TheChek News Flow

The Swiss bank has weathered a period of market crises, executive turnover and financial losses

Stress in the U.S. banking system jumped across the Atlantic this week, sparking turmoil for embattled Swiss bank Credit Suisse.

The European lender has long been dogged by issues. But on Wednesday, problems surrounding the bank exploded into plain view. After a whirlwind 24 hours marked by a dramatic fall in the bank’s stock price and financial contagion concerns, Credit Suisse said it would borrow cash from the Swiss central bank to shore up its liquidity. On Saturday, Credit Suisse’s larger rival, UBS Group AG UBS -5.50% , was in talks to take over all or part of the bank.

Here’s what you need to know on how Credit Suisse got here and what might happen next.

Zurich-based Credit Suisse traces its history back to 1856, when it was founded to finance the expansion of Swiss railroads. Today, it stands as Switzerland’s second-largest bank by assets, trailing UBS.

The bank’s main business is managing money and creating investment products for wealthy clients around the world. Recently, Credit Suisse has been working to spin off its investment-banking arm as part of an attempt to move on from a long stretch of scandals and quarterly losses.

Investors have been on high alert for signs of contagion following the rapid collapse of California-based Silicon Valley Bank last week. That led to a selloff in shares of banks around the world, including Credit Suisse’s.

But problems for the Swiss lender turned particularly acute on Wednesday, when its largest shareholder, Saudi National Bank, said in a Bloomberg TV interview that it wasn’t considering adding to its investment due to regulatory rules. Saudi National Bank owns 9.9% of Credit Suisse. Capital requirements often prevent banks from holding more than 10% of other banks.

The timing couldn’t have been worse. Investors were already jittery about other potential weak links in the financial system. The comments amplified their concerns about the bank’s ability to make money and raised the prospect that it might have to tap shareholders again for funds.

So-called credit-default swaps surged, as investors rushed to protect themselves against a possible Credit Suisse default. At the same time, the Swiss lender’s shares plunged, losing 24% on Wednesday—its largest-one day drop in recorded history. Prices on its bonds fell to distressed levels.

Traders rushed to scoop up options tied to Credit Suisse, with activity hitting its highest levels in recent history, according to data provider Trade Alert. Put options—or bearish contracts that typically profit as a stock falls—outnumbered bullish call options.

Credit Suisse clients and regulators were keeping close watch. European Central Bank officials called the banks it supervises to ask about their exposure to Credit Suisse, people familiar with the matter said. Meanwhile, some clients paused trades with the bank, The Wall Street Journal reported.

After the close of European markets on Wednesday, Swiss regulators said they would provide liquidity to Credit Suisse, if needed.

Within hours, Credit Suisse said it would tap a more than $50 billion lifeline from the Swiss National Bank. That sent Credit Suisse’s stock price up on Thursday, lifting other European banks alongside it.

Credit Suisse may not actually need the money, analysts said. Rather, it borrowed the money to reassure investors about their ability to get cash quickly.

Dan Davies, head of research at Frontline Analysts, said the bank likely won’t use the facility to cover operating costs. It has used the aid to buy liquid securities, which could be sold quickly if the bank ever needed the cash, improving its balance sheet, he said.

“They’ve mainly got that for the purposes of having it in order to wave it around and tell everyone, ‘Look at our strong liquidity ratio,’” he said.

It was likely intended as a show of force to investors who shorted Credit Suisse’s stock or sold credit-default swaps insuring against default, said Jérôme Legras, head of research at Axiom Alternative Investments.

Yes. The beleaguered lender’s bonds and other securities continue to show signs of stress.

Shares of Credit Suisse fell nearly 7% in Switzerland on Friday, meaning the stock has shed about a fifth of its value this week. Meanwhile, prices on Credit Suisse bail-in bonds, which get wiped out in case the bank runs into serious trouble, have made little recovery.

Investors also continue to buy protection against the bank defaulting on some of its debt. The cost of insuring against default on five-year Credit Suisse senior debt is double what it was at the start of the week.

For years.

The bank has weathered a period of market crises, executive turnover and financial losses. Most notably, it was burned by its connection to the separate collapses of now-bankrupt Greensill Capital and Bill Hwang’s Archegos Capital Management. In 2021, the Credit Suisse took a $5 billion hit due to the collapse of Archegos, which was equivalent to more than a year’s worth of profit.

More recently, the bank has been contending with customer withdrawals. In October, a social-media firestorm over the bank’s health drove outflows of rich clients, Credit Suisse executives have said.

The withdrawals continued through the end of the quarter and prompted the bank to reach out personally to more than 10,000 wealthy customers to reassure them of the bank’s health.

Deposits fell 40% last year to 234 billion Swiss francs, equivalent to $252 billion, while total assets dropped 30% to 531 billion francs, or about $571 billion, because the bank was, among other things, scaling back its businesses. Credit Suisse reported a 2022 net loss of 7.3 billion francs, after posting a net loss of 1.7 billion francs the year before.

Investors were already spooked by last year’s outflows. “Their investors and their deposit holders have been basically looking at this slightly on edge,” said Octavio Marenzi, chief executive of consulting firm Opimas.

Wealth-management clients are extremely conservative investors with very large amounts of money and they became concerned, he said. “It’s been a slow motion unfolding with CS that reached a breaking point and tipping point a few days ago.”

Credit Suisse mainly manages money for people with millions of dollars to invest. The bank counts billionaires and sovereign-wealth funds among its biggest clients. Most of its loan portfolio is in ultraconservative Switzerland, where it is the country’s No. 2 bank by assets, serving savers and companies. It also has large investment-banking and asset-management arms.

It is considered a systemically important bank by global regulators given its size and interconnectedness with the financial system.

Silicon Valley Bank was a regional bank, serving U.S. venture capitalists and technology startups.

Credit Suisse, as is typical in the industry, has placed bets to hedge against rising interest rates; Silicon Valley Bank reported virtually no interest rate hedges on its massive bond portfolio at the end of 2022.

Swiss authorities are eager to arrest Credit Suisse’s slide by reaching some kind of deal with UBS—and soon. UBS’s balance sheet is twice as big as Credit Suisse’s, and it has proved a far stronger and more stable bank.

A transaction isn’t simple, though. Silicon Valley Bank’s parent company had some other businesses, but the biggest share was a domestic bank that did the straightforward work of banking—taking deposits and making loans.

Credit Suisse is vastly more complicated. It has a domestic (Swiss) bank, a global operation managing money of rich clients and an investment bank. UBS could take some or all of those pieces, or other bidders may emerge for parts—or a transaction may not come together at all.

Credit Suisse is deeply integrated into the global financial system—working closely with a number of banks and institutional investors. European banking stocks tumbled this past week due in part to investor fears of contagion, investors said.

On a broader level, the problems of Silicon Valley Bank and Credit Suisse have led investors to believe that the Federal Reserve might pause or scale back its plans to further raise interest rates to tame inflation.