public legal battles and mounting losses at Credit Suisse Group more striking and hard to comprehend.
In mid-March, unease about the bank’s mounting problems snowballed and its shares slumped, forcing management to appeal to Swiss banking authorities for a public vote of confidence.Credit Suisse’s failings have included a criminal conviction for allowing drug dealers to launder money in Bulgaria, entanglement in a Mozambique corruption case, a spying scandal involving a former employee and an executive and a massive leak of client data to the media.
As other banks sought to hedge their counterparty risk for transactions with Credit Suisse, quoted prices for a one-year credit default swap jumped from 836 basis points, indicating a probability of defaulting of 10 per cent, on March 14 to higher than 3000 basis points. Few actual trades were executed, however, as liquidity in the market dried up.
In another sign of stress, Credit Suisse’s additional tier 1 bonds – which are subordinate to all other ranks of debt and may be written down if capital falls below a predetermined level – were trading below 80 per cent of face value, a level typically signalling distress. Even bonds coming due in April traded at prices well below face value.The Wall Street giant, whose failure in 2008 triggered the global financial crisis, succumbed when funding dried up and other banks stopped dealing with it.
It also has enough money-like liquid assets to pay back half of all its liabilities in deposits and loans from other banks, according to Bloomberg Opinion banking columnist Paul J. Davies. Koerner said the firm’s liquidity coverage ratio showed it can handle over a month of heavy outflows in a period of stress.
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